Using emissions trading schemes to reduce heterogeneous distortionary taxes: The case of recycling carbon auction revenues to support renewable energy

Claire Gavard, Sebastian Voigt and Aurélien Genty

Energy Policy, 2022, vol. 168, issue C

Abstract: We examine the economic impacts of using the revenues from environmental taxation to reduce a pre-existing distortionary tax in a multisector economy where the environmental regulation and pre-existing distortionary tax apply heterogeneously across polluting sectors. With a numerical framework including a detailed sectoral disaggregation, we quantify these in the specific case of the European Union where carbon pricing coexists with electricity levies employed to support renewable energy. We find that using auction revenues from the EU Emissions Trading System (ETS) to reduce the national levies results in a 1.8% ETS carbon price increase but a 5.9% drop in the non-ETS carbon constraint. While the energy intensive sectors often benefit from electricity levy exemptions, the combination of these exemptions and of the recycling of carbon auction revenues to support renewable energy makes the ETS sectors worse off than if carbon revenues are transferred to households. In aggregate, the recycling option analysed here results in a GDP gain due to its impacts on the non-ETS sectors, the reduction of the electricity levy and associated distortionary effects.

Keywords: Carbon auctions; Renewable energy support; Electricity levy; Emissions trading scheme; Revenue recycling (search for similar items in EconPapers)
JEL-codes: C68 E62 H21 H23 Q42 Q54 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:enepol:v:168:y:2022:i:c:s0301421522003585

DOI: 10.1016/j.enpol.2022.113133

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