Equity and efficiency of carbon tax policies in Switzerland with endogenous energy substitution

Matthias Leuthard ()
Additional contact information
Matthias Leuthard: ETH Zurich

Swiss Journal of Economics and Statistics, 2025, vol. 161, issue 1, 1-24

Abstract: Abstract The costs and speed of the energy transition are closely linked to the elasticity of substitution between fossil fuels and clean energy sources. Yet, despite its central role, this parameter has been treated as exogenous and constant in numerical studies of climate policy. Drawing on recent empirical evidence, this paper incorporates an endogenous elasticity of substitution that flexibly interacts with the relative share of clean energy in the economy into the CITE model—a dynamic CGE model of Switzerland featuring endogenous growth and heterogeneous households. Using this refined approach, I compare the equity and efficiency implications of carbon taxation under endogenous versus exogenous energy substitution and explore alternative revenue recycling schemes, including lump-sum transfers to households and output subsidies for clean energy. Although beneficial to the economy as a whole, the dynamic feedback effect arising from endogenous energy substitution has distributional impacts favoring high-income households, challenging its presumed progressivity. Redistributing carbon tax revenues as output subsidies for clean energy is most efficient in terms of aggregate welfare under low-to-moderate climate targets. However, due to the absence of direct household transfers, this policy option leads to the most regressive outcome, highlighting an equity–efficiency trade-off in the design of tax-based climate policy.

Keywords: Carbon taxation; CGE modeling; endogenous growth; endogenous energy substitution; distributional consequences; revenue recycling; O31; O32; O41; C68; Q43; Q54; Q55; Q58 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1186/s41937-025-00144-7 Abstract (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sjecst:v:161:y:2025:i:1:d:10.1186_s41937-025-00144-7

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/41937

DOI: 10.1186/s41937-025-00144-7

Access Statistics for this article

Swiss Journal of Economics and Statistics is currently edited by Marius Brülhart

More articles in Swiss Journal of Economics and Statistics from Springer, Swiss Society of Economics and Statistics Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().