Targeted Carbon Tax Reforms

Abstract

In the presence of intersectoral linkages, sector-specific carbon tax changes can have complex general equilibrium effects. In particular, a carbon tax on the emissions of a sector can lead to an increase in aggregate emissions. We analytically characterise how incremental taxes on the emissions of any set of sectors affect aggregate emissions. We show that carbon tax reforms that target sectors based on their position in the production network can achieve a greater reduction in aggregate emissions than reforms that target sectors based on their direct emissions alone. We illustrate the effects of carbon tax reforms by calibrating our intersectoral network model to the economies of two countries.

Keywords: emissions tax, carbon tax, pollution tax, climate change, environmental tax reform, input-output linkages, intersectoral network

JEL Classification: D51, D62, H23, Q54