Carbon Taxes and the Double Dividend Hypothesis in a Recursive-Dynamic CGE model for Spain

A carbon tax is potentially a policy that can reduce CO₂ emissions and mitigate climate risks, at lowest economy-wide costs. We develop a dynamic CGE model for Spain to assess the economic and environmental effects of a carbon tax, and test the double dividend hypothesis. We simulate the impact of three carbon taxes: €10, €20 and €30 per ton of CO₂. For each tax, four “revenue recycling” scenarios are examined: a reduction of taxes on capital, on labor, on VAT, and a scenario in which revenues are not recycled. We find a double dividend for taxes of €10/ton and lower, within five to seven years of implementation. We estimate an annual CO₂ emissions reduction of around 10% with this tax. Under some circumstances, the double dividend can be achieved for a tax of €20/ton. In any case, recycling revenues to cut pre-existing taxes reduces costs of imposing carbon taxes.