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.
Economic Systems Research
Freire-González, J. & Ho, M. S. (2019) Carbon taxes and the double dividend hypothesis in a recursive-dynamic CGE model for Spain. Economic Systems Research, DOI: 10.1080/09535314.2019.1568969