Social incidence and economic costs of carbon limits: a computable general equilibrium analysis for Taiwan

Abstract

In this paper, a computable general equilibrium model is constructed and is applied to analyse the economic costs of carbon emissions limits on the Taiwanese economy. The counterfactual simulation technique is applied to investigate the economic effects of mitigating carbon emissions via a carbon tax with a compensation policy. Empirical results basing on the Taiwan's data show that both compensation policies, i.e. income tax rate decrease and carbon tax revenues transfer, can reduce the costs of carbon emissions limits and possibly offset welfare reductions due to implementation of a carbon tax. These results also show that, with respect to allocation and distributional effects, the carbon tax revenues transfer is better than the income tax rate decrease for the selection in compensation policy. From the acceptability of national greenhouse policy, this finding reveals that the economic costs of limiting carbon emissions via a carbon tax can be reduced, if carbon emissions limits are accompanied by redistributing carbon tax revenues.