Energy Tax Simulation in a Flexible CGE Model of Catalonia

• Authors: Ferran Sancho.
• BSE Working Paper: 112282 | September 15
• Keywords: applied general equilibrium , tax reform , tax substitution , double dividend , CO2 emissions
• JEL codes: C68, D58, H22, Q48
• applied general equilibrium
• tax reform
• tax substitution
• double dividend
• CO2 emissions

There is a considerable body of literature that has studied whether or not an adequately designed tax swap, whereby an ecotax is levied and some other tax is reduced keeping government income constant, may achieve a so-called double dividend, that is, an increase in environmental quality and an increase in overall efficiency. Arguments in favor and against are abundant. Our position is that the issue should be empirically studied starting from an actual, non-optimal tax system structure and by way of checking the responsiveness of equilibria to revenue neutral tax regimes under alternate scenarios regarding the technological structure of the economy. We find that the most critical elasticity for achieving a double dividend is the substitution elasticity between labor and capital whereas the elasticity that would generate the highest carbon dioxide emissions reduction is the energy goods substitution elasticity.