REVENUE RECYCLING AND COST EFFECTIVE GHG ABATEMENT: AN EXPLORATORY ANALYSIS USING A GLOBAL MULTI-SECTOR MULTI-REGION CGE MODEL

Abstract

Carbon pricing generates revenues which can be recycled back into the economy in different ways to help mitigate the economic cost of abatement. These include, lump-sum transfers to households; reducing existing distortionary taxes, such as income taxes on labor and capital; investment in technology funds leading to energy/emissions efficiency improvements; and/or infrastructure developments that help expedite the adoption of low or lower carbon-intensive technologies. In this paper, we undertake illustrative simulations to explore how different revenue recycling options influence the overall economic outcome in terms of broad macroeconomic indicators, such as Gross Domestic Product (GDP) or household welfare. Environment and Climate Change Canada’s (ECCC) multi-sector, multi-region Computable General Equilibrium (CGE) model (EC-MSMR) is used to simulate various revenue recycling options. These simulations are undertaken for the U.S. economy. The main findings of the paper are: (i) using carbon revenue for a general income tax reduction or investment subsidy is more advantageous than a lump-sum transfer to U.S. consumers in terms of welfare or GDP; and (ii) using carbon revenue for a sector-based subsidy such as renewable energy is more disadvantageous than a lump-sum transfer to consumers. In terms of accumulated welfare effects, our results indicate that the best carbon revenue recycling option is the investment subsidy or capital income tax reduction in the longer horizon; labor tax reductions yield the best outcome in the shorter horizons.