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AN INVESTIGATION OF CARBON TAXES AND TERMS OF TRADE IN A LARGE MACROECONOMETRIC MODEL

Published online by Cambridge University Press:  30 December 2021

Dawn Holland ,
Ian Hurst ,
Amit Kara  and
Iana Liadze
Dawn Holland*
Affiliation:
National Institute of Economic and Social Research, London, United Kingdom
Ian Hurst
Affiliation:
National Institute of Economic and Social Research, London, United Kingdom
Amit Kara
Affiliation:
Economic Statistics Centre of Excellence, London, United Kingdom
Iana Liadze
Affiliation:
National Institute of Economic and Social Research, London, United Kingdom
*
*Corresponding author: d.holland@niesr.ac.uk
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Abstract

Carbon taxes are likely to play a key role in meeting greenhouse gas emission targets that are consistent with the Paris Agreement. In this article, we assess the macroeconomic effects of a carbon tax on the global economy, paying particular attention to the terms-of-trade implications for importers and exporters of fossil fuels. We use a modified version of the National Institute’s Global Econometric Model, NiGEM. In the stylized scenarios, all countries and regions impose a permanent and uniform carbon tax immediately. Our simulations show that demand for fossil fuels falls substantially in response to the tax, global (pre-tax) prices of fossil fuels decline, and the tax can raise substantial revenue for the government. The overall impact on GDP growth and inflation in each country depends on the fossil fuel intensity of output, the net losses/gains in terms of trade and the macroeconomic policy reaction.

Keywords

macromodellingcarbon priceclimate policyQ58H23E12E60
Type
Research Article
Information
National Institute Economic Review , Volume 258: MACROECONOMICS OF CLIMATE CHANGE , Autumn 2021 , pp. 47 - 65
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of National Institute Economic Review

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