Hostname: page-component-cd9895bd7-q99xh Total loading time: 0 Render date: 2024-12-25T17:25:13.608Z Has data issue: false hasContentIssue false
  • English
  • Français

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
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aghion, P., Dechezleprêtre, A., Hémous, D., Martin, R. and Van Reenen, J. (2016), ‘Carbon taxes, path dependency, and directed technical change: Evidence from the auto industry’, Journal of Political Economy, 124, 1, pp. 1–51.10.1086/684581CrossRefGoogle Scholar
Batten, S., Sowerbutts, R. and Tanaka, M. (2020), ‘Climate change: Macroeconomic impact and implications for monetary policy’, in Walker, T., Gramlich, D., Bitar, M. and Fardnia, P. (eds), Ecological, Societal, and Technological Risks and the Financial Sector. Palgrave Studies in Sustainable Business in Association with Future Earth, Cham: Palgrave Macmillan, https://doi.org/10.1007/978-3-030-38858-4_2.Google Scholar
BP (2019), ‘BP statistical review of world energy’, June 2019, available online at http://www.bp.com/statisticalreview.Google Scholar
Congressional Budget Office (2011), Reducing the Deficit: Spending and Revenue Options, Washington, DC: Congressional Budget Office.Google Scholar
Hantzsche, A., Lopresto, M. and Young, G. (2018), ‘Using NiGEM in uncertain times: Introduction and overview of NiGEM’, National Institute Economic Review, 244, 1, pp. R1–14.10.1177/002795011824400109CrossRefGoogle Scholar
IPCC (2021), Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [Masson-Delmotte, V., Zhai, P., Pirani, A., Connors, S.L., Péan, C., Berger, S., Caud, N., Chen, Y., Goldfarb, L., Gomis, M.I., Huang, M., Leitzell, K., Lonnoy, E., Matthews, J.B.R., Maycock, T.K., Waterfield, T., Yelekçi, O., Yu, R., and Zhou, B. (eds)], Cambridge University Press (in press).Google Scholar
Jaffe, A. (2020), ‘Stranded assets and sovereign states’, National Institute Economic Review, 251, pp. R25–36, https://doi.org/10.1017/nie.2020.4.CrossRefGoogle Scholar
Kahn, M.E., Mohaddes, K., Ng, R.N., Pesaran, M.H., Raissi, M. and Yang, J.C. (2019), Long-Term Macroeconomic Effects of Climate Change: A Cross-Country Analysis , No. w26167, Cambridge, MA: National Bureau of Economic Research.10.3386/w26167CrossRefGoogle Scholar
Krogstrup, S. and Oman, W. (2019), ‘Macroeconomic and financial policies for climate change mitigation: A review of the literature’, IMF Working paper WP/19/185.10.5089/9781513511955.001CrossRefGoogle Scholar
McKibbin, W.J., Morris, A.C., Wilcoxen, P.J. and Liu, W. (2018), ‘The role of border carbon adjustments in a US carbon tax’, Climate Change Economics, 9, 1, p. 1840011.10.1142/S2010007818400110CrossRefGoogle Scholar
Network for Greening the Financial System [NGFS] (2019), First Comprehensive Report – A Call for Action, Paris: NGFS, Banque de France.Google Scholar
OECD (2016), Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, Paris: OECD Publishing, https://doi.org/10.1787/9789264260115-en.Google Scholar
Stern, N. and Stiglitz, J.E. (2021), The Social Cost of Carbon, Risk, Distribution, Market Failures: An Alternative Approach , No. w28472, Cambridge, MA: National Bureau of Economic Research.10.3386/w28472CrossRefGoogle Scholar
Vermeulen, R., Schets, E., Lohuis, M., Kolbl, B., Jansen, D.J. and Heeringa, W. (2018), An Energy Transition Risk Stress Test for the Financial System of the Netherlands, No. 1607. Amsterdam, The Netherlands: Netherlands Central Bank, Research Department.Google Scholar