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The mitigation potential of eco-taxation on carbon emissions: income effects under downward rigid wages

Author

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  • Ferran Sancho
Abstract
Eco-taxation is the preferred market based tool for achieving mitigation of CO2 emissions and fostering sustainability. It works through tax-induced changes in the price of polluting activities while ideally transferring the environmental cost to emitters and users. The initial eco-tax signaling is transmitted and further amplified to the rest of the economy through the structure of cost interactions. In particular, real-world economies work under wage adjustment rules that reflect downward rigidity in labor costs when facing rising prices. These common rules may in fact affect the mitigation capacity of the eco-tax policies. We study this issue using an interindustry model in which we overcome the classical dichotomy between prices and quantities thanks to the novelty of connecting consumption demand with the changes in private income levels that would follow from the enacted eco-tax. We isolate income effects by keeping the given productive structure of the economy as unaltered as possible. In this sense, the proposed model has a bit of a neo-ricardian flavor. We implement the model and check the mitigation effectiveness of two different eco-tax policies using recent tabular data for the Spanish economy in 2015. The main conclusion is that we would not observe double benefits, even when all eco-tax collections are recycled back into the economy.

Suggested Citation

  • Ferran Sancho, 2020. "The mitigation potential of eco-taxation on carbon emissions: income effects under downward rigid wages," UFAE and IAE Working Papers 968.20, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    • Handle: RePEc:aub:autbar:968.20
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    More about this item

    Keywords

    Mitigation; eco-taxation; tax recycling; wage adjustment.;
    All these keywords.

    JEL classification:

    • C57 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Econometrics of Games and Auctions
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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