Abstract of PhD Thesis

Carbon energy taxation and revenue recycling - An applied general equilibrium analysis for the Irish economy

Wiepke Wissema (2007), Trinity College Dublin

Policy measures are required to reduce emissions of greenhouse gases in order to slow global warming and reduce the effects of climate change, which are particularly problematic for the most vulnerable inhabitants of this planet. A computable general equilibrium model with specific detail in taxation and energy use is developed in this thesis to quantify the impact of the implementation of energy taxation to reduce carbon dioxide emissions in Ireland. Benchmark data combining physical energy and emissions data and economic data in the form of a Social Accounting Matrix (SAM) were compiled from various data sources. Model calculations show that the reduction target for energy related CO2 emissions in Ireland of 25.8 percent compared to 1998 levels could be achieved with a carbon energy tax of 10-15 euro per tonne of CO2. Though fuel switching is important in meeting the target, this result is more sensitive to the possibilities for producers to substitute away from energy use. Welfare would fall but only by small percentages. In production and consumption patterns there is a shift in demand from fuels with a high emission factor to energy sources with a lower carbon-intensity and from energy to other commodities. This thesis confirms that a carbon energy tax leads to greater emission reductions than an equivalent uniform energy tax. The latter has a stronger negative impact on the less polluting energy sectors whereas the carbon tax greatly stimulates the use of renewable energy and reduces the use of peat and coal. The possibility of a Double Dividend for Ireland is also investigated with a model enhanced with a detailed representation of the tax system and transfers between agents. This extended specification creates the possibility to perform thorough second-best analysis, i.e. to assess interactions of the carbon tax with pre-existing distortionary taxes in more detail than is usually possible in an AGE model. Four different methods to recycle the revenue of the carbon tax are compared. Results indicate that the most favourable method is through a lowering of the VAT rates. Surprisingly, reducing labour taxes leads to worse welfare effects. This result is governed by the tightness in the Irish labour market that restricts labour supply. The analysis contributes to a better informed debate about environmental taxation in Ireland.