Climate Change Policies and Tax Recycling Schemes: Simulations with a Dynamic General Equilibrium Model of the Italian Economy

Abstract

A dynamic general equilibrium model of the Italian economy is used to assess the impact of carbon taxation (or auctioned carbon permits), where additional revenue is used to cut either existing taxes on labor or on capital income. Simulation results do not support the existence of the so-called "double dividend" when labor taxes are reduced, whereas lower tax rates on capital have mild positive effects on growth and welfare, with progressivity properties on income distribution. These findings hinge on the assumptions of open economy, given world interest rate, and capital mobility.

The Intra-country Distributional Impact of Policies to Fight Climate Change: A Survey

“…A number of authors consider that general-equilibrium modeling is better adapted, as it avoids this problem (Kriström, 2006;Roson, 2003;OECD, 2004). As seen in the next section, the same holds true when it comes to analysing the economic impact of environmental policies.…”

Carbon Markets, Institutions, Policies, And Research

“…Most recently, Bento and Jacobsen (2007) use a conceptual and numeric model to show that, when rents related to the use exhaustible resources are not fully taxed, net welfare gains constituting a double dividend can be generated when environmental taxes are used to cut preexisting labor taxes. Country studies include; McKitrick (1997), Canada; Garbaccio, Mun and Jorgenson (1999), China; Edwards and Hutton (2001), UK; Ibarraran, Viniegra and Boyd (2001), Mexico; Roson (2003), Italy; and Takeda (2007), Japan.…”