Optimized Tax Policy for Fossil Fuel Power Plants to Improve Social Welfare: A Subsidy-Driven Approach

Abstract

One of the challenges of fossil fuel power plants is CO2 emissions. By implementing a tax, the utilization of non-fossil resources can be increased, leading to a reduction in CO2. However, an incorrect tax policy can negatively impact the social welfare index. This paper encompasses the social welfare Index, which incorporates economic, social, and environmental aspects. Furthermore, tax revenue has been allocated as a subsidy to non-fossil producers. The mutual effects of taxation, prices, and subsidies create a loop, wherein the amount paid as a subsidy and received as tax converge in an optimized cycle. Thus, the tax formula presented in this article exhibits two key characteristics: optimality in increasing social welfare and equivalence between the amounts paid and received through its application. The results indicate that an optimized tax formula leads to an increased social welfare index. Additionally, the findings demonstrate that with the increase in the capacity of non-fossil resources, the effect of the tax in improving the social welfare index becomes more significant. However, with continued growth, the impact on social welfare gradually diminishes until the point where further capacity expansion beyond a specific limit will have no effect.