AN INVESTIGATION OF CARBON TAXES AND TERMS OF TRADE IN A LARGE MACROECONOMETRIC MODEL

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...

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Bibliographic Details
Published in:National Institute economic review 2021-01, Vol.258, p.47-65
Main Authors: Holland, Dawn, Hurst, Ian, Kara, Amit, Liadze, Iana
Format: Article
Language:English
Subjects:
Carbon
Central banks
Climate change
Costs
Cyclones
Econometrics
Emissions
Environmental policy
Environmental tax
Fiscal policy
Fossil fuels
GDP
Global economy
Global warming
Greenhouse effect
Greenhouse gases
Gross Domestic Product
Inflation
International trade
Macroeconomics
Paris Agreement
Prices
Taxation
Taxes
Terms of trade
Trade policy
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Summary: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.
ISSN:0027-9501
1741-3036
DOI:10.1017/nie.2021.38