Should carbon tax revenues be earmarked for renewable energy development

Abstract

The risk of having a contraction in the economy due to carbon tax has been a public concern. Literature has argued some mechanisms in recycling the revenue from carbon tax could reduce this risk. Using the case of countries in the East Asian region, this paper aims to analyze whether supporting the development of renewable energy using the revenue from the carbon tax could compensate for the negative impact of the carbon tax on the economy and further decline the level of carbon emissions. To achieve this goal, a multi-country computable general equilibrium model integrated with carbon emission and household expenditure microsimulation models, called IRSA-East Asia is utilized. The main finding is that, for East Asian developing countries, channelling carbon tax revenue into subsidizing their renewable electricity sector might be a preferable route. Conversely, for developed nations in the region, allocating carbon tax revenue to standard government expenditures seems sufficient. Show more