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M. P. Ramos and O. O. Chisari
government can make the decision to compensate taxes, for instance, increasing the
carbon tax to reduce other distortionary taxes.
Rest of the World. The rest of the world buys domestic exports and sells imports
in addition to making transactions in the financial market and collecting dividends
from investment (FDI). In the benchmark situation, the value of exports equalizes
the value of imports (trade balances).
The equivalent variation (EV) is the welfare measure chosen to evaluate the change
in the level of the agents’ utility when prices of goods, services and factors change.
Carbon Emissions. Two indicators of carbon emissions are measured at the
national level. The first one is the total carbon emission index that is computed
according to the consumption of polluting goods and the production of carbonintensive sectors, taking into account the mechanism of latent technologies (fixed
proportions). The second carbon indicator is our “Kuznets index”, which compares
the total carbon emissions with the level of activity, providing the carbon-intensity
measurement of the country’s GDP.
The net impact in terms of emissions depends on carbon inter-industrial transactions. For example, let us assume that an economy has only two goods (Q 1 , Q 2 ),
where each good contributes differently to the total carbon emissions (e 1 and e 2 are
the coefficients of carbon emissions per unit of product Q 1 and Q 2 , resp.); thus, total
carbon emissions are: CO 2 E = e 1 Q 1 + e 2 Q 2 .
Then, the change in the total carbon emissions in an economy, when introducing,
for example, an ETR on good 2 (e.g. t 2 ), will be broken down into three separate
effects using the taxonomy proposed by Brock and Scott Taylor (2004). They identify
three channels through which emissions can be reduced:
First, the scale effect, which takes into account how the scale of activity can
change responding to taxes or other incentives, and thus, impacting on emissions.
Technically, this effect is given by movements along a ray defined by Q 2 = sQ 1 ,
where s is a positive number; then, dCO 2 E/dQ 1 = e 1 + e 2 s.
The second effect is the composition effect, which considers the modifications in
the composition of the value added (in terms of the share of every activity in the total),
reducing the relative participation of carbon-intensive activities. This effect depends
on the movement of the economy along the frontier of possibilities of production
Q 2 (Q 1 ), and thus, dCO 2 E/dQ 1 = e 1 + e 2 Q 2
(Q 1 ).
Finally, the third effect is the intensity or technique effect, which derives from
educing the coefficients of emissions per unit of output as a result of the adoption
of alternative technologies, i.e. dCO 2 E/de 1 = Q 1 . This effect could be the result
of substituting polluting production technologies by cleaner ones (less emission
intensive). Allowing for a latent cleaner technology implementation (considered in
this CGE model) leads to the abatement of emissions keeping the same industrial
structure and without reducing the level of the economic activity. Nonetheless, as
reviewed in the literature, the implementation of new green alternative technologies
is not costless. The presence of sunk capital and the cost of opportunity of foreign
resources could limit the introduction or the extent of application of a new clean
technology that could change the intensity of emissions per unit of production. Thus,
when the implementation of a cleaner production method becomes too expensive,
M. P. Ramos and O. O. Chisari
government can make the decision to compensate taxes, for instance, increasing the
carbon tax to reduce other distortionary taxes.
Rest of the World. The rest of the world buys domestic exports and sells imports
in addition to making transactions in the financial market and collecting dividends
from investment (FDI). In the benchmark situation, the value of exports equalizes
the value of imports (trade balances).
The equivalent variation (EV) is the welfare measure chosen to evaluate the change
in the level of the agents’ utility when prices of goods, services and factors change.
Carbon Emissions. Two indicators of carbon emissions are measured at the
national level. The first one is the total carbon emission index that is computed
according to the consumption of polluting goods and the production of carbonintensive sectors, taking into account the mechanism of latent technologies (fixed
proportions). The second carbon indicator is our “Kuznets index”, which compares
the total carbon emissions with the level of activity, providing the carbon-intensity
measurement of the country’s GDP.
The net impact in terms of emissions depends on carbon inter-industrial transactions. For example, let us assume that an economy has only two goods (Q 1 , Q 2 ),
where each good contributes differently to the total carbon emissions (e 1 and e 2 are
the coefficients of carbon emissions per unit of product Q 1 and Q 2 , resp.); thus, total
carbon emissions are: CO 2 E = e 1 Q 1 + e 2 Q 2 .
Then, the change in the total carbon emissions in an economy, when introducing,
for example, an ETR on good 2 (e.g. t 2 ), will be broken down into three separate
effects using the taxonomy proposed by Brock and Scott Taylor (2004). They identify
three channels through which emissions can be reduced:
First, the scale effect, which takes into account how the scale of activity can
change responding to taxes or other incentives, and thus, impacting on emissions.
Technically, this effect is given by movements along a ray defined by Q 2 = sQ 1 ,
where s is a positive number; then, dCO 2 E/dQ 1 = e 1 + e 2 s.
The second effect is the composition effect, which considers the modifications in
the composition of the value added (in terms of the share of every activity in the total),
reducing the relative participation of carbon-intensive activities. This effect depends
on the movement of the economy along the frontier of possibilities of production
Q 2 (Q 1 ), and thus, dCO 2 E/dQ 1 = e 1 + e 2 Q 2
(Q 1 ).
Finally, the third effect is the intensity or technique effect, which derives from
educing the coefficients of emissions per unit of output as a result of the adoption
of alternative technologies, i.e. dCO 2 E/de 1 = Q 1 . This effect could be the result
of substituting polluting production technologies by cleaner ones (less emission
intensive). Allowing for a latent cleaner technology implementation (considered in
this CGE model) leads to the abatement of emissions keeping the same industrial
structure and without reducing the level of the economic activity. Nonetheless, as
reviewed in the literature, the implementation of new green alternative technologies
is not costless. The presence of sunk capital and the cost of opportunity of foreign
resources could limit the introduction or the extent of application of a new clean
technology that could change the intensity of emissions per unit of production. Thus,
when the implementation of a cleaner production method becomes too expensive,