The Role of Revenue Recycling Schemes in Environmental Tax Selection: A General Equilibrium Analysis

52 Pages Posted: 11 Dec 2007

See all articles by Govinda R. Timilsina

Govinda R. Timilsina

World Bank - Development Research Group (DECRG)

Date Written: November 2007

Abstract

This study examines the roles of revenue recycling schemes for the selection of alternative tax instruments (i.e., carbon-, sulphur-, energy- and output-tax) to reduce CO2 emissions to a specified level in Thailand. A static, single period, multi-sectoral computable general equilibrium (CGE) model of the Thai economy has been developed for this purpose. This study finds that the selection of a tax instrument to reduce CO2 emissions would be significantly influenced by the scheme to recycle the tax revenue to the economy. If the tax revenue is recycled to finance cuts in the existing labour or indirect tax rates, carbon tax would be more efficient than the sulphur-, energy- and output-taxes to reduce CO2 emissions. On the other hand, if the tax revenue is recycled to households through a lump-sum transfer, sulphur and carbon taxes would be more efficient than energy and output taxes. The ranking between the sulphur and carbon taxes under the lump sum transfer scheme depends on substitution possibility of fossil fuels. Sulphur tax is found superior over carbon tax at the higher substitution possibility between fossil fuels; the reverse is found true at the lower substitution possibility. In all schemes of revenue recycling considered, the output tax is found to be the most costly (i.e., in welfare terms) despite the fact that it generates two to three times higher revenue than the other tax instruments.

Suggested Citation

Timilsina, Govinda R., The Role of Revenue Recycling Schemes in Environmental Tax Selection: A General Equilibrium Analysis (November 2007). World Bank Policy Research Working Paper No. 4388. Available at SSRN: https://ssrn.com/abstract=1069478

Govinda R. Timilsina (Contact Author)

World Bank - Development Research Group (DECRG) ( email )

1818 H Street NW
MSN3-311
Washington, DC 20433
United States

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