Under What Conditions Does a Carbon Tax on Fossil Fuels Stimulate Biofuels?

41 Pages Posted: 20 Apr 2016

See all articles by Govinda R. Timilsina

Govinda R. Timilsina

World Bank - Development Research Group (DECRG)

Stefan Csordas

World Bank - East Asia and Pacific Region

Simon Mevel

International Food Policy Research Institute (IFPRI)

Date Written: June 1, 2011

Abstract

A carbon tax is an efficient economic instrument to reduce emissions of carbon dioxide released from fossil fuel burning. Its impacts on production of renewable energy depend on how it is designed -- particularly in the context of the penetration of biofuels into the energy supply mix for road transportation. Using a multi-sector, multi-country computable general equilibrium model, this study shows first that a carbon tax with the entire tax revenue recycled to households through a lump-sum transfer does not stimulate biofuel production significantly, even at relatively high tax rates. This reflects the high cost of carbon dioxide abatement through biofuels substitution, relative to other energy substitution alternatives; in addition, the carbon tax will have negative economy-wide consequences that reduce total demand for all fuels. A combined carbon tax and biofuel subsidy policy, where part of the carbon tax revenue is used to finance a biofuel subsidy, would significantly stimulate market penetration of biofuels. Although the carbon tax and biofuel subsidy policy would cause higher loss in global economic output compared with the carbon tax with lump sum revenue redistribution, the incremental output loss is relatively small.

Keywords: Climate Change Mitigation and Green House Gases, Transport Economics Policy & Planning, Taxation & Subsidies, Environment and Energy Efficiency, Energy and Environment

Suggested Citation

Timilsina, Govinda R. and Csordas, Stefan and Mevel, Simon, Under What Conditions Does a Carbon Tax on Fossil Fuels Stimulate Biofuels? (June 1, 2011). World Bank Policy Research Working Paper No. 5678. Available at SSRN: https://ssrn.com/abstract=1859201

Govinda R. Timilsina (Contact Author)

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

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

Stefan Csordas

World Bank - East Asia and Pacific Region ( email )

Washington, DC 20433
United States

Simon Mevel

International Food Policy Research Institute (IFPRI) ( email )

1201 Eye St, NW,
Washington, DC 20005
United States

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