Selective Carbon Taxation in Production Networks: Evidence from Mexico
25 Pages Posted: 7 Apr 2021 Last revised: 10 Oct 2022
Date Written: November 3, 2021
Many governments consider carbon taxation as an efficient tool to reduce carbon emissions. How can carbon taxation be best introduced? This paper examines the effect of selective carbon taxation on aggregate emissions in the context of input-output linkages. Our contribution is to model carbon taxes as a charge on the emissions of individual energy sources rather than on output or the final consumption good. We show theoretically the difference between taxing sectors and energy sources for the effect of carbon taxation on aggregate emissions. We then introduce the measure of emission centrality and show that it is a helpful statistic to evaluate how price effects influence emissions within the production network following the introduction of a carbon tax. Our empirical contribution is to exploit the introduction of carbon taxation in Mexico in 2014, and use input-output data, to show that the political economy effects that made government eliminate taxation on some energy sources resulted in a 22% lower reduction in aggregate emissions.
Keywords: Carbon Pricing, Macroeconomic Development, Input-Output Linkages
JEL Classification: H23, O11, C67, O47
Suggested Citation: Suggested Citation