AN INVESTIGATION OF CARBON TAXES AND TERMS OF TRADE IN A LARGE MACROECONOMETRIC MODEL. (2021)

• Record Type: Journal Article
• Authors: Holland, Dawn; Hurst, Ian; Kara, Amit; Liadze, Iana
• Is Part Of: National Institute economic review. Volume 258:Number 1(2021)
• Page Start: 47
• Page End: 65
• Publication Date: 2021
• Subjects: macromodelling -- carbon price -- climate policy; Q58 -- H23 -- E12 -- E60; Economic history -- 1945- -- Periodicals; Economics -- Great Britain -- Periodicals; Great Britain -- Economic conditions -- 1945-1964 -- Periodicals; 330.941
• DOI: 10.1017/nie.2021.38
• Languages: English
• ISSNs: 0027-9501

Abstract

Abstract : Carbon taxes are likely to play a key role in meeting greenhouse gas emission targets that are consistent with the Paris Agreement. In this article, we assess the macroeconomic effects of a carbon tax on the global economy, paying particular attention to the terms-of-trade implications for importers and exporters of fossil fuels. We use a modified version of the National Institute's Global Econometric Model, NiGEM. In the stylized scenarios, all countries and regions impose a permanent and uniform carbon tax immediately. Our simulations show that demand for fossil fuels falls substantially in response to the tax, global (pre-tax) prices of fossil fuels decline, and the tax can raise substantial revenue for the government. The overall impact on GDP growth and inflation in each country depends on the fossil fuel intensity of output, the net losses/gains in terms of trade and the macroeconomic policy reaction.