Using emissions trading schemes to reduce heterogeneous distortionary taxes: The case of recycling carbon auction revenues to support renewable energy. (September 2022)

• Record Type: Journal Article
• Authors: Gavard, Claire; Voigt, Sebastian; Genty, Aurélien
• Is Part Of: Energy policy. Volume 168(2022)
• Publication Date: 2022-09
• Subjects: Carbon auctions -- Renewable energy support -- Electricity levy -- Emissions trading scheme -- Revenue recycling; C68 -- E62 -- H21 -- H23 -- Q42 -- Q54; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2022.113133
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: We examine the economic impacts of using the revenues from environmental taxation to reduce a pre-existing distortionary tax in a multisector economy where the environmental regulation and pre-existing distortionary tax apply heterogeneously across polluting sectors. With a numerical framework including a detailed sectoral disaggregation, we quantify these in the specific case of the European Union where carbon pricing coexists with electricity levies employed to support renewable energy. We find that using auction revenues from the EU Emissions Trading System (ETS) to reduce the national levies results in a 1.8% ETS carbon price increase but a 5.9% drop in the non-ETS carbon constraint. While the energy intensive sectors often benefit from electricity levy exemptions, the combination of these exemptions and of the recycling of carbon auction revenues to support renewable energy makes the ETS sectors worse off than if carbon revenues are transferred to households. In aggregate, the recycling option analysed here results in a GDP gain due to its impacts on the non-ETS sectors, the reduction of the electricity levy and associated distortionary effects. Highlights: We assess the impact of using carbon revenues to reduce an electricity levy. Initially used to reach a constant renewable energy target share. We analytically disentangle the effects of these instruments. We numerically quantify the impacts on heterogeneously regulated sectors. We find losses for exempted sectors but overall gains due to distortion reductions.