Investments and public finance in a green, low carbon, economy

There is a large and growing demand for estimates of investments, particularly in the power sector, needed to cut GHG emissions and for estimates of the financial implications of climate policy, both at the national and international level. A new study by CMCC authors Carlo Carraro, Alice Favero, Emanuele Massetti evaluates the impacts on investments and public finance of a transition to a green, low – carbon economy induced by carbon taxation.
Four global tax scenarios were examined using the integrated assessment model WITCH, and results were published in the journal Energy Economics.
The paper highlights as carbon taxes induce an overall contraction of investments, even if costs, investments and tax revenues induced by carbon taxes are only loosely related. Moreover, investments in power generation increase only with global GHG concentrations (stabilization target) below 550 ppm CO2 – eq.

The abstract of the article:

The paper evaluates the impacts on investments and public finance of a transition to a green, low carbon, economy induced by carbon taxation. Four global tax scenarios are examined using the integrated assessment model WITCH. Taxes are levied on all greenhouse gases (GHGs) and lead to global GHG concentrations equal to 680, 560, 500 and 460 ppm CO2-eq in 2100. Investments in the power sector increase with respect to the Reference scenario only with the two highest taxes. Investments in energy-related R&D increase in all tax scenarios, but they are a small fraction of GDP. Investments in oil upstream decline in all scenarios. As a result, total investments decline with respect to the Reference scenario. Carbon tax revenues are high in absolute terms and as share of GDP. With high carbon taxes, tax revenues follow a “carbon Laffer” curve. The model assumes that tax revenues are flawlessly recycled lump-sum into the economy. In all scenarios, the power sector becomes a net recipient of subsidies to support the absorption of GHGs. In some regions, with high carbon taxes, subsidies to GHG removal are higher than tax revenues at the end of the century.

Read all the outcomes and download the full paper at ScienceDirect website.

Photo by CECAR – Climate and Ecosystems Change Adaptation R

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