Supply control vs. demand control: why is resource tax more effective than carbon tax in reducing emissions?

Abstract

Carbon tax and some other policies are designed to reduce emissions; resource tax can raise the energy price from the supply side to achieve the purpose of emission mitigation. Based on previous studies, this paper abstracts mitigation policies into supply-control (resource tax as an example) and demand-control (carbon tax as an example). The effects of these policies have been divided into the direct and the indirect effects. A dynamic recursive computable general equilibrium model is applied to simulate different impact path of the two policies. The research shows that if there is no foreign trade and the market is completely market-oriented, the effect of the demand control and the supply control may be equivalent. But this is not the real case. Under the same level of CO2 emission, carbon tax can significantly reduce the energy demand of enterprises and restrain energy imports. However, resource tax can significantly increase domestic energy prices firstly, and then enterprises will be more willing to use cheaper imported energy. Regardless of energy security, relatively low energy use costs ease the economic costs of emission mitigation. Therefore, if every country in the world is required to reduce emissions compulsorily, resource tax may be a better policy of reducing emissions while obtaining “excess profits”.