The distributional effect of a carbon tax on income in Taiwan

Abstract

Environmental issues have become more important worldwide. A carbon tax is a strong tool for cutting carbon emissions directly through the internalization of the external costs of pollution. To mitigate the impact of carbon taxation, it is necessary to recycle the tax revenue into other taxes, subsidies, and transfers. In Taiwan, carbon tax policy has been under consideration. To analyze the effect of carbon tax and tax revenue recycling, this paper adopts a recursive dynamic computable general equilibrium (CGE) model-General Equilibrium Model for Energy, Environment, and Technology (GEMEET)-under a comprehensive economic systems framework. The results show that a suitable recycling mechanism is a key factor for the success of green tax reform for a significant improvement in the economy, environment, and in income distribution, simultaneously.