Article
The mitigation potential of eco-taxation on carbon emissions: income effects under downward rigid wages
Environmental Economics and Policy Studies
(2021)
Abstract
Eco-taxation is the preferred market based tool for achieving mitigation of CO 2 emissions and
fostering sustainability. It works through tax-induced changes in the price of polluting activities
while ideally transferring the environmental cost to emitters and users. The initial eco-tax
signaling is transmitted and further amplified to the rest of the economy through the structure of
cost interactions. In particular, real-world economies work under wage adjustment rules that
reflect downward rigidity in labor costs when facing rising prices. These common rules may in
fact affect the mitigation capacity of the eco-tax policies. We study this issue using an
interindustry model in which we overcome the classical dichotomy between prices and
quantities thanks to the novelty of connecting consumption demand with the changes in private
income levels that would follow from the enacted eco-tax. We isolate income effects by keeping
the given productive structure of the economy as unaltered as possible. In this sense, the
proposed model has a bit of a neo-ricardian flavor. We implement the model and check the
mitigation effectiveness of two different eco-tax policies using recent tabular data for the
Spanish economy in 2015. The main conclusion is that we would not observe double benefits,
even when all eco-tax collections are recycled back into the economy.
Keywords
- Mitigation,
- eco-taxation,
- tax recycling,
- wage adjustment
Disciplines
Publication Date
Summer July 3, 2021
DOI
http:/link.springer.com/article/10.1007/s10018-020-00280-9
Citation Information
Ferran Sancho. "The mitigation potential of eco-taxation on carbon emissions: income effects under downward rigid wages" Environmental Economics and Policy Studies Iss. 23 (2021) p. 93 - 107 Available at: http://works.bepress.com/ferran_sancho/78/