On the Spillover Effects of CO2 Taxation on the Emissions of other Air Pollutants

Abstract

In this paper, we compare and contrast the environmental, macroeconomic and distributive effects of CO₂ taxation with the effects of taxing a variety of air pollutants at their external costs. We do so using a multi-sector and multi-household dynamic computable general equilibrium model of the Portuguese economy. We find that a carbon tax of 114 euros per ton of CO₂ is necessary to achieve the IPCC 2030 targets. It does so, however, at a high macroeconomic and distributional cost. In turn, the macroeconomic and distributional effects of taxing different pollutants at their external costs in line both qualitatively and quantitatively with the effects of the CO₂ taxation. In absolute terms, however, better environmental results in terms of GHG and air pollutants emissions are achieved through the level of CO₂ taxation necessary to achieve the IPCC targets than through direct taxation of such emissions at their external costs. Ultimately, the benefits of complementing the CO₂ taxation with the taxation of other air pollutants at their external costs does not seem significant from either efficiency, fairness, or environmental perspectives to justify the practical complexity of considering it.