ABSTRACT
In this chapter, we use the ambitious policy mix scenario of Chapter 5 as our starting point. The scenario achieves the ambitious 2°C target in 2050 in the four East Asian countries and the main price-based instrument is the carbon tax, which generates revenue for national governments. Our analysis in this chapter consists of scenarios that are designed to enforce budget neutrality.
We explore different ways in which the revenues from carbon taxes might be used to reduce other tax rates, that is, through Environmental Tax Reform (ETR). The options for other taxes to reduce are income taxes, VAT, and employers’ social security contributions. Additionally, we also look at a scenario in which revenues are recycled back as lump-sum payments to households as a basic income. The analysis is carried out using the E3ME model, with the same set-up that was used in Chapter 5. It shows that a carbon tax as part of ETR could lead to a smaller loss of GDP than the carbon tax alone or could lead to an overall increase in GDP.
