Macroeconomic Impact Of The Carbon Tax

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This paper examined the macroeconomic impact in the case of the carbon tax. In order to quantify its impact, this study divides key economic agents (firms and consumers) and analyzes their economic activities. I find that firms and consumers will respond to the carbon tax ($40/ton) by decreasing their economic activities at 2% and 0.7% respectively. As a result, a decrease in GDP is expected due to decreased production and consumption. To avoid this, tax dividends should be allocated to consumers non-uniformly depending on the income level and renewable energy subsidy should be invested to firms to maintain their production level. Introduction A great deal of scientific evidence has supported the importance of environmental policy to…show more content…
As a result, GDP will be negatively affected by the effects of reduced production activities of firms and lowered disposable income level of consumers. Therefore, in order to minimize the negative impact on the economy, policy should be carefully designed to compensate household proportionally to the extent of impacts due to the carbon tax. And, it needs to have alternative incentives for firms to sustain their production level through subsidizing renewable industries. In order to show this result, this study takes steps to explain each of following policy questions: 1) How and which would consumers be affected, 2) How would tax payers (firms) react in the response of carbon tax, and 3) What could the overall impact on the economy be. General idea: Structure of carbon tax policy and Comparison with CPP The major difference between CPP and this proposal is that CPP is a quantity-based emission regulation while allowing market trade, whereas the proposal is a tax-based regulation. Due to the different nature of each mechanism, there are obvious trade-offs between both policies. First, cap and trade can achieve reduction goal with more certainty by setting a clear goal for emission reductions. But cap and trade method needs higher administration cost to monitor and regulate firms on a regular basis. Whereas, a carbon tax is simple to apply by setting a certain rate of tax and no further
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