Publication: Carbon Tax in an Economy with Informality: A Computable General Equilibrium Analysis for Cote d’Ivoire
Date
2021-06
ISSN
Published
2021-06
Author(s)
Timilsina, Govinda
Dissou, Yazid
Toman, Mike
Heine, Dirk
Abstract
In an economy with substantial
informality, a carbon tax can produce fiscal co-benefits
that improve economic performance in addition to reducing
carbon dioxide emissions. If the carbon tax revenues are
used to cut production or labor taxes on formal firms,
particularly those not in the energy sector, the cost of
imposing the carbon tax is reduced, and there may even be
net economic benefits. These tax cuts can also provide an
incentive for informal firms to move to formal parts of the
economy. This study confirms these hypotheses using a
computable general equilibrium model for Côte d’Ivoire.
However, the scale and even the sign of overall economic
impacts and formal-informal sectoral interactions are
sensitive to the scheme and scale of revenue recycling. The
largest fiscal co-benefits, in terms of gross domestic
product and economic welfare gains, would occur when the
entire carbon tax revenue, after keeping the government
revenue neutral, is used to cut existing labor or production
taxes for non-energy formal firms. Reducing the existing
value-added tax also increases gross domestic product and
economic welfare, but without reducing the informality. The
study also shows that energy producers should be exempted
from using the carbon tax revenues to cut their production
or labor taxes; otherwise, carbon dioxide reduction
decreases due to a rebound effect. Although a carbon tax
with lump-sum transfers of revenues is progressive, it would
be economically inefficient because of gross domestic
product and welfare reduction and lack of incentives to
encourage informal activities to move to the formal parts of
the economy.
Citation
“Timilsina, Govinda; Dissou, Yazid; Toman, Mike; Heine, Dirk. 2021. Carbon Tax in an Economy with Informality : A Computable General Equilibrium Analysis for Cote d’Ivoire. Policy Research Working Paper;No. 9710. © World Bank, Washington, DC. http://openknowledge.worldbank.org/handle/10986/35830 License: CC BY 3.0 IGO.”
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