A cost-effective implementation is assumed, where the abatement is achieved by replacing the current CO2-tax system and GHG price in the EU Emissions Trading System (EU ETS) with uniform emissions pricing. The analysis is conducted by means of Statistics Norway’s computable general equilibrium (CGE) model SNOW-NO of the Norwegian economy. With a perspective of more than ten years, we consider an equilibrium approach to be relevant to capture the long run adaptation to climate policy. The CGE model allows us to study the interaction among many simultaneous measures and how they interplay with pre-existing distortions. We also study the impacts of recycling the revenue from the emissions pricing in a way that dampens pre-existing distortions, namely reduces the labour taxation.
The analysis is split into two phases. In phase 1, various 2035 policy scenarios are simulated and compared to a common reference scenario, with a focus on constructing economy-wide marginal abatement cost curves for two different target structures. In the first, Policy i), various economy-wide targets for 2035 are to be met solely through domestic abatement measures. In the second, Policy ii), the abatement is split into two sub-targets, one for emissions currently covered by the EU ETS, and one for remaining emissions, which are covered by EU’s effort-sharing regulation (ESR). The Policy ii) target structure allows for purchases of allowances in the EU ETS, if cost effective. However, it disregards similar cross-border options for the abatement in the ESR-covered sector. This is motivated by limited practical access in the current cooperation with the EU.
In the second phase of the analysis, we examine the macroeconomic and industry-specific implications of one of the policy scenarios from the first phase in detail. The selected scenario has a GHG abatement target of 60 per cent compared to the 1990 level which is to be achieved solely by domestic abatement, i.e., by conducting Policy i). The selected policy scenario is analysed given two different recycling options for the revenue from emission pricing: a lump sum, non-distortive transfer back to the household sector, and by reducing labour taxation. The latter option illustrates how the revenue from carbon pricing can be used to reduce distortive taxes, thus obtaining a double dividend.
The main results of the analysis are that the uniform emission prices span from 2,900 to 12,300 NOK (in fixed 2022 prices) per tonne of abated GHG emissions across the simulated 2035 policy scenarios. We observe that, for the same economy-wide abatement target of 65 per cent cut relative to 1990, the marginal abatement cost (MAC) is more than doubled if Policy i) is chosen instead of Policy ii). Further, in the detailed assessment of the selected 60 per cent abatement scenario in the second phase, we find that revenue recycling via reduced labour taxation can bisect the social cost as compared with the lump-sum recycling case. This reflects that in the lump-sum case, the interaction between the GHG emission price and the pre-existing labour taxation adds significantly to the social cost. The explanation is that labour taxation encourages households to choose more leisure than socially beneficial, and when an emission price is introduced, even more leisure will be preferred by the households. The driver behind increased leisure is a drop in the real wage and, thus, in the marginal benefit of working.