Computable General Equilibrium Analysis of Carbon Tax Policies

Computable General Equilibrium (CGE) models are economy-wide simulation tools that integrate production, consumption and trade interactions across multiple sectors to assess the economic and environmental consequences of policy interventions. In the context of carbon taxation, CGE analysis captures how a levy on carbon emissions alters relative prices, reallocates resources, and influences welfare, trade balances and sectoral outputs. By incorporating behavioural responses of households and firms, factor mobility, tax-revenue recycling mechanisms and closure rules, CGE studies quantify both the direct abatement effect of the tax and the indirect economic adjustments. Static models offer a snapshot of policy impacts under fixed technology and labour supply assumptions, while recursive dynamic formulations project effects over time, accounting for capital accumulation and technological change. Key questions addressed include the size of the emission reduction achievable at a given tax rate, the extent of economic burden borne by different income groups, the potential for a “double dividend” or “triple dividend” when revenues fund tax cuts or green investment, and the role of international trade in moderating domestic impacts. CGE analysis thus provides rigorous, policy-relevant insights into the design of carbon taxes that balance environmental objectives with economic efficiency and equity considerations.

Research from Nature Portfolio

Recent studies employing a dynamic recursive CGE framework have contrasted demand-control and supply-control instruments for emission mitigation. Demand-control, exemplified by a carbon tax, curbs energy consumption by raising the price of carbon-intensive inputs, thereby reducing both domestic demand and energy imports. Supply-control measures, such as resource taxes, elevate domestic energy costs upstream, encouraging substitution and potentially lowering mitigation costs. Simulation results demonstrate that under realistic open-economy conditions, carbon taxes are more effective at suppressing industrial energy demand, while resource taxes may shift production patterns and affect energy security. The analysis highlights the importance of accounting for international trade, indirect price effects and market structure when comparing policy instruments aimed at emission reduction.

Computable General Equilibrium Analysis of Carbon Tax Policies publication trend

The graph below shows the total number of articles in computable general equilibrium analysis of carbon tax policies across all publications each year (not limited to Nature Index journals).

Technical terms

Computable General Equilibrium (CGE) model: A quantitative framework that simulates how economies adjust to policy changes by ensuring supply and demand balance across all markets.

Carbon tax: A levy imposed on the carbon content of fossil fuels, designed to internalise the social cost of greenhouse-gas emissions.

Revenue recycling: The use of tax-generated revenue to fund reductions in other taxes or public investment, thereby mitigating adverse economic effects.

Double dividend: The hypothesis that environmental taxes can yield both environmental improvement and economic efficiency gains when revenues are recycled to reduce distortionary taxes.

Recursive dynamic model: A modelling approach that updates capital stocks and technology over successive time periods, allowing for the analysis of transitional dynamics.

References

1. How to Promote Low-Carbon Economic Development? A Comprehensive Assessment of Carbon Tax Policy in China. International Journal of Environmental Research and Public Health (2021).
2. Supply control vs. demand control: why is resource tax more effective than carbon tax in reducing emissions?. Humanities and Social Sciences Communications (2020).
3. Carbon Trading or Carbon Tax? A Computable General Equilibrium–Based Study of Carbon Emission Reduction Policy in China. Frontiers in Energy Research (2022).
4. Recycling Carbon Tax under Different Energy Efficiency Improvements: A CGE Analysis of China. Sustainability (2021).