Support to renewable energy sources and carbon capture and sequestration: comparison of alternative green tax reforms

Abstract

We compare the economic and environmental effects of several specifications of a green tax reform (GTR) where tax revenues are used to support renewable energy sources (RESs) and carbon capture and sequestration (CCS) activities. With this aim, we propose an equilibrium model where final-goods production uses labour and energy, and energy production uses nonpolluting RES and polluting fossil fuels. The comparison is based on three key indicators: output per worker, energy intensity and the ratio of renewables over nonrenewables. We test five variations of the GTR in addition to the no-policy case. Results show that a GTR as the one we propose here never provides a double dividend. There are environmental benefits but at the expense of the economy. Additionally, for lower tax levels, prioritizing RES support has lower economic costs and potential environmental benefits. For higher tax levels, CCS support becomes more competitive.