| Abstract | Rapid increase of atmospheric GHG emissions concentration in the recent years has intensified
the need to investigate many diverse types of mitigation policy options, both nationally
and at international level, for their economic and environmental impacts. In this study, thus,
four different policy measures, such as carbon taxation, energy efficiency improvement, fiscal
adjustments particularly those related with indirect tax rationalization and subsidy
removal, and sulfur taxation are selected to be analyzed for their potential impacts on the
economy and GHG/ local pollutant emissions reduction for a developing country, Pakistan.
This analysis assesses the impacts of carbon tax separately and in coordination with energy
efficiency improvement, mainly because the climate taxes which are empirically
observed to exhibit substantial GHG emissions reduction usually incur GDP losses. Similarly,
the energy efficiency improvement that generates the effects identical to an increase in
physical energy inputs and reduction in implicit energy prices accompany the perils of rebound
or in some cases take-back effects. Since appropriate carbon/energy pricing can not
only prevent fall of energy services costs emanating from increased energy efficiency which
instigate the rebound or take-back effects but also reduces the negative economic effects associated
with the climate taxes, it thus seems imperative for any environmental policy design
to view these technology and relative price related policies as complementary, and significantly
important especially to put the country on the right path leading towards sustainable
development in the future.
A 20 sectors recursive dynamic CGE model based on the neoclassical approach is developed
for the simulations. Since input-output table which provides foundation for construction
of a SAM is not published in the recent years in Pakistan, as the latest available belongs to
1990-91, special efforts are made to update it especially by incorporating the latest available
inter-industrial energy consumption, value added, taxes, tariffs, subsidies, final consumptions,
international trade, depreciation, and investment related details for the benchmark year,
2008. The model is run until 2050, with policy measures starting from the year 2015.
Regarding carbon tax and energy efficiency improvement policy options, three main
scenarios are developed: Scenario T where carbon tax is levied at $10 to $80/ton of CO2 and
the tax revenue is assigned for government consumption; Scenario TR where additional tax
recycling is assumed and CO2 tax of $50/ton is simulated with lump-sum transfer of the tax
revenue to households; and Scenario TE where energy efficiency growth for primary energy
sources is jointly simulated with $50/ton of CO2 tax, while treating the tax revenue for government
consumption. The findings of the analysis reveal that carbon tax can reduce harmful
pollutant emissions such as CH4, N2O, and SO2 along with CO2 for which the tax is meant for
to a significant level but with negative GDP impact. However, this GDP loss at lower tax
rates is observed fairly small than at the higher tax rates. Other macroeconomic variables are
also expected to decrease except the government consumption which increases significantly,
mainly due to its increased revenue potential, with rise in the tax rate. In the case of second
scenario where tax revenue is recycled to households, the relative GDP loss is found considerably
moderate. This would happen because increased household income would encourage
spending on both the private consumption and investment in the economy. The results of the
joint carbon tax - energy efficiency improvement simulations in the last scenario are found
quite significant. Here GDP is estimated to grow comparatively positive with even higher reductions
in energy consumption demand and so pollutant emissions. That is, economic
iv
development is expected to follow cleaner environment and enhanced energy security with
less import dependency of the country.
For the analysis of fiscal reforms, four counterfactual scenarios are developed. In Scenario
F1, indirect tax rationalization is assumed as the only shock to the economic system; in
Scenario F2, subsidy elimination is considered; in Scenario F3, both indirect tax rationalization
and subsidy removal are simulated in unison; and in Scenario FT, carbon tax is
implemented in reconciliation with the other policy changes defined in the previous scenarios.
In all the alternative policy measures, the additional revenues generated are assigned to
the government consumption expenditures. The GDP under the both indirect tax rationalization
and subsidy removal policies is found positive – though slightly negative at the end of
the simulation periods for complete subsidies elimination – with sufficiently large reductions
in energy consumption and pollutant emissions (the subsidy removal policy measure is, however,
appeared more efficient in terms of reductions in energy consumption demand and the
pollutant emissions). This is expected to strengthen the impacts of carbon tax when implemented
with the other fiscal reforms/ adjustments. As in the last policy scenario in this
section, with a slightly more GDP loss, reductions in energy consumption and consequently
pollutant emissions are estimated to be considerably higher than observed in the case of Scenario
T for the same tax rates.
In the final analysis of sulfur taxation especially for its co-benefits of the GHG emissions
reduction in this study (Scenario TL), the results show significant decrease in coal consumption,
followed by small changes in oil and gas. This would cause decline in sulfur emissions
to a reasonable level even at smaller macroeconomic costs, but with least impact on GHG
emissions. These results are contrary to the findings of some of the existing CGE studies in
which local pollutant SO2 control policies are found to have important implications regarding
GHG emissions reduction. A thorough comparison between the different relevant cases thus
reveals that the local and GHG emissions mitigation policies, in the Pakistan case, would not
yield rather similar results in terms of co-benefits of other emissions reduction unless and until
the dream of abundant indigenous coal reserves alongside their exploitation is realized and
thereby the coal share in total primary energy consumption is increased significantly. |