652 C. Kemfert and H. Welsch
Table 6: Nonabatement Baseline under Alternative Elasticity Assumptions
Emissions GDP
EmissionsGDP million tons CO
2
billion ECU tons1000 ECU
Standard elasticities 2000
835.89 1139.57
0.73 2005
878.83 1263.31
0.70 2010
920.92 1397.69
0.66 2015
963.63 1543.48
0.62 2020
999.78 1701.69
0.59 Higher elasticities
2000 914.02
1148.82 0.80
2005 960.15
1275.07 0.75
2010 1004.80
1410.45 0.71
2015 1050.33
1556.11 0.67
2020 1087.19
1713.17 0.63
4. CO
2
EMISSIONS AND CARBON TAX
To understand the influence of higher elasticities, it should be recalled that they change not only the effects of abatement, but,
in the first place, the nonabatement emission baseline. This effect arises because world energy prices are assumed to grow at a lower
rate than the autonomous energy efficiency factor. Under these circumstances, a higher elasticity of substitution between energy-
capital and labor implies a higher energy intensity see Section 3B. As a result, the baseline emission level will be higher under
higher substitution elasticities.
Table 6 shows the baseline carbon emissions under alternative elasticity assumptions, along with GDP and the emission intensity
CO
2
GDP. It can be seen that the difference in emissions is quite pronounced.
7
Because of the higher energy input in the high- elasticity case, GDP is also somewhat higher.
The fact that the nonabatement baselines develop differently under alternative sets of elasticities has important implications
for the macroeconomic effects of abatement, as will be seen in the next section. In the first place, however, it raises the problem
of how to define “equivalent” abatement targets under alternative sets of elasticities. Obviously, requiring the same target emission
level
under both sets of elasticities would imply a much higher
7
That the deviation is rather strong already in 2000 arises because the base year for model calibration is as early as 1985.
ENERGY-CAPITAL-LABOR SUBSTITUTION AND CO
2
653
degree of abatement in the high-elasticity case than in the low
elasticity case, which would bias our estimates of the required tax rate as well as the economic effects of abatement.
8
Thus, we define an “equivalent” abatement target as one involving equal absolute
abatement . In other words, we compute how much abatement is
required in the low-elasticity case to attain the emission level of 1990; then we subtract this abatement level from the high-elasticity
emission baseline to obtain high-elasticity target emissions. Overall, the following abatement scenarios are considered: A-R:
stabilization of emissions at 1990 level under standard elasticities, REDIST; B-R: equal absolute abatement under higher elasticities,
REDIST; A-E: stabilization of emissions at 1990 level under stan- dard elasticities, EMPLOY; B-E: equal absolute abatement under
higher elasticities, EMPLOY.
The tax rates, tax revenues, and revenue shares in GDP that are associated with these abatement scenarios are shown in Table
7. Consider first the cases in which the revenue is rebated to private households REDIST. It can be seen that in the high
elasticity case significantly lower tax rates are required than under standard elasticities, for equal absolute abatement B-R. If the
tax revenue is used to reduce labor costs EMPLOY, we also find that higher elasticities imply lower tax rates. This is what one
would expect: higher elasticities of substitution mean higher price elasticities, which implies that a given abatement target requires
a smaller tax-induced price increase.
If we compare the EMPLOY cases with the corresponding REDIST cases we find that the tax rates are higher in the former
than in the latter. The reason for this is that under EMPLOY we have a higher level of economic activity than under REDIST see
Section 5.
The tax revenues in the various cases are an immediate conse- quence of the corresponding tax rates: higher elasticities imply
lower revenues and lower revenueGDP ratios, and EMPLOY implies higher revenues and revenueGDP ratios than REDIST.
A question that has received much attention in the public fi- nance literature on an “ecological tax reform” concerns the stabil-
ity of the revenueGDP ratio see Pethig, 1997. In this regard we find that in all six scenarios the revenue share in GDP increases
8
From a strictly ecological point of view, it is the target emission level rather than the target abatement level that counts. Some further remarks on this issue are made in the
concluding section.
654 C. Kemfert and H. Welsch
Table 7: Tax Rates and Tax Revenues
Tax Rate Revenue
RevenueGDP ECUton CO
2
billion ECU percent
Scenario A–R 2000
3.25 2.64
0.19 2005
21.88 16.17
1.31 2010
30.03 22.20
1.64 2015
39.40 29.12
1.97 2020
48.24 35.66
2.20 Scenario B–R
2000 2.56
2.28 0.20
2005 15.01
12.36 0.98
2010 20.84
17.16 1.26
2015 27.49
22.64 1.52
2020 33.53
27.67 1.69
Scenario A–E 2000
3.52 2.86
0.25 2005
24.88 18.39
1.46 2010
34.46 25.47
1.84 2015
45.65 33.74
2.22 2020
56.27 41.59
2.49 Scenario B–E
2000 2.80
2.29 0.21
2005 16.95
13.96 1.10
2010 23.64
19.47 1.40
2015 31.39
25.84 1.69
2020 38.38
31.61 1.89
over time. However, in line with theoretical expectations, the increase is less pronounced under the higher and closer-to-unity
elasticities.
5. MACROSECTORAL EFFECTS
