This paper applies a DYNK (Dynamic New Keynesian) model to compare the traditional environmental tax reform for greenhouse
gas emissions with a taxation scheme that taxes greenhouse gas emissions embodied in consumption within the framework of a
unilateral policy of the EU 27. The embodied emissions of different commodities are taxed independently of their origin. The
greenhouse gas tax rates applied are identical and new revenues are in both cases recycled via lower social security contributions
of employers. The article shows the macroeconomic results, driven by the different impact of the taxation schemes on price
competitiveness of EU 27 firms. These differences drive the leakage and show negative leakage in the case of taxing embodied
greenhouse gas emissions. Both taxation schemes are also regressive for household incomes emphasising the importance of the
choice of revenue recycling. In terms of emission reduction, we find the taxation of emissions embodied in consumption less
effective.
This paper calculates the carbon footprint of private consumption in the EU 27 by five groups of household income, using a
fully fledged macroeconomic input-output model covering 59 industries and five groups of household income for the EU 27. Due
to macroeconomic feedback mechanisms, this methodology – besides induced intermediate demand – also quantifies: 1. private
consumption induced in the other household groups, 2. impacts on other endogenous final demand components, and 3. negative
feedback effects due to output price effects of household demand. The carbon footprint is calculated separately for the consumption
vector of each of the five income groups. The simulation results yield a non-linear income elasticity of direct and indirect
emissions at each income level: the value of the direct footprint income elasticity decreases from 1.32 (first quintile) to
0.69 (fourth quintile). The value of the indirect footprint income elasticity is always below unity and decreases from 0.89
to 0.62. The results in general reveal a relative decoupling effect: the share of the top income group in income (45 percent)
is much larger than its share in the carbon footprint (37 percent) and vice versa for the bottom income group (6 percent in
income and 8 percent in footprint).
in: Larry Kreiser, Mikael S. Andersen, Birgitte E. Olsen, Stefan Speck, Janet E. Milne, Hope Ashiabor (Eds.), Carbon Pricing: Design, Experiences and Issues