CO2 taxes, equity and the double dividend - Macroeconomic model simulations for Austria

This paper investigates the impacts of CO2 tax schemes on CO2 emissions, equity and macroeconomic indicators in Austria with the macroeconomic model DYNK[AUT]. Our scenarios focus on non-ETS CO2 emissions and comprise different tax rates and revenue recycling options (lower labor taxes, lower VAT and lump sum payments). The short-term comparative scenario analysis indicates that CO2 taxes without recycling lead to significant CO2 emission reductions at moderate economic costs. Equity impacts on households depend on the indicator used but can be regressive without recycling. Most recycling schemes can achieve a double dividend, i.e. emission reductions and increases in GDP. Lump sum payments are less efficient than reducing the VAT or labor taxes. Equity impacts are progressive with lump sum payments, rather proportional with lower VAT and regressive with lower labor taxes. A combination of recycling schemes and/or a restriction of lump sum payments to lower income households can minimize the trade-off between equity and efficiency. Our simulations suggest that well-designed CO2 tax schemes could be a crucial and socially acceptable element within a comprehensive policy package to achieve GHG emission targets for non-ETS sectors in Austria.