Eco-tax multipliers help design more effective carbon mitigation policies

Abstract

I explore strategies to enhance the effectiveness of an environmental tax aimed at reducing carbon emissions from specific activities. The policy design addresses two key issues. The first concerns the structure of the tax itself, with the goal of improving its impact on emission mitigation. To this end, I introduce and apply a new concept: eco-tax multipliers. The second issue involves the need for an analytical tool capable of capturing the price effects of environmental taxes while preserving the aggregate consistency of the circular flow of income. To address this, I propose an improved version of the standard Type II interindustry quantity model. This enhanced model incorporates a novel feature: prices, as the initial receptors of the environmental tax, act as endogenous drivers of equilibrium quantities and, consequently, of carbon emissions. The empirical viability of this approach is demonstrated using recent data from the Spanish economy.