Analyzing Macroeconomic Effects of Environmental Taxation in the Czech Republic with the Econometric E3ME Model

Market-based instruments have gradually become a significant tool of environmental policy in central European countries. By using the structural macroeconometric E3ME model the authors compare two alternative green tax based policy frameworks in the Czech Republic. While the first imposes a tax on emissions of classical pollutants (particulates, sulphur dioxide, nitrous oxides, and volatile organic compounds), the second consists of carbon taxation intentionally set at the level equalizing environmental effect measured by externalities that are avoided as result of both reductions in emissions subject to taxation and ancillary effects. The authors also analyze impacts of revenue recycling. The comparison of economic impacts of both considered policy set ups indicates that policy aimed at the taxation of classical pollutants outperforms carbon policies in cases without revenue recycling. On the other hand, mainly due to significantly higher revenues from carbon taxation, when the revenues are recycled, a carbon taxation framework appears to be a better option.