GHG Mitigation Policies and Employment: A CGE Analysis with Wage Rigidity and Application to Canada

We use a general equilibrium framework to assess the impact of carbon mitigation policies in the presence of labour market rigidities. We analyze the impact of reducing CO 2 emissions in a cap-and-trade system and the implications of different revenue-recycling options. Our results suggest that the policy has a negative impact on employment and welfare when permit revenues are recycled as lump-sum transfers to households. Using the carbon proceeds to reduce payroll tax achieves better outcomes, as the benefits outweigh the pure abatement cost. Moreover, using permit revenues to reduce payroll tax of low-skill workers alone represents the best option.