Macroeconomic effects of carbon dioxide emission reduction: a computable general equilibrium analysis for Malaysia

This study analyzes the macroeconomic effects of limiting carbon emissions using computable general equilibrium (CGE) model in the Malaysian economy. Doing so, we developed an environmental computable general equilibrium model and investigate carbon tax policy responses in the economy applying exogenously different degrees of carbon tax into the model. Three simulations were carried out using a Malaysian Social Accounting Matrix. The carbon tax policy illustrates that a 1.21% reduction of carbon emission reduces the nominal GDP by 0.82% and exports by 2.08%; a 2.34% reduction of carbon emission reduces the nominal GDP by 1.90% and exports by 3.97%and a 3.40% reduction of carbon emission reduces the nominal GDP by 3.17% and exports by 5.71%. Imposition of successively higher carbon tax results in increased government revenue from baseline by 26.67%, 53.07% and 79.28% respectively. However, fixed capital investment increased in scenario 1a (1st) by 0.43% but decreased in scenarios 1b (2nd) and 1c (3rd) by 0.26% and 1.79% respectively from the baseline. According to our findings policy-makes should consider initial (1st) carbon tax policy. This policy results in achieving reasonably good environmental impacts without losing the investment, fixed capital investment, investment share of nominal GDP and government revenue.