Network and General Equilibrium Effects of Carbon Taxes and Deforestation1

This article investigates the economic effects of carbon taxation, using a multi-sector general equilibrium model with intersectorial input-output linkages and greenhouse gas emissions. We construct a novel and comprehensive sector-level dataset incorporating all relevant sources of greenhouse gas emissions and calibrate the model for Brazil. The carbon price is determined to meet the country’s annual greenhouse gas emissions pledge under the Glasgow Climate Pact until 2030. In the presence of production networks, the initially concentrated tax shocks propagate throughout the economy, causing widespread variations in relative input prices. As expected, sectors heavily reliant on taxed pollutant resources, such as Energy and Transport, experience significant declines in production. However, some sectors that are not heavily taxed directly may experience a steep price increase and output fall because many of their inputs are highly pollutant and so intensely taxed. The extent of GDP losses depends on the deforestation scenario, ranging from 0.25% (reflecting the record low deforestation levels of 2012) to 5.71% (corresponding to the 2022 rates). The inclusion of Agriculture & Livestock in the taxation leads to considerably smaller GDP losses