An analysis on the carbon tax policy for energy transition and zero-carbon: Estimation of a macro-fiscal model

We analyze the impact of policy combination of carbon tax and corporate income tax on carbon emission and economy by estimating the mid-scale quarterly Keynesian macro-fiscal model. The model consists of six blocks of final demand, foreign transaction, price, wage and employment, fiscal revenue, and energy and environment. The six blocks consist of 33 behavioral equations and 35 definition equations, and each behavioral equation is estimated using the least squares method. To our knowledge, this is the first study of the impact of combined carbon tax and corporate income tax on the Korean economy using a Keynesian macro-fiscal model. The imposition of a carbon tax assumes a scenario in which numerous energy sources are taxed at a low rate and a scenario in which few energy sources are taxed at a high rate. To offset the economic slowdown caused by the carbon tax, this study assumed a fiscal policy combination scenario with exemption of corporate income taxes through investment in energy efficiency. In particular, the scenario assumed that the carbon emission factor of electricity would be improved. The results of the scenario analysis using the macro-fiscal model are summarized as follows. First, it is more efficient to impose a high carbon tax on a narrow range of energy sources. Second, the economic slowdown caused by the carbon tax can be offset through corporate tax cuts. Third, it is effective to use the secured finances to improve the efficiency of electricity.