October 3, 2011

Under what Conditions does a Carbon Tax on Fossil Fuels Stimulate Biofuels?

by Govinda R. Timilsina, S. Csordas and S. Mevel

- Using a multi-sector, multi-country computable general equilibrium model, this study shows first that a carbon tax with the entire tax revenue recycled to households through a lump-sum transfer does not stimulate biofuel production significantly, even at relatively high tax rates. This reflects the high cost of carbon dioxide abatement through biofuels substitution, relative to other energy substitution alternatives; in addition, the carbon tax will have negative economy-wide consequences that reduce total demand for all fuels.

Timilsina, G.R., S., Csordas, and S. Mevel (2011). "Under what Conditions does a Carbon Tax on Fossil Fuels Stimulate Biofuels?" World Bank Policy Research working paper No. WPS 5678, Jun 2011.