Computable General Equilibrium Techniques for Carbon Tax Modeling

Problem statement: Lacking of proper environmental models environmental pollution is now a solemn problem in many developing countries particularly in Malaysia. Some empirical studies of worldwide reveal that imposition of a carbon tax significantly decreases carbon emissions and does not dramatically reduce economic growth. To our knowledge there has not been any research done to simulate the economic impact of emission control policies in Malaysia. Approach: Therefore this study developed an environmental computable general equilibrium model for Malaysia and investigated 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. Results: The carbon tax policy illustrated that a 1.21% reduction of carbon emission reduced the nominal GDP by 0.82% and exports by 2.08%; 2.34% reduction of carbon emission reduced the nominal GDP by 1.90% and exports by 3.97% and 3.40% reduction of carbon emission reduced the nominal GDP by 3.17% and exports by 5.71%. Conclusion/Recommendations: 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 by 0.43% and decreased in scenarios 1b and 1c by 0.26 and 1.79% respectively from the baseline. According to our policy findings policy makers should consider 1st (scenario 1a) 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.