Simulating the environmental and economic effects of a carbon tax in Vietnam: a static computable general equilibrium analysis

Abstract

PurposeA carbon tax has been widely discussed and implemented in developed countries to mitigate carbon emissions, but this measure is still quite new in developing countries. Recently, the ambition of Vietnam's government in mitigating emissions has been mentioned in international commitments. To achieve these targets, the government is making efforts to seek and implement mitigation measures in the country. While carbon pricing was introduced in Vietnam, there is no study simulating the effects of a carbon tax in the country. This study simulates the environmental and economic effects of a carbon tax and then proposes appropriate policies in Vietnam.Design/methodology/approachThis study investigates the impact on the Vietnamese economy within the static computable general equilibrium (CGE) framework. Compared with previous models, the proposed model in this paper is a fairly standard CGE approach that tries to picture the economic system of Vietnam. In addition, a carbon tax on output will be modeled in this framework. This carbon tax mechanism is more flexible and direct when a carbon tax is based on direct emissions by industry level and the industry's carbon intensity. The paper decomposes the Vietnamese economy into 18 different production sectors, based on the different emission levels of CO2. The CGE model makes possible to examine the impact of a carbon tax on the whole economy through all possible channels and to differentiate a separate carbon tax among different production sectors. The impact of a differentiated carbon tax is explored not only at the macroeconomic level but also at each different industrial level. Another feature of this paper is to investigate the impact of reallocation revenue from the carbon tax.FindingsThis paper has found that by designing carbon tax scenarios at different carbon prices ($1/tCO2, $5/tCO2, $10/tCO2) with different targeted industries, this study shows that higher carbon prices cause greater damage to GDP and welfare, but also better reductions in emissions. In addition, a carbon tax on the energy sectors results in milder economic and welfare damage but less emission reduction than when levying on all sectors. At the sectoral level, a carbon tax might cause sectoral restruction. Interestingly, the electricity sector is the most affected and also is the main contributor to reducing emissions in Vietnam. Finally, the study also shows that reallocation policies of new revenue from the carbon tax would reduce the economic damage caused by carbon taxes, and in many cases promote GDP and welfare. However, these policies reduce the environmentally positive impact of the carbon tax and even induce an increase in emissions in some cases.Originality/valueThis paper studies the pure impacts of a carbon tax, it also simulates the impact of several recycling policies where the increased tax revenue is incorporated. Thereby, this research supports to design and implement carbon tax policies in Vietnam. This paper also would contribute to the literature an example of the adoption of the carbon tax in a developing country, and it could be a lesson for others with similar conditions. Compared with previous models, the proposed model in this paper is a fairly standard CGE approach that tries to picture the economic system of Vietnam. In addition, a more flexible carbon tax mechanism is proposed to improve adequate coverage of emission resources.