Taxing CO2 and subsidising biomass: Analysed in a macroeconomic and sectoral model

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    This paper analyses the combination of taxes and subsidies as an instrument to enable a reduction in CO2
    emission. The objective of the study is to compare recycling of a CO2 tax revenue as a subsidy for biomass use as
    opposed to traditional recycling such as reduced income or corporate taxation.
    A model of Denmark's energy supply sector is used to analyse the e€ect of a CO2 tax combined with using the
    tax revenue for biomass subsidies. The energy supply model is linked to a macroeconomic model such that the
    macroeconomic consequences of tax policies can be analysed along with the consequences for speci®c sectors such
    as agriculture. Electricity and heat are produced at heat and power plants utilising fuels which minimise total fuel
    cost, while the authorities regulate capacity expansion technologies. The e€ect of fuel taxes and subsidies on fuels is
    very sensitive to the fuel substitution possibilities of the power plants and also to the extent to which expansion
    technologies have been regulated.
    It is shown how a relatively small CO2 tax of 15 US$/tCO2 and subsidies for biomass can produce signi®cant
    shifts in the fuel input-mix, when the expansion of production capacity is regulated to ensure a ¯exible fuel mix. The
    main ®nding is that recycling to biomass use will reduce the level of CO2 tax necessary to achieve a speci®c emission
    reduction. Policies to ensure a more intensive use of such relatively expensive renewable energy sources as biomass
    could be implemented with only small taxes and subsidies. # 2000 Published by Elsevier Science Ltd. All rights
    Original languageEnglish
    JournalBiomass & Bioenergy
    Issue number2
    Pages (from-to)113-124
    Publication statusPublished - 2000


    • Taxes and subsidies
    • Fuel substitution
    • CO2 reduction


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