Using emissions trading schemes to reduce heterogeneous distortionary taxes: The case of recycling carbon auction revenues to support renewable energy

We examine the economic impacts of using revenues from environmental taxation to reduce a pre-existing distortionary tax in multisector economy where regulation and apply heterogeneously across polluting sectors. With numerical framework including detailed sectoral disaggregation, we quantify these specific case European Union carbon pricing coexists with electricity levies employed support renewable energy. find that auction EU Emissions Trading System (ETS) national results 1.8% ETS price increase but 5.9% drop non-ETS constraint. While energy intensive sectors often benefit levy exemptions, combination exemptions recycling makes worse off than if are transferred households. In aggregate, option analysed here GDP gain due its on sectors, reduction associated effects.