As the economic effects of climate change unfold, governments face increasing pressure to adopt more aggressive mitigation policies, including (significant) taxation of carbon emissions. In fact, the costs of delayed action can be substantial.

Drawing on a multi-sector model that combines the workers' skills distribution with the economy’s sectoral composition, it is possible to quantify the aggregate and distributional effects of carbon taxation. This exercise estimates a 32.9% (80.4%) carbon tax needed for Portugal to meet the 35% (70%) emission reduction target. The tax costs the Portuguese economy at most 1.7% (7.5%) of GDP, in the event that the government does not rebate the tax revenues back to the economy, which would be the worst-case scenario. Despite the relatively small impact on GDP and welfare in the case of the 32.9% carbon tax, there are asymmetrical distributional effects at the sectoral and individual levels, particularly affecting workers who remain in polluting energy sectors.

For more details, see Hasna, Lourenço and Santos (2022), “On the aggregate and distributional effects of carbon taxation in Portugal”, Banco de Portugal Economic Studies, Vol. VIII, No. 3, Banco de Portugal.

Prepared by Nuno Lourenço. The analyses, opinions and findings expressed above represent the views of the author and not necessarily those of the Banco de Portugal or the Eurosystem.

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