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On the aggregate and distributional effects of carbon taxation in Portugal
Drawing on the model developed by Cavalcanti et al. (2021), we quantify the aggregate and distributional effects of a carbon tax in Portugal. Carbon taxation induces changes in relative prices and reallocation of inputs, including labour.We target a decline in emissions of a 30 to 40%, required for Portugal to achieve its original Paris Agreement pledge. This entails at most a 1.7% drop in output. As the Paris Agreement targets have been revised over time, we also estimate the carbon tax needed for Portugal to achieve a 70% decline in emissions, which stands at 80.4%. We find that the effects are asymmetric across sectors and individuals, with those workers with a comparative advantage in dirty energy sectors who do not reallocate being hit harder.