The effect of carbon taxes on energy use by the manufacturing sector of Taiwan

This study evaluates the possible impact of carbon taxes on the most import ant sector of a newly industrialized economy. Changes in the energy consump tion pattern and the resulting carbon dioxide emissions are analyzed for th e entire manufacturing sector as well as four energy-intensive industries o f Taiwan. A carbon tax is imposed as a predetermined, fixed tax on each typ e of energy according to its carbon content. Simulations are performed, usi ng a two-stage translog price model, for a reference case and for four diff erent levels of carbon taxes. The results indicate that a high tax is expec ted to stabilize CO2 emissions to the 1990 level by the year 2005 while mai ntaining a 5% growth rate in the manufacturing sector. Reductions in energy consumption and CO2 emissions resulting from such taxes are substantial, a nd are sensitive to the tax level. Prices of energy aggregates increase due to a carbon tax and are directly related to the increase in the level of t he carbon tax. Industries react differently to the tax in choosing their en ergy mix. Specifically, a decrease in the share allocated to coal inputs an d an increase in the shares of oil, natural gas, and noncarbon energy input s in its energy mix is observed in the electricity generation sector.