Sustainable carbon tax design under multiple green subsidies: A system dynamics framework

Abstract

Carbon tax policy has proven its effectiveness in reducing emissions. However, inappropriate carbon tax design can aggravate economic and social aspects. Thus, a systemic framework for designing sustainable carbon tax policy is highly needed. This study develops a System Dynamics (SD) framework for assessing the influence of three key factors of carbon tax namely tax rate, escalation rate, and revenue recycling on sustainability performance represented by the cost, GDP, job availability, income per capita, carbon intensity, and energy loss under uncertainties. A revenue recycling schema is proposed considering revenue-neutral and revenue-positive where three different green subsidies are considered for Renewable Energy (RE), Electric Vehicle (EV), and Energy Efficiency (EE). The simulation-based experiment is conducted by taking the U.S. case. Through statistical and pattern analysis, this study reveals how those three factors influence sustainability independently and how they interact. Overall, carbon tax can improve all indicators unless for cost and energy loss. The best revenue recycling is to prioritize RE subsidy, followed by EV and EE. Scenario analysis is also done to assess the long-term impacts dynamically, including the comparison with a baseline where the U.S. has not implemented carbon tax. Finally, policy implications and practical challenges are highlighted including strategies to overcome.