1. What is a carbon tax and how does it affect the economy?

The primary objective of a tax is to reduce greenhouse gas emissions, particularly carbon emissions. By putting a price on carbon, the tax provides a financial incentive for businesses and individuals to adopt cleaner technologies, improve energy efficiency and switch to alternative low-carbon products.

We estimate that a global carbon tax of $100 per tonne of CO2 emitted would, in total, be the equivalent of 5.01% of global GDP. However, this cost would be partially offset by a 2.83% increase in government tax revenues, leading to a net economic cost of 2.18% (of global GDP).  The region most affected would be Emerging Markets, starting with India, followed by Russia, China, Bulgaria and Taiwan.

We also note that the introduction of a $100 carbon tax could lead to an inflation shock, as the carbon tax would be passed from the producer to the rest of the supply chain: +4.08% for the producer price index and +3.53% in terms of the consumer price index.

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