The effect of a carbon tax rise on Iceland’s economy
This paper studies the potential impact of higher carbon taxation - to reach the government’s
emission targets by 2030 - on Iceland’s economy. The paper is divided into two parts.
First, a DSGE modelling exercise suggests that the equivalent of an oil price hike
of between 30% and 55% is needed to reach the 2030 target, implying a GDP decline
of between 0.3% and 0.6% by 2030. The impact on inflation would be very small. Second,
a panel regression for the fishing industry reveals that a 40-50% oil price hike would
be sufficient to reduce the entire fishing fleet’s emissions by 10%, raising total
factor costs for the fishing companies by 4-5%. Such a cost hike would hardly threaten
the competitiveness of the fishing industry. Both approaches assume that a carbon
tax rise would have no effect on production technology.
Published on April 08, 2022
In series:OECD Economics Department Working Papersview more titles