A CGE ANALYSIS OF THE ECONOMIC IMPACT OF OUTPUT SPECIFIC CARBON TAX ON THE MALAYSIAN ECONOMY

Abstract

Environmental pollution is an emerging issue in many developing countries and its mitigation is
 increasingly being integrated into national development policies. One approach to mitigate the problem is
 by implement pollution control policies in the form of pollution tax or clean technology incentives. Empirical
 studies for developed countries reveal that imposition of a carbon tax would decrease CO2
 emissions
 significantly and do not dramatically reduce economic growth. However, the same result may not apply for
 small-open developing countries such as Malaysia. The objective of this study is to quantify the impact of
 pollution tax on the Malaysian economy under the backdrop of trade liberalization. To examine the economic
 impact and effectiveness of carbon tax, a single-country, static Computable General Equilibrium model for
 Malaysia is constructed. The model is extended to incorporate output-specific carbon tax elements. Three
 simulations were carried out using a Malaysian 2000 Social Accounting Matrix. The first simulation
 examines the impact of halving the baseline tariff and export duty while the second solely focused on the
 impact of output-specific carbon tax. The third simulation combines both former scenarios. The model
 results indicate that the Malaysian economy is not sensitive to further liberalization. The reason could be
 attributed to the fact that Malaysian export duty is already low. Additionally, simulation results also indicate
 that while imposition of carbon tax reduces carbon emission, it also results in lower GDP and trade.