Modeling, analysis, and evaluation of a carbon tax policy based on the emission factor

• We study a tax policy based on the emission factor.
• We compare it to other environmental policies using a social welfare model.
• The policy provides the highest consumers’ surplus and the lowest market price.
• The optimal tax rate induces high emitters to use less carbon-intensive fuels.
• A reduction in the emission factor leads to a reduction in the total emissions.

This paper studies a tax policy based on the emission factor, which is used as an intensity measure. Specifically, the paper models a situation where policy makers set a limit on the production emission factor of a regulated industry and require firms to pay tax if they exceed that target. The efficiency of the policy is evaluated against other existing environmental policies using a social welfare mathematical programming model. A case study is built within the context of the cement industry and is used to carry out the analysis. The results show that the intensity-based carbon tax achieves the highest consumers’ surplus and production quantities and the lowest prices. The policy is found to be effective in reducing CO2 emissions with little impact on social welfare.