Assessing carbon tax using a CGE model with firm heterogeneity: An application to Vietnam

Vietnam's government is considering introducing a carbon market as part of its decarbonization strategy. The carbon tax is an option for the government to regulate greenhouse gas emissions. We evaluate the potential macroeconomic and climate impacts of carbon tax policy in Vietnam using a unique data set and simulation analysis with a multi-sector dynamic computable general equilibrium model. The model allows for firm heterogeneity: domestic firms and foreign-invested enterprises. The results show that with plausible tax rates, emissions can be reduced to levels 1.3-2.8 percent below the target value of emissions in 2030. The cost is a loss in GDP by 1.2-2.7 percent in 2030. The results also show that foreign-invested enterprises tend to increase emissions in the medium run even with a carbon tax while a carbon tax is more effective when applied to domestic firms. In addition, a substantial reduction in emissions from the energy sector and improvement in energy efficiency are keys to success in carbon abatement.