Employing a CGE model in analysing the environmental and economy-wide impacts of CO2emission abatement policies in Malaysia

The impact of global warming has received much international attention in recent decades. To meet climate-change mitigation targets, environmental policy instruments have been designed to transform the way goods and services are produced as well as alter consumption patterns. The government of Malaysia is strongly committed to reducing CO2gas emissions as a proportion of GDP by 40% from 2005 levels by the year 2020. This study evaluates the economy-wide impacts of implementing two different types of CO2emission abatement policies in Malaysia using market-based (imposing a carbon tax) and command-and-control mechanism (sectoral emission standards). The policy simulations conducted involve the removal of the subsidy on petroleum products by the government. A carbon emission tax in conjunction with the revenue neutrality assumption is seen to be more effective than a command-and-control policy as it provides a double dividend. This is apparent as changes in consumption patterns lead to welfare enhancements while contributing to reductions in CO2emissions. The simulation results show that the production of renewable energies is stepped up when the imposition of carbon tax and removal of the subsidy is augmented by revenue recycling. This study provides an economy-wide assessment that compares two important tools for assisting environment policy makers evaluate carbon emission abatement initiatives in Malaysia.