Evaluation of a carbon tax in Costa Rica linking a demand system focused on energy goods and an input-output model

This study evaluates the impact of a carbon tax on CO2 emissions in Costa Rica. For the above, a demand system is estimated using data from a household expenditure survey, which allows for obtaining the elasticities of demand for various groups of goods focused on energy. Then, the environmental extension of the Leontief price model is implemented to determine the change in prices caused by different carbon tax rates (25, 50, 75, and 100 USD/ton CO2). Subsequently, both models are linked to obtain the variations in production and sectoral emissions. In addition, a Monte Carlo simulation is carried out since the estimated price elasticities have a standard deviation associated with them. The results suggest that carbon taxes mainly affect transportation, while the rest of the sectors have slight impacts in all simulated scenarios. For example, the drop in total CO2 emissions is explained between 89.6% and 91.3% by the decrease in emissions in the passenger transport and other transport sectors with a 95% confidence interval. The previous is explained by the composition of Costa Rica's energy matrix, which has a very high share of renewable energies. Finally, some climate policy options are suggested to contribute to this country's carbon neutrality.