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This study investigates how a carbon tax could reduce fiscal and economic distortions as well as cut carbon emissions in developing-country economies. A computable general equilibrium model is developed to analyze the economic impacts of a hypothetical carbon tax in Côte d’Ivoire, a country in Sub-Saharan Africa with large losses of tax revenues due to informality and leakage. The model represents informal as well as formal production activities. The analysis shows that the economic impacts of a carbon tax and the levels of CO2 reduction vary significantly among alternatives for recycling the carbon tax revenue. A carbon tax with revenues recycled to reduce the existing value-added tax would increase GDP and economic welfare. If the revenue is used to cut the existing tax on labour, the carbon tax would not only increase GDP but also induce the migration of workers from informal to formal activities. The analysis also shows that if energy producers are not excluded from carbon tax revenue recycling, the carbon emission reduction is significantly lower due to a rebound effect. A carbon tax with lump-sum transfers of revenues to households would be progressive as the revenue is equally transferred to all households, but it reduces economic output and does not help reduce informal economic activities. A carbon tax can be beneficial to developing countries by generating fiscal co-benefits through revisions of other taxes.The size of the fiscal co-benefits depends on the carbon tax design.A carbon tax with revenue recycled to cut labour taxes incentivizes informal economic activities to move to the formal sector and to increase economic welfare.Using carbon tax revenues to reduce the value-added tax can reduce tax evasion and increase economic welfare.Unless energy producers are prevented from receiving the benefits of carbon tax revenue recycling, emission reduction is decreased due to a rebound effect. A carbon tax can be beneficial to developing countries by generating fiscal co-benefits through revisions of other taxes. The size of the fiscal co-benefits depends on the carbon tax design. A carbon tax with revenue recycled to cut labour taxes incentivizes informal economic activities to move to the formal sector and to increase economic welfare. Using carbon tax revenues to reduce the value-added tax can reduce tax evasion and increase economic welfare. Unless energy producers are prevented from receiving the benefits of carbon tax revenue recycling, emission reduction is decreased due to a rebound effect.

In an economy with substantial informality, a carbon tax can produce fiscal co-benefits that improve economic performance in addition to reducing carbon dioxide emissions. If the carbon tax revenues are used to cut production or labor taxes on formal firms, particularly those not in the energy sector, the cost of imposing the carbon tax is reduced, and there may even be net economic benefits. These tax cuts can also provide an incentive for informal firms to move to formal parts of the economy. This study confirms these hypotheses using a computable general equilibrium model for Côte d’Ivoire. However, the scale and even the sign of overall economic impacts and formal-informal sectoral interactions are sensitive to the scheme and scale of revenue recycling. The largest fiscal co-benefits, in terms of gross domestic product and economic welfare gains, would occur when the entire carbon tax revenue, after keeping the government revenue neutral, is used to cut existing labor or production taxes for non-energy formal firms. Reducing the existing value-added tax also increases gross domestic product and economic welfare, but without reducing the informality. The study also shows that energy producers should be exempted from using the carbon tax revenues to cut their production or labor taxes; otherwise, carbon dioxide reduction decreases due to a rebound effect. Although a carbon tax with lump-sum transfers of revenues is progressive, it would be economically inefficient because of gross domestic product and welfare reduction and lack of incentives to encourage informal activities to move to the formal parts of the economy.

This paper develops a dynamic stochastic general equilibrium model to analyze and derive simple budget rules in the face of volatile public revenue from natural resources in a low-income country like Niger. The simulation results suggest three policy lessons or rules of thumb. When a resource price change is positive and temporary, the best strategy is to save the revenue windfall in a sovereign fund, and use the interest income from the fund to raise citizens'consumption over time. This strategy is preferred to investing in public capital domestically, even when private investment benefits from an enhanced public capital stock. Domestic investment raises the prices of domestic goods, leaving less money for government to transfer to households; public investment is not 100 percent effective in raising output. In the presence of a negative temporary resource price change, however, the best strategy is to cut public investment. This strategy dominates other methods, such as trimming government transfers to households, which reduces consumption directly, or borrowing, which incurs an interest premium as debt rises. In the presence of persistent (positive and negative) shocks, the best strategy is a mix of public investment and saving abroad in a balanced regime that provides a natural insurance against both types of price shocks. The combination of interest income from the sovereign fund, transfers to households, and output growth brought about by public investment provides the best protective mechanism to smooth consumption over time in response to changing resource prices.

In this study, we analyse the impact of the creation of a customs union among UEMOA (Western African Economic and Monetary Union)countries, with a special emphasis on the labour market structure. The implementation of the customs union reform will translate in most of these countries, into a greater openness, even with third party countries. This greater openness raises concerns in these countries as regards its potential impact on welfare, production and employment. In this study, in contrast to many other papers, we relax the assumption of a perfect functioning of the labour market. We consider the presence of a dualism in the labour market and the existence of a minimum wage for the formal workers. We use a multi-country and multi-sectoral computable general equilibrium model (CGE) to assess the impact of the reform. We find that the presence of a minimum nominal wage for the formal workers may significantly reduce the gains stemming from the customs union reform. Our simulation results indicate that the costs induced by this rigidity may exceed 45%, in some cases, in terms of the reduction in the welfare gains obtained without rigidity.