How efficient are market-based instruments in mitigating climate change in small emitter South Asian economies?

This paper examines the effectiveness, efficiency, and economy-wide impacts of a carbon tax, fuel tax, and some policy mix options for Sri Lanka and Pakistan using their global commitments to reduce carbon emissions. The results indicate that the carbon tax is best for Sri Lanka to reduce emissions by 7% from 2010 levels. This policy shows the least welfare deteriorating effect with increases in real GDP by 0.2%. Although Pakistan has a distorted market of energy subsidies and taxes, the carbon tax is appropriate for emissions reductions of 5% from 2011 levels with no adverse impact on GDP. Thus, both economies can achieve their emission targets cost-effectively and any welfare loss can be compensated from the carbon tax revenues. However, a carbon tax is not a one size fits all climate change policy instrument given the associated cost effectiveness-efficiency trade off, and the countries' dependence on domestic and imported energy resources.