Carbon Taxes and Fiscal Deficits
Chapter 13

Hector Pollitt, Cambridge Econometrics

September 2014

Outline of the presentation• Background• Previous analysis in Europe and the US• Scenarios• Model results• Conclusions

Implementation of ETR• A short history:– first introduced in Northern Europe in the early 1990s– never implemented at European level (ETS instead) but
gradually grew in popularity at national level– many ETR’s have exemptions for particular industries,
showing the political nature of tax reform– revenues have been used for a variety of different
purposes, including environmental measures (not strictlyETR) and many changes to general taxation– ETR can be complementary to renewables policy, energy
efficiency standards and other environmental regulation

What happened next… energy prices

Source: US EIA, http://www.eia.gov/forecasts/steo/realprices/What happened next… crisis!
Govt expenditure% of GDP2015
Tax revenues

102001

2005

Source: World Development Indicators, World Bank2009

From ETR to ET…
• In 2009/10, many countries introduced fiscalstimulus packages to support their nationaleconomies• But public deficits, which were widening
anyway, meant many countries imposedausterity packages• ETR was no longer feasible, the question
became which tax to increaseA major study in Europe• This report used theE3ME model tocompare the effects
of a carbon tax
against alternative
instruments• Vivid Economics(2012)

Three Options were compared…
• The chart shows the impact on GDP in Spain forthree different tax increases (same revenues)

Source: Vivid Economics (2012), using the E3ME model

Conclusions from the study• Similar results were found for Poland andHungary– all three countries benefit from reducing fossil fuel imports• Employment follows a similar pattern• The report concluded that:– Carbon-energy taxes have generally been considered an
instrument of environmental policy rather than fiscal policy,
but it is time to reconsider that view.

A major study in the US• This report used a
CGE model tocompare the effects
of a carbon tax
against alternative
instruments• By RFF in the US,
Carbone et al (2013)

Carbon taxes and the US deficit

Source: Carbone et al (2013)

Results from the study• The CGE modelling found that a $30/tonne
carbon tax has a slightly worse effect on GDP
than increasing consumption or (especially)
labour taxes, but the difference is very small outto 2050
• But emissions fall by around 16% with thecarbon tax, compared to Business as Usual

In East Asia…
Gross Debt, % GDP
250

200

150

100

500

China

Source: IMF

Japan

Korea

Taiwan Province of China

Scenarios
Scenario

Revenues raised (% GDP, Description
2020)
CHJA

KR

TAReferencecaseS1

0.0

0.0

0.0

0.0

See Chapter 10

2.1

6.4

8.7

8.1

Carbon tax, see Chapter 10S22.1

6.4

8.7

8.1

Increase in sales tax rate

S3

2.1

6.4

8.7

8.1

Increase in income tax rate

S4

2.1

6.4

8.7

8.1

Increase in labour tax rateResults – China, GDPcarbon tax
labour tax
VAT

income tax

Results – Japan, GDPcarbon tax
labour tax
VAT

income tax

Results – Korea, GDPcarbon tax
labour tax
VAT

income tax

Results – Taiwan, GDPcarbon tax
labour tax
VAT

income tax

Conclusions• There are some quite large national
differences, particularly relating to labour
markets and price movements• Carbon taxes appear to come out quitefavourably in most cases• Remaining tasks:– a few results need to be checked further– consistency with other chapters (notably 10) needs checked