Environmental taxes and fiscal deficits
Assessment with the E3ME-Asia model

Hector Pollitt, Cambridge Econometrics

June 2014

Overview• Background to the policy situation• Previous assessment• Application for East Asia
• Conclusions

Introduction• There is a consensus amongst policy makers
that carbon pricing is a necessary but not
sufficient condition for decarbonisation (e.g.
Grubb, 2014)• Around 60 countries have or are considering
carbon pricing of some description• Two principal mechanisms exist:– carbon tax– Emission Trading Scheme (ETS)• This presentation discusses the revenues thatthese mechanisms may generate

Environmental Tax Reform• ETR is the introduction or increase of anenvironmental tax, compensated by a reduction
in existing taxes• Results from macroeconomic models show thatthe choice of which tax to reduce can have an
important bearing on the overall results• In particular, there has been a fierce debate
over the existence of a possible ‘double
dividend’Environmental Tax Reform (cont)• Assessment withmacroeconomic models(e.g. Chapter 7 here) hasshown that the choice oftax to reduce can be a
crucial determining factorof economic outcomes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 GDP
20

15
Tax revenues

102001

2005

Source: World Development Indicators, World Bank2009

From ETR to ET…
• In 2009/10, many countries introduced fiscal
stimulus 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 alternativeinstruments• 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 aninstrument of environmental policy rather than fiscal policy,
but it is time to reconsider that view.

A major study in the US• This report used aCGE model tocompare the effects
of a carbon tax
against alternativeinstruments• 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Important differences in the studies• The modelling approach was different:– the European study used a macro-econometric model, while
the US study used a CGE model• The US extracts energy so does not have thesame benefits from reducing fuel imports• The EU already has the ETS in place so there
are some ‘rebound’ effects from reducing
energy consumption in other ways

Turning to East Asia…
• Chapter 14 of E3 Modeling for a Sustainable Low
Carbon Economy in East Asia will consider thisissue for:– China– Japan– Korea– Taiwan

Source: Google MapsTurning to East Asia… (cont)• Each country has its own unique position
regarding debts/deficits and the existingtaxation system (including carbon pricing)• A similar analysis will be carried out as for
Europe, using the E3ME-Asia macroeconometric model• The chapter will also draw on CGE model
analysis• Results will be available around September

Turning to East Asia… (cont)• But we can draw some conclusions about
expected results already:– carbon taxes have the potential to raise large amounts ofrevenues, at least at first– there could be net economic benefits to countries that areimporters of fuels– overall the economic impact is likely to be not that muchdifferent to raising other taxes…
– … but there are fairly large potential carbon savings,
particularly in areas with high use of cheap coalEnvironmental taxes and fiscal deficits
Assessment with the E3ME-Asia model

Hector Pollitt, Cambridge Econometrics

June 2014

References•••••Barker, T, S De-Ramon and H Pollitt (2009) ‘Revenue recycling and labour markets:
Effects on costs of policies for sustainability’, in Bosetti, V, R Gerlagh and SP Schleicher(eds) ‘Modelling Sustainable Development: Transitions to a Sustainable Future’, EdwardElgar.
Carbone, JC, RD Morgenstern, RC Williams III and D Burtraw (2013) ‘Deficit Reductionand Carbon Taxes: Budgetary, Economic, and Distributional Impacts’, Resources for theFuture, http://www.rff.org/RFF/Documents/RFF-Rpt-Carbone.etal.CarbonTaxes.pdf
Grubb, M (2014) ‘Planetary Economics’, Routledge.
Pollitt, H, Y Zhao, J Ward, R Smale, M Krahe and M Jacobs (2012) ‘The Potential Rolefor Carbon Pricing in Reducing European Deficits’, Global Policy Essay, September
2012.
Vivid Economics (2012) ‘Carbon taxation and fiscal consolidation: the potential of carbon
pricing to reduce Europe’s fiscal deficits’, report prepared for the European Climate
Foundation and Green Budget Europe, May 2012.