11th Global Conference on Environmental Taxation Issues

3 – 5 November 2010Bangkok, Thailand

Paper #24

Assessment of Fiscal Intervention Measures: Perspectives from

Environmental MacroeconomicsAuthors

Seck TANDodo J. Thampapillai

Presentation Outline

• Objective• Conceptual Framework• Analysis • Overview of Findings• Empirical Analysis• Case for Environmental Capital Investment• Conclusion

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Objective

• Demonstrate the distinction in policy intervention when environmental macroeconomic framework is applied as opposed to the standard macroeconomic framework

Illustration made in terms of: • Policy intervention via environmental taxes, and

reinvestment in environmental capital• China is used as a case study

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Conceptual Framework • Policy intervention is usually made based on standard

macroeconomic frameworks. There is no consideration given to environmental capital (KN) and its depreciation (DKN)

• When the environmental macroeconomic framework is used, KN is acknowledged and DKN is internalized

• The income determined from the environmental macroeconomic framework is more sustainable than that determined from the standard framework

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Conceptual FrameworkThere are two different frameworks which comparison is based on.

Standard Macroeconomic Framework

• At equilibrium, GDP Y

• Equilibrium income, Y* is defined as a function of marginal propensity to consume (), taxes (), and propensity to invest ()

Y* = f, )

Environmental Macroeconomic Framework

• At equilibrium, GDP – DKN Y

• Equilibrium income, Y** is defined as a function of marginal propensity to consume (), taxes (), propensity to invest (), and proportion of environmental degradation ()

Y** = f , )

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aggregate expenditure

nationalincome

depreciation of environmental capitalnational

income aggregate expenditure

Conceptual Framework• We also estimate the EXTRA TAX that has to be levied

in the standard framework to obtain the same income outcome as in the sustainable framework

• The tax illustrates the extent of divergence between the sustainable and the unsustainable time paths

• If the extra tax revenue is returned as investment to the environment, DKN in future time periods could reduce permitting the economy to expand and achieve some sustainability

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Analysis• In this simple Keynesian analysis,

KN refers to the depreciation of the air-shed in terms of air pollution and the depreciation of agricultural soils in terms of fertilizer usage

DKN is the sum of the costs of abating air pollution and applying fertilizers

The extra tax in the standard framework that makes the result resemble those of the environmental macroeconomic framework range from 43% - 56%

The level of tax in this analysis is 10% and it will be levied for three years. The extra taxes considered will be for the first four years (T+1)

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Overview of FindingsYA

Actual GDP

Y*

Standard Y

Y**

Sustainable Y

No no re-investment

and re-investment

2004 Marginally above Y*

Markedlyabove Y**

Significantly below Y*

Below Y* Below Y*

2005 Marginally above Y*

Markedlyabove Y**

Significantly below Y*

Below Y* Below Y*

2006 Marginally above Y*

Markedlyabove Y**

Significantly below Y*

Below Y* Below Y*

2007 Significantlyabove Y*

Markedlyabove Y**

Significantly below Y*

Below Y* Overtakes Y*

2008 Significantlyabove Y*

Markedlyabove Y**

Significantly below Y*

Below Y* Markedlyabove Y*

2009 Significantlyabove Y*

Markedlyabove Y**

Significantly below Y*

Below Y* Markedlyabove Y*

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Empirical Analysis

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Standard and Sustainable Framework (no extra taxes)

Empirical Analysis

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Standard and Sustainable Framework (extra taxes in the sustainable framework) BUT accounting practice does not include KN investments from extra taxes

Empirical AnalysisStandard and Sustainable Framework NO extra taxes

Standard and Sustainable Framework WITH extra taxes

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Empirical Analysis• The graph on the left shows

the variation between the standard and the sustainable income with consideration to extra taxes

• The variation is exponential when there are no extra taxes

• On the other hand, the variation is relatively less pronounced with extra taxes

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Empirical Analysis• Accounting includes KN

investment from extra taxes• When taxes collected are

re-invested, the sustainable income will surpass the standard income in three years

• The variation between the two increases steadily beyond the third year

• If there were no re-investment, the sustainable income will stay below the standard income

Standard and Sustainable Framework with Taxes Re-Invested

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Case for KN Investment

• There are four areas of closed loop production options available for China – amongst several others

1. Sewerage Treatment 2. Air-Conditioning and Heating 3. Energy Supply4. Methods of Commodity Development

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Conclusion

• Policies within a government’s portfolio must provide allowance for the restoration of environmental capital

• The policies should cater towards a wide range of options for maintaining and/or restoring environmental capital

• Levying additional environmental taxes over a limited period of time allows for the financing of these policies

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The End

Questions & Answers

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