The Relative Effectiveness of Different Types of Environmental Tax: the Ac Se of New Zealand Frank G

Brigham Young University BYU ScholarsArchive 2nd International Congress on Environmental International Congress on Environmental Modelling and Software - Osnabrück, Germany - Modelling and Software June 2004 Jul 1st, 12:00 AM Reducing Carbon Emissions? The Relative Effectiveness of Different Types of Environmental Tax: The aC se of New Zealand Frank G. Scrimgeour Les Oxley Koli Fatai Follow this and additional works at: https://scholarsarchive.byu.edu/iemssconference Scrimgeour, Frank G.; Oxley, Les; and Fatai, Koli, "Reducing Carbon Emissions? The Relative Effectiveness of Different Types of Environmental Tax: The asC e of New Zealand" (2004). International Congress on Environmental Modelling and Software. 172. https://scholarsarchive.byu.edu/iemssconference/2004/all/172 This Event is brought to you for free and open access by the Civil and Environmental Engineering at BYU ScholarsArchive. It has been accepted for inclusion in International Congress on Environmental Modelling and Software by an authorized administrator of BYU ScholarsArchive. For more information, please contact [email protected], [email protected]. Reducing Carbon Emissions? The Relative Effectiveness of Different Types of Environmental Tax: The Case of New Zealand Frank G. Scrimgeour a , Les Oxley b,c and Koli Fatai a aDepartment of Economics, University of Waikato, bDepartment of Economics, University of Canterbury cAdjunct Professor, Department of Economics, University of Western Australia Abstract: Although countries experiences on environmental taxation differ, discussions in New Zealand coincide with the recent announcement by the government of a new carbon tax and a new energy tax to be introduced before the first phase of the Kyoto protocol. This paper provides preliminary simulation results that may help answer some policy-related questions including the relative micro- and macro- level impacts of energy taxes or carbon taxes and the likely impacts of the carbon taxes on the competitiveness of energy intensive industries. Keywords: Carbon tax, greenhouse gas emissions, CGE model 1. Introduction economic and social instruments that may be used to pursue those policies. Introducing a Recent debates in the literature (Parry, 1995, carbon tax may result in welfare losses. Does Parry et.al., 1999; Bovenberg and Goulder, 1996) this imply that a policy committed to their on the likely economic and social impacts of introduction means that the macro and micro- alternative types of environmental taxation have economic impacts of an energy tax or fuel tax are highlighted the importance of issues including more acceptable to New Zealanders? Are all externalities, environmental concerns, double sectors in the New Zealand economy likely to dividend, revenue neutrality and equity. The bear, equally, the adjustment costs as New recent Kyoto Protocol (henceforth, KP), has Zealand ratifies the KP? What is the likely further reinforced the importance of these issues. impact on economic growth, employment, The issues also raise the need for empirical-based investment and other macro-economic variables? analysis to guide policy makers. Indeed, it is What are the likely impacts on firms? This paper partly this need that has generated a vast amount attempts to answer some of these questions using of literature studying some of the environmental a CGE model of the New Zealand economy. and economic issues relating to international The model is specifically designed to focus on agreements such as the Kyoto Protocol. A the energy sector and can simulate the effects of, challenge for many of the studies is to find in particular, three types of GHG taxes: an options that ‘maximize society welfare’ and at the energy tax on all fossil fuels, a carbon tax and same time reduce greenhouse gas emissions finally a fuel tax on petroleum products. (henceforth, GHG) and its likely costs. The paper is constructed as follows. In the New Zealand context, some of the Section 2 discusses the economics of carbon recent discussion has focused on conceptual taxes and some international experiences. issues relating to for example, revenue recycling, Section 3 briefly outlines the structure of the double dividends. Furthermore, there has been CGE model used and Section 4 discusses the discussion of the likely impact of the KP on the simulation results. The final section concludes environment, economic performance (eg. and summarizes the findings. economic growth, competitiveness, employment, investment etc.) and income distribution. To date 2. The economics of carbon taxes and the New Zealand government seems to favour a related issues combination of energy taxes, fuel taxes and carbon taxes. Additionally, there is on-going The fundamental theoretical basis of discussion related to the alignment of the environmental taxes have been well documented government’s favoured policies with their (early discussions include Baumol, 1972; implementation and governance, and the Baumol and Oates, 1971, 1988) and will only be briefly discussed in this section. TheThTT This some stage to reduce GHG emissions. The early literature showed that society’s welfare literature on this is extensive see Ekins and would be improved if there were a tax on a good Barker (2001) for a review and will not be whose consumption or production resulted in a discussed in detail here. negative externality. Baumol and Oates (1971) The experiences of European countries, further argue that an environmental tax would however, may have important lessons for New minimize the costs to society and at the same time Zealand where special importance may be achieve an ‘environmental greening’ objective attached to the so called “eco-leaders,” when a negative externality to society existed. Denmark, Netherlands, Norway and Sweden. However, there is still no general consensus on Other countries for example, Austria, Belgium, the effectiveness of alternative instruments Finland, Germany and Switzerland have made available to policy makers where they include, small, but continuing steps towards a greater role energy taxes, carbon taxes, subsidies and to be played by CO 2 taxes in their economy. transfers. The main issue here is ‘which These countries may also offer important instrument or combination of instruments would lessons, but currently they are typically less be optimal?’ A carbon tax may be regressive as it important than those from the “eco-leaders” on may affect poorer households disproportionaly which we will now concentrate. (Ekins and Parker, 2001). With any regressive The introduction of the carbon taxes by tax, however, this may be resolved by reducing the “eco-leaders” generally involves three other taxes or the introduction of transfers, which components. First, subsidies and taxes that may may offset the negative impact of carbon taxes on be distortionary are either modified or removed. poor households. Poor households may have the Secondly, taxes are restructured including tendency to buy cheaper and perhaps less energy- legislation to align them with environmental efficient appliances than richer households. A objectives. Thirdly, the new green taxes are carbon tax may also be advantageous to the introduced (Ekins and Barker, 2001). With these economy if it lowered other taxes that are three main aspects identifies, a few observations perceived to be more distortionary. This may and lessons may bee drawn from the literature. include labour income taxes see for example, Bruce et. al. (1996) and Barker and (Barker, 1995). On the other hand, Goulder Kohler (1998) have shown that eco-taxes can be (1995) argues that a carbon tax is more regressive using data for OECD countries. distortionary than labour tax because of too Especially vulnerable are poorer households who narrow tax base, the possibility of double taxation may be hard hit by eco-taxes. However, the (i.e. on both intermediate input and final output) experience of the eco-leaders is that it is possible and its non-uniform content in energy products. for the regressive tendency of eco-taxes to be Furthermore, Gaskins and Weyant (1993) have moderated. In addition, eco-taxes may have argued that the introduction of a carbon tax may trade-offs that are absent in other forms of create more distortions because of the extent to taxation. In some European countries (eg. which a carbon tax or environmental change Norway, Finland, Austria and Denmark) for affects the prices faced by both consumers and example, there is no leaded gasoline as high producers. Thus, the debate on the effectiveness taxes have eliminated it from their respective of a carbon tax remains active and ongoing. markets (Ekins and Parker, 2001). This results A recent survey by Ekins and Barker in a change in consumption patterns where (2001) on carbon tax and carbon emission trading consumers substitute leaded gasoline for high concluded that “market based instruments of GHG products, but at the same time keeping a carbon control will achieve a given level of large tax base (i.e. unleaded gasoline). emissions reduction at lower cost than From the literature discussed above, one regulations.” (p.368). Studies on the effectiveness can perhaps conclude that the experiences of the of a carbon tax have generally concluded, European eco-leaders seem to show that however, that it generally achieves its objective of countries like New Zealand should not expect the reducing GHG emissions. eco-taxes to yield significant revenues, but should be encouraged by the fact that eco-taxes 2.1. Carbon Taxes

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