International Institute for Applied Systems Analysis Schlossplatz 1 • A-2361 Laxenburg • Austria Telephone: (+43 2236) 807 342 • Fax: (+43 2236) 71313 E-mail: [email protected] • Internet: www.iiasa.ac.at Interim Report IR-99-27 An Emissions Tax in Siberia: Economic Theory, Firm Response, and Noncompliance in Imperfect Markets Koko Warner ([email protected]) Approved by Professor Sten Nilsson ([email protected]) Project leader, Sustainable Boreal Forest Resources Project July 7, 1999 Interim Reports on work of the International Institute for Applied Systems Analysis receive only limited review. Views or opinions expressed herein do not necessarily represent those of the Institute, its National Member Organizations, or other organizations supporting the work. Contents Chapter 1: Introduction 1.0 Introduction ................................................................................................................1 1.1 Literature review ........................................................................................................3 1.1.1 Negative externalities and market tools ..................................................................4 1.1.2 Analysis of emissions taxes .....................................................................................6 1.1.3 Qualified support for emissions taxes ...................................................................10 1.1.4 Recommendations for policy mix .........................................................................11 1.1.5 Importance of endogenous factors ........................................................................11 1.1.6 Emissions charges in transition economies ...........................................................12 1.2 Driving questions ......................................................................................................15 1.3 Objectives and contributions ....................................................................................17 1.4 Methodology .............................................................................................................18 1.5 Conclusions ...............................................................................................................19 Chapter 2: Air pollution in Siberia: A volume and risk-weighted analysis of a Siberian Pollution Database 2.0 Overview and principle findings ..............................................................................26 2.1. Introduction .............................................................................................................30 2.2 Siberian emissions database .....................................................................................31 2.2.1 Toxicity rank of database chemical .......................................................................33 2.3. Pollution profile of the Siberian environment .........................................................36 2.3.1 Regions at risk .......................................................................................................36 2.3.1.1 Regional emissions by volume ...........................................................................38 2.3.2 Cities, Industry and chemical patterns ...................................................................42 2.3.2.1 City-source emissions of toxic substances .........................................................44 2.4. Emissions threat to forest ecosystems .....................................................................50 2.4.1 Effects of metals on forest decline ........................................................................52 2.4.2 Natural factors combine with anthropogenic pollution .........................................54 ii 2.4.3 CO2 and the role of Siberian forests ......................................................................54 2.5. Conclusions ..............................................................................................................57 Chapter 3: Theoretical groundwork and evaluation of an emissions tax 3.0 Overview ...................................................................................................................63 3.1 Assumptions and framework ....................................................................................64 3.1.1 Model Assumptions and Framework .....................................................................64 3.2 Theory of environmental allocation: The transformation space and static allocation in Siberia ........................................68 3.2.1 Production theory ...................................................................................................69 3.2.2 The transformation space with environmental quality...........................................73 3.3 Defining use of the environment in Siberia...............................................................81 3.3.1 Property rights ........................................................................................................82 3.3.2 Public goods ...........................................................................................................83 3.3.3 Shadow pricing and optimal environmental use ...................................................85 3.4 Assigning an environmental price ............................................................................87 3.4.1 Establishing the shadow price ...............................................................................88 3.4.2 Shadow prices and the regional economy ..............................................................90 3.5 Conclusions ...............................................................................................................91 Chapter 4: Outline of Siberia’s environmental tax program 4.0 Introduction ...............................................................................................................96 4.1 Emissions charge program .......................................................................................97 4.1.1 Historical development of market-based environmental policy.............................97 4.1.2 Development of environmental quality standards .................................................98 4.1.3 Setting pollution charge rates ..............................................................................101 4.2 Institutional aspects of Siberian air pollution policy ..............................................106 4.2.1 Institutional framework for emissions charges ....................................................107 4.2.2 Institutional challenges for the emissions tax.......................................................109 4.3 Program Goals ........................................................................................................113 4.3.1 Environmental protection priorities......................................................................113 4.3.2 Environmental fund and hypothecation ...............................................................115 4.3.3 Revenue goals fall short ......................................................................................117 iii 4.3.3 Abatement and environmental quality .................................................................120 4.4 Conclusions .............................................................................................................122 Chapter 5: Enterprise response to Siberia’s emissions tax 5.0 Introduction .............................................................................................................129 5.1 Firm response to tax levels .....................................................................................130 5.2 Profit-maximizing firms and emissions charges: Tax level less influential.......................................................................................132 5.3 Noncompetitive firm behavior and the emissions charge .......................................135 5.3.1 Evidence of imperfect competition: Dominant industrial polluters in Siberia .............................................................136 5.3.2 Model of monopoly response to a pollution tax ..................................................137 5.3.3 The polymetallic industry, a regional monopoly..................................................141 5.4 Non-profit-maximizing firms and the emissions tax ..............................................146 5.5. Conclusions ............................................................................................................151 Chapter 6: Environmental compliance 6.0 Introduction .............................................................................................................157 6.1 Historical background of tax compliance ...............................................................159 6.1.1 Methodological issues .........................................................................................161 6.2 Indicators of environmental noncompliance ..........................................................162 6.3 Compliance calculus and Siberian firms: A model for analysis .............................172 6.3.1 Relational capital and market distance ................................................................175 6.3.2 Tax offsets and non-cash production to pay taxes ...............................................179 6.3.3 Pattern of enterprise compliance .........................................................................181 6.4 Moving Siberian enterprise towards compliance ...................................................183