Environmental tax and regional government consumption expenditure in a fiscal federalism system

Abstract

The increasing attention to climate changes have led national Governments to design environmental tax policies able to face environmental problems and their associated economic consequences like as a negative change of GDP. The environmental taxation in particular is considered a powerful instrument of pollution control. More important, it provides public revenue that can be recycled at local level in order to attain the regional double dividend in a fiscal federalism framework. In this respect, we use a Computable General Equilibrium (CGE) model with imperfect labour market, to assess the regional effects of an environmental fiscal reform designed with the aim of reducing the CO2 emissions in a fiscal federalism setting. In particular, we introduce a local green tax on commodities output with a progressive structure. The tax burden depends on the commodity polluting power. According to fiscal federalism principles the tax revenue is collected by the local Government and it is entirely recycled to finance the local consumption expenditure. The application is done on a bi-regional Social Accounting Matrix for Italy and the results highlights the distributional effects of the reform on macroeconomic variables into the bi-regional income circular flow.