Abstract
Environmental taxes constitute a crucial instrument aimed at reducing resource use through lower production losses, resource-leaner products, and more resource-efficient production processes. In this paper we focus on material use and apply a multi-sector dynamic stochastic general equilibrium (DSGE) model to study two types of taxation: tax on material inputs used by industry, energy, construction, and transport sectors, and tax on output of these sectors. We allow for endogenous adoption of resource-saving technologies. We calibrate the model for the EU27 area using an IO matrix. We consider taxation introduced from 2021 and simulate its impact until 2050. We compare the taxes along their ability to induce reduction in material use and raise revenue. We also consider the effect of spending this revenue on reduction of labour taxation. We find that input and output taxation create contrasting incentives and have opposite effects on resource efficiency. The material input tax induces investment in efficiency-improving technology which, in the long term, results in GDP and employment by 15%–20% higher than in the case of a comparable output tax. We also find that using revenues to reduce taxes on labour has stronger beneficial effects for the input tax.
Highlights
The need to limit the use of natural resources is becoming one of the most pressing issues for policy-makers
Simulating tax rates which lead to an equal drop in material use, we find that the material input tax results in GDP and employment that is 15%–20% higher compared to the scenario with the output tax
We use a multi-sector, large-scale dynamic stochastic general equilibrium (DSGE) model which we calibrate and estimate for the EU27 area
Summary
The need to limit the use of natural resources is becoming one of the most pressing issues for policy-makers. We find that input and output taxation create contrasting incentives and have an opposite effect on resource efficiency, which implies different dynamics of material use and macroeconomic outcomes. The input tax implies smaller macroeconomic costs and better resource efficiency outcomes than the output tax in all variants of the simulations considered. This leads us to the conclusion that a material input tax is a more efficient instrument to achieve resource decoupling. In the paper we highlight and discuss one reason for the different effects of input and output tax: a material tax provides an incentive for firms to substitute materials with material-saving technologies.
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