Revenue Recycling Research Articles

How Will an Emissions Trading System Affect Household Income and Social Equity? A CGE-Based Case Study of China

Recently, China’s National Development and Reform Commission (NDRC) announced the establishment of a nationwide carbon emissions trading system (ETS), which will be the largest ETS in the world. The national ETS directly encourages enterprises to make a low-carbon transition through market mechanisms. In addition, the ETS is a potential source of significant government revenue through the auction of emissions permits. The allocation of this revenue is an important consideration for the NDRC. Some ETS areas already have experience with revenue recycling. For example, the California government directly returns ETS revenue to residents through electricity bill credits, as well as dedicated some of the revenue to the Greenhouse Gas Reduction Fund (GGRF). This study uses a computable general equilibrium (CGE) model to explore the economic impact of directly returning the revenue from the ETS to residents in China. At the same time, taking into account the significant differences between different income groups in urban and rural areas in China, the research explores the difference between different distribution policies. The results show that the coal industry will suffer the greatest negative impact from the ETS. By 2050, the number of people employed in the coal industry will fall by 63.8% compared to 2012, and under the ETS scenario, coal employment will decrease by 75.3%. However, these employment effects can be mitigated by targeted transfers to the displaced coal workers using ETS revenue. At the national level, ETS policies have a positive effect on GDP due to the income effect of revenue recycling. From the perspective of household income, the ETS policies will have differing impacts on different income groups. In addition, different income distribution methods will also change the impact on the income of different groups. Among these revenue distribution options, the distribution by population be most conducive to the promotion of social equity.

On the Construction of China’s Environmental Tax Revenue Use System

Environmental governance and protection is an important task for governments all over the world. Among them, environmental tax is the most important means for countries to protect the environment by system. However, the Levy of environmental tax often has a direct negative impact on the international competitiveness of pollution-intensive industries and export-oriented enterprises. Meanwhile, it also causes the problem of income redistribution, such as raising the living cost of low-income groups. It may be a good idea to build an environmental tax revenue use system so as to lower or eliminate these negative externalities. The construction of the environmental tax revenue use system is the core of the overall construction of the environmental tax legal system from the perspective of fiscal and taxation integration, which not only meets the basic requirements of the principles of tax law, but also has the value of law enforcement. As for China, it also has the promotion function of structural tax cuts. At present, China has not yet established a special system for the use of environmental tax revenue. Instead, environmental protection tax revenue is regarded as local tax revenue, which is included in the general public budget and used by local governments. However, the specific construction of a country’s environmental tax revenue use system should not be limited to the existing environmental tax laws and regulations in a country, but should conform to the trend of expanding the scope of environmental tax collection and make predictive research. Therefore, how to construct a systematic system for the use of environmental tax revenue in line with China’s actual needs is an urgent task for China to implement the foreseeability of environmental tax legislation. In theory, the basic ways of using environmental tax revenue include general fiscal revenue to make up fiscal deficits, special funds to solve environmental problems, revenue recycling to reduce the tax burden of other distorted taxes, etc. The implementation effect of the foreign environmental tax revenue use system verifies the necessity of constructing an environmental tax revenue use system. Its basic experience is to take fiscal neutrality” as the orientation of legislative reform, mostly adopt mixed income use system, special funds are still prevalent, and income recycling mechanism is increasingly favored. There are two enlightenments to our country: first, the system of using environmental tax revenue should become the basic supporting system of environmental tax reform in our country; second, the mechanism of income recycling should become an important part of the environmental tax revenue use system in our country. The construction of China’s environmental tax revenue use system should adhere to the three principles of synchronization of income use and environmental tax reform, including top-level design principle, fiscal balance and income neutrality principle guided by the overall interests of the society, and tax legality and public participation principle. Under the guidance of the above principles, the specific system under the combined mode of classification and mixed use is constructed: resource environmental tax revenue is regarded as general fiscal revenue; environment pollution and destruction income is treated as a special-purpose mode; carbon tax/energy tax revenue is introduced into the revenue recycling mechanism.

Carbon taxes and the double dividend hypothesis in a recursive-dynamic CGE model for Spain

ABSTRACTA carbon tax is potentially a policy that can reduce CO2 emissions and mitigate climate risks, at lowest economy-wide costs. We develop a dynamic CGE model for Spain to assess the economic and environmental effects of a carbon tax, and test the double dividend (DD) hypothesis. We simulate the impact of three carbon taxes: €10, €20 and €30 per ton of CO2. For each tax, four ‘revenue recycling’ scenarios are examined: a reduction of taxes on capital, on labor, on value-added tax, and a scenario in which revenues are not recycled. We find a DD for taxes of €10/ton and lower, within five to seven years of implementation. We estimate an annual CO2 emissions reduction of around 10% with this tax. Under some circumstances, the DD can be achieved for a tax of €20/ton. In any case, recycling revenues to cut pre-existing taxes reduces costs of imposing carbon taxes.

Carbon Dividend — An Instrument for a Socially Just Environmental and Climate Policy?

Internalising external costs is economically and ecologically efficient and should therefore be done comprehensively. Critics, however, call it socially unjust because poorer households allegedly pay a heavier price than rich ones (regressive distributional effects). This argument, which hinders political realisation, only holds true if you neglect the revenue side. The article shows that a (carbon) dividend for revenue recycling in Germany would make the distributional effects progressive rather than regressive: The lower 50% of income distribution would receive a net benefit, whereas the upper 50% would be burdened. An internalisation of external costs that is linked to a (carbon) dividend would therefore also be socially just.

Distributional Impacts of Climate Mitigation Policies - A Meta-Analysis

Understanding the distributional impacts of market-based climate policies is crucial to design economically efficient climate change mitigation policies that are socially acceptable and avoid adverse impacts on the poor. Empirical studies that examine the distributional impacts of carbon pricing and fossil fuel subsidy reforms in different countries arrive at ambiguous results. To systematically determine the sources of variation between these outcomes, we apply an ordered probit meta-analysis framework. Based on a comprehensive, systematic and transparent screening of the literature, our sample comprises 53 empirical studies containing 183 effects in 39 countries. Results indicate a significantly increased likelihood of progressive distributional outcomes for studies on lower income countries and transport sector policies. The same applies to study designs that consider indirect effects, behavioral adjustments of consumers or lifetime income proxies. Future research on different types of revenue recycling schemes and lower income countries would further contribute to the literature.

Parallel Tracks Towards a Global Treaty on Carbon Pricing

We argue that a global carbon price is the only way to effectively tackle free riding in international climate policy, required to substantially reduce greenhouse gas emissions. We briefly review the main reasons behind the essential role of carbon pricing, address common misunderstandings and scepticism, and identify key complementary policy instruments. Negotiating global carbon pricing is argued to be much easier than negotiating binding country-level targets, especially if it includes equitable revenue recycling. Moreover, a global carbon price can be more readily adapted to new data and insights of climate science. We propose a political strategy towards a global carbon price that consists of two tracks. The first entails assembly of a carbon-pricing club, a specific case of a climate club, to gradually move towards a full participatory agreement on carbon pricing. The second track involves putting time and energy into re-focusing UNFCCC negotiations on a carbon-pricing agreement. The two tracks reinforce one another, increasing the likelihood of a successful outcome.

The distributional effects of a carbon tax and its impact on fuel poverty: A microsimulation study in the French context

This paper studies the distributional effects of France's recently introduced carbon tax. Using a microsimulation model built on a representative sample of the French population from 2012, it simulates the taxes levied on each household's consumption of energy for housing and transport. Without revenue recycling, the carbon tax is regressive and increases fuel poverty. From a policy perspective, this finding indicates that the question of fuel poverty cannot be ignored in the quest for a fair ecological transition. It proposes that some of the revenues from the carbon tax should be redistributed to households. Different designs of cash transfer to support households are then compared. The results show that the inequities of the carbon tax could be offset at reasonable cost relative to total carbon tax revenues. However, adjusting the design of cash transfers to criteria other than income level does not diminish the cost of compensating households. The benefits of finely adjusting cash transfers may therefore be somewhat limited. Most notably, the results show that targeting revenue recycling at low-income households would help to reduce fuel poverty substantially. This study therefore indicates that carbon taxation actually provides an opportunity to finance ambitious policies to fight fuel poverty.

Exploring the impacts of a low-carbon policy instrument: A case of carbon tax on transportation in China

The rapid growth of energy consumption and CO2 emission in transportation has brought great challenges to China’s energy demand and environmental issues. Carbon tax, considered as an efficient low-carbon policy instrument, can effectively reduce the use of fossil fuels and improve energy efficiency. This study aims to explore the impacts of a transportation carbon tax on transport sectors, macroeconomy and social welfare by developing a computable general equilibrium (CGE) model. Meanwhile, to achieve fiscal revenue neutrality, two schemes are employed for revenue recycling. One is that all of the carbon tax revenue is recycled to subsidize households through lump-sum transfer; the other one is that carbon tax revenue is used to reduce the income tax of households and enterprises. The simulation results show that the appropriate carbon tax rate is 50 Chinese Yuan (RMB)/ton-CO2. At this level of taxation, energy demand and carbon reduction have fewer negative impacts on the macro-economy and transport sectors. We also find that the appropriate carbon tax rates among different transport sectors and different energy categories are different. The appropriate carbon tax rates for airlines, railway, urban transport and water transport are same (50 RMB/ton-CO2), while the appropriate carbon tax rate for road transport sector is 60 RMB/ton-CO2. The recycling of carbon tax revenue to households and enterprises should be implemented to realize the “weak double dividend” effect of the carbon tax.

THE IMPACT OF COAL RESOURCE TAX REFORM ON THE CHINESE ECONOMY: A CGE ANALYSIS

China’s coal resource tax reform, introducing an ad valorem tax to replace previous volume-based tax from December 2014, marked a new stage of the resource pricing mechanism reform. In particular, coal, as a pollution-intensive energy, is the main source of energy for China. With this in mind, it is the time to ask what the impacts of this reform would be on Chinese economy. A computable general equilibrium (CGE) model is applied to explore the impact of a 5% ad valorem coal resource tax on Chinese economy under four scenarios involving distinguished electricity pricing mechanisms and tax revenue recycling scheme by deducting consumption tax. Simulation results show that levying ad valorem tax will reduce the output of energy-intensive industries with minor negative impact on economy. A consumption tax deduction can offset the negative impact on real GDP and help the economy to restructure. The concern that reform will push up inflation is unnecessary, even under the market price mechanism of electricity. In terms of winners, export-oriented industries benefit when no tax revenue recycling, while industries producing private consumption goods benefit when ad valorem coal resource tax revenue is used to deduct consumption tax.

Distributional effects of taxes on car fuel, use, ownership and purchases

We analyse distributional effects of four car-related tax instruments: an increase of the fuel tax, a new kilometre tax, an increased CO2-differentiated vehicle ownership tax, and a CO2-differentiated purchase tax on new cars. Distributional effects are analysed with respect to income, lifecycle category, and spatial dimensions. The analysed taxes are progressive over most of the income distribution, but barely regressive if the highest and lowest incomes are included. However, the fraction of the population who suffer substantial welfare losses relative to income is much higher in lower income groups. We also study revenue recycling schemes; when these are included, the combined effect of tax and recycling is progressive. Considering geographical differences; rural areas carry a larger burden of fuel and vehicle taxes than urban areas, and satellites/suburbs carry a larger burden than central cities. However, rural areas are affected remarkably similar regardless of where in the country they are located.

EMF32 RESULTS FROM NEMS: REVENUE RECYCLING

We show results from the National Energy Modeling System generated during the Energy Modeling Forum 32 study — focusing on macroeconomic responses to different methods of recycling carbon tax revenue. We find that recycling such revenue directly to consumers in the form of lump sum payments results in smaller negative GDP impacts than using the revenues to reduce business taxes.

THE INTERGENERATIONAL INCIDENCE OF GREEN TAX REFORM

We examine the lifetime incidence and intergenerational distributional effects of an economy-wide carbon tax swap using a numerical dynamic general equilibrium model with overlapping generations of the U.S. economy. We highlight various fundamental choices in policy design including (1) the level of the initial carbon tax, (2) the growth rate of the carbon tax trajectory of over time, and (3) alternative ways for revenue recycling. Without revenue recycling, we find that generations born before the tax is introduced experience smaller welfare losses, or even gain, relative to future generations. For sufficiently low growth rates of the tax trajectory, the impacts for distant future generations decrease over time. For future generations born after the introduction of the tax, the negative welfare impacts are the smallest (largest) when revenues are recycled through lowering pre-existing capital income taxes (through per-capita lump-sum rebates). For generations born before the tax is introduced, we find that lump-sum rebates favor very old generations and labor (capital) income tax recycling favors very young generations (generations of intermediate age).

DISTRIBUTIONAL IMPLICATIONS OF A NATIONAL CO2 TAX IN THE U.S. ACROSS INCOME CLASSES AND REGIONS: A MULTI-MODEL OVERVIEW.

This paper presents a multi-model assessment of the distributional impacts of carbon pricing. A set of harmonized representative CO2 taxes and tax revenue recycling schemes is implemented in five large-scale economy-wide general equilibrium models. Recycling schemes include various combinations of uniform transfers to households and labor and capital income tax reductions. Particular focus is put on equity — the distribution of impacts across household incomes — and efficiency, evaluated in terms of household welfare. Despite important differences in the assumptions underlying the models, we find general agreement regarding the ranking of recycling schemes in terms of both efficiency and equity. All models identify a clear trade-off between efficient but regressive capital tax reductions and progressive but costly uniform transfers to households; all agree upon the inferiority of labor tax reductions in terms of welfare efficiency; and all agree that different combinations of capital tax reductions and household transfers can be used to balance efficiency and distributional concerns. A subset of the models go further and find that equity concerns, particularly regarding the impact of the tax on low income households, can be alleviated without sacrificing much of the double-dividend benefits offered by capital tax rebates. There is, however, less agreement regarding the progressivity of CO2 taxation net of revenue recycling. Regionally, the models agree that abatement and welfare impacts will vary considerably across regions of the U.S. and generally agree on their broad geographical distribution. There is, however, little agreement regarding the regions which would profit more from the various recycling schemes.

U.S. CARBON TAX SCENARIOS AND BIOENERGY

This paper documents application of the Future Agricultural Resources Model (FARM) to stylized carbon tax scenarios specified by the Stanford Energy Modeling Forum (EMF). Model results show that the method of tax revenue recycling makes a difference. Either labor-tax, or capital-tax, recycling can reduce the welfare cost of a carbon tax policy relative to lump sum recycling. Of the two tax recycling options, reducing capital taxes provides the greater reduction in welfare costs. However, carbon tax revenues decline with stringent carbon dioxide (CO2) emission targets and the availability of a negative-emissions technology such as bio-electricity with CO2 capture and storage (BECCS). As BECCS expands, net carbon tax revenues peak and decline due to an offsetting subsidy for carbon sequestration, limiting the potential for labor- or capital-tax recycling to reduce welfare costs of a climate policy.

THE WELFARE CONSEQUENCES OF TAXING CARBON

For EMF 32, we applied a new version of our Intertemporal General Equilibrium Model (IGEM) based on the North American Industry Classification System (NAICS). We simulated the impacts arising from the Energy Modeling Forum’s broad range of carbon taxes under three revenue recycling options — lump sum redistributions, capital tax reductions, and labor tax cuts. We examined their consequences for industry prices and quantities, for the overall economy, and for the welfare of households, individuals, and society, the latter in terms of efficiency and equity. We rank recycling mechanisms from most to least favorable in terms of the magnitudes of their impacts on net social welfare — efficiency net of equity — recognizing that other objectives may be more important to policy makers and the public. Finally, we and the EMF 32 effort focus only on the economic effects of carbon taxation and revenue recycling; the environmental benefits arising from emissions reductions are not within our scope of study. We find CO2 emissions abatement to be invariant to the chosen recycling scheme. This means that policy makers need not compromise their environmental objectives when designing carbon tax swap options. We also find additional emissions reductions beyond the scope of coverage and points of taxation. Reducing capital taxes promotes new saving, investment and capital formation and is the most favorable recycling mechanism. In 2010 dollars, the welfare loss per ton abated ranges from $0.19 to $3.90 depending on the path of carbon prices. Reducing labor taxes promotes consumption and work through real-wage incentives and is the next most favorable recycling scheme. Here, the welfare loss per ton abated ranges from $11.09 to $16.49 depending on the carbon tax trajectory. Lump sum redistribution of carbon tax revenues is the least favorable recycling option. It incentivizes neither capital nor labor. Consequently, the damages to the economy and welfare are the greatest among the three schemes. With lump sum recycling, the welfare loss per ton abated ranges from $37.15 to $43.61 as carbon taxation becomes more aggressive. While this ranking is common among the participating EMF 32 models, the spread in our results is the greatest in comparison which we attribute to the substitution possibilities inherent in IGEM’s econometrics, the absence of barriers to factor mobility, and likely differences in the manner in which tax incentives are structured. We find welfare gains are possible under capital and labor tax recycling when emissions accounting is viewed from a top-down rather than a bottom-up perspective and carbon pricing is at an economy-wide average. However, these gains occur at the expense of abatement. We find capital tax recycling to be regressive while labor tax recycling is progressive as is redistribution through lump sums. Moreover, we find that the lump sum mechanism provides the best means for sheltering the poorest from the welfare consequences of carbon taxation. Thus, promoting capital formation is the best use of carbon tax revenues in terms of reducing the magnitudes of welfare losses while the lump sum and labor tax options are the best uses for reducing inequality.

The Intergenerational Incidence of Green Tax Reform

We examine the lifetime incidence and intergenerational distributional effects of an economy wide carbon tax swap using a numerical dynamic general equilibrium model with overlapping generations of the U.S. economy. We highlight various fundamental choices in policy design including (1) the level of the initial carbon tax, (2) the growth rate of the carbon tax trajectory of over time, and (3) alternative ways for revenue recycling. Without revenue recycling, we find that generations born before the tax is introduced experience smaller welfare losses, or even gain, relative to future generations. For suffciently low growth rates of the tax trajectory, the impacts for distant future generations decrease over time. For future generations born after the introduction of the tax, the negative welfare impacts are the smallest (largest) when revenues are recycled through lowering pre-existing capital income taxes (through per-capita lump-sum rebates). For generations born before the tax is introduced, we find that lump-sum rebates favor very old generations and labor (capital) income tax recycling favors very young generations (generations of intermediate age).

The Dynamics of Negative Carbon Emissions: The Case of Forestry

This paper examines the dynamic interactions between forest biomass, atmospheric carbon, and land use change. These three factors are modeled using a dynamic system model as state equations while the policymaker decides the optimal timber harvesting and deforestation quantities. An extension of the model with a tax on forest products and a revenue recycling mechanism is included as well. As forests are suggested as potential climate change mitigation tools to reach net negative emissions due to their function as carbon sinks, examinations into this dynamic relationship are of increasing importance. This investigative line can shed light on how to sustainably manage forests in the context of climate change, as well as indicate forests’ role in atmospheric carbon dioxide removal, and there are multiple opportunities for extension of its application.

Double Progressivity of Infrastructure Development through Carbon Pricing - Insights from Nigeria

Concerns over adverse impacts on poverty and inequality discourage many lower-income countries from regulating their greenhouse gas emissions, despite being highly vulnerable to climate change. This paper analyses the distributional effects of carbon pricing and revenue recycling in basic infrastructure development in Nigeria. We assess the income impacts of a carbon tax based on microsimulations, combining an environmentally-extended input-output model with household survey data. Our results suggest double progressivity. That is, lower-income households would bear a relatively lower tax burden while enjoying greater infrastructure access gains. Hence, while carbon pricing revenues are unlikely to suffice to finance universal infrastructure access, the policy approach can serve as entry point to align environmental with sustainable development goals.

Understanding the heterogeneous effects of gasoline taxes across income and location

Using confidential household-level data, we estimate spatial and demographic heterogeneity in household-level gasoline price elasticities and gasoline tax burdens from a 60-cent federal gasoline tax increase. In order to address unobserved consumer heterogeneity, we employ a parametric adaptation of the maximum score methodology to model the household’s choice of vehicles and driving decisions, allowing for disaggregated vehicle choices, vehicle-specific fixed effects, and interactions among the multiple vehicles in each household. We estimate average price elasticities of demand for gasoline at -0.74, with significant heterogeneity across space and demographics. We also find that rural and poor households bear the greater share of the burden from increasing taxes. Finally, we suggest a revenue recycling policy that helps mitigate the gasoline tax's resulting economic inequalities across household location and income. In addition, though a gasoline tax is an effective policy for reducing the externalities associated with driving, our policy also allows the government to retain some revenue from the tax even after the revenue recycling.

Employing a CGE model in analysing the environmental and economy-wide impacts of CO2 emission abatement policies in Malaysia.

The impact of global warming has received much international attention in recent decades. To meet climate-change mitigation targets, environmental policy instruments have been designed to transform the way goods and services are produced as well as alter consumption patterns. The government of Malaysia is strongly committed to reducing CO2 gas emissions as a proportion of GDP by 40% from 2005 levels by the year 2020. This study evaluates the economy-wide impacts of implementing two different types of CO2 emission abatement policies in Malaysia using market-based (imposing a carbon tax) and command-and-control mechanism (sectoral emission standards). The policy simulations conducted involve the removal of the subsidy on petroleum products by the government. A carbon emission tax in conjunction with the revenue neutrality assumption is seen to be more effective than a command-and-control policy as it provides a double dividend. This is apparent as changes in consumption patterns lead to welfare enhancements while contributing to reductions in CO2 emissions. The simulation results show that the production of renewable energies is stepped up when the imposition of carbon tax and removal of the subsidy is augmented by revenue recycling. This study provides an economy-wide assessment that compares two important tools for assisting environment policy makers evaluate carbon emission abatement initiatives in Malaysia.