Green Tax and it s Effects on Economic, Social and Environmental

ecuadorianaceManagement

Oct 28, 2013 (3 years and 9 months ago)

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Green Tax and it
,

s Effects on E
conomic, Social
and Environmental
Indices

i
n Khorasan
-
Razavi P
rovince
, Iran


Abstract



One of the most important government challenges is the environmental crisis.
Macro
-
economic policies can make variations in the environmental system function. These
variations, especially viewpoint emission, can be very important. Financial policy and
ta
xes are two of the major macro
-
economic policies. Green taxes are important as a major
implement in achieving sustainable development. In this study,
I
ndirect taxes (taxes on
fossil fuels) have been considered, and have been tried using an input
-
output tab
le of the
Khorasan
-
Razavi province in 2001, specifically looking at the amount of pollutants and
greenhouse gas emissions, to survey the welfare and environmental effects on the green
tax for the consumer sectors of energy in Mashhad. For this purpose, usi
ng the
computational general equilibrium model, welfare changes with and without
environmental impact, changes in demand for fossil fuels and changes in pollutants for the
eleven tax scenarios have been studied. For consideration of emissions, variations o
f
pollutants (CO
2
, SO2,

NO
X
,

CO, CH and SPM) are calculated with variations of fossil
fuels. To this end, two environmental factors

-
health and heating
-

have been considered.
The emissions depend on each sector’s use of each type of fossil fuel, i.e. each
sector has a
sector specific emission factor for each type of fuel used. The results indicated that
taxation on fuel reduced intermediate and consumer demand for fossil fuels. If the
environmental effects are considered, in the all scenarios, the welfare c
hanges were
positive and welfare increases as the tax rate increases; in the other words, the increasing
taxes on fossil fuels is desirable. The highest growth rate of welfare is the 15% tax rate
(scenario IV). Under the 15% tax rate on fossil fuels, welfa
re has
decreased 0.1%, if the
environmental effects are not considered. Furthermore, CO2
,
SO2,

NOX
,

CO, CH and
SPM emissions have decreased 4.7%, 2.7%, 3.5%, 3.4%, 4.8% and 2.9% respectively, and
by removing the pollutants, the environmental factors of hea
lth and heating saw a welfare
increase of 0.096%

and 4.6% respectively.


Key words
: Emission, Welfare, Fossil fuels, Green tax, CGE,
Khorasan
-
Razavi Province
.


Introduction

Today’s
,

the

energy supply is one of the most basic prerequisite for ec
onomic and
social development among countries.

Also,
sustainable development

e
ffects

in

energy
sector
ha
ve

a
significant role
in
improv
ing

social, economic and environmental
conditions
,

so

it
will be
reduce the environmental damage

which is

due to

pollutants and greenhouse
gas emissions
.

H
ow the production and use of energy carriers in
the

different

consumers
sector
s is one

of the
effective
factors to

create

environmental pollution at

local, regional
and international
scale
. Accordingly the amount
of pollutants and greenhouse gas
emissions and
the stud
y

of

trend of
them

will provide
appropriate tools for planning and
policies to reduce the effects and consequences of negative

consumption of

energy
.

Green taxes can increase efficiency, also

the Socia
l benefit increased

because of
decrease pollution costs
.

Green taxes are imposed on producers of pollution
.

Receive this
type of tax, in addition to environmental pollution is reduced, it can

be

as a source of


revenue for the government in this field
,

On
the other hand

collect
this
taxes
,

reduce
costs
of
environmental
and
economic stability
.

One type of green taxes

is

indirect of environmental taxes that can b

e imposed on
types of production or consumption inputs that use them

is associated

with some kind

of
environmental damage

,
including taxes on fuels , taxes on types of fertilizers, oil
,

cache
insect
,
oil products and plastic
s.

In this study,
I
ndirect taxes (taxes on f
ossil fuels) have been consider
ed

as green taxes

and have

been

studied
economic
,

welf
are

and

environmental effects in different
sectors

of
Khorasan Razavi.

In following,

has been reviewed on the

literature

of this tax

and

investigate the effects of taxation on fuel in different of environmental aspects
.


Review of literature

B
rief
ly

can be

said
,

the literature

of
environmental and
e
specially

green taxes,
have
considerably

grown

in the last two decades. Although domestic studies are limited
in
this
field but the
re is

wide variety of foreign studies. Briefly referred to some of
them,

in
following
:

Hwan Bae and Shortle

(2005),
studied
consequences of welfare reform green taxes in
small open economies to
Pennsylvania
;

they

were simulated

of the possible consequences
of alternative carbon taxes with

conventional taxes
in a computable gen
eral equilibrium
model
.

Consumer welfare impacts from environmental tax reform were conventionally
decomposed into three effects: the Pigouvian effect, the tax revenue recycling effect, and
the tax interaction effects.

Their results show
ed

that
,

when the carbon tax
was

imposed in
open economies, inter
-
regional trade sectors
were

more responsive than foreign trades,
since the elasticity of substitution for inter
-
regional trades
was

higher than that for the
foreign trades. This different inter
-
regio
nal trading effect leads to different welfare
outcomes.

Koskela, Sinn and Schob (1995)
,

i
ntroduced

green taxes in the three tax reform began
after the Second World War;
they studied

tax reform in an open economy in which

unemployment was neutral in terms o
f income tax and alternative energy tax The wages
were examined. Their results show that green taxes
internalize

negative external effects
and
affect

domestic market

actors
.


Anonymous

(2004),

in
his

study "development
green
tax" express
ed

green taxes ha
d

mak
ed a double benefit to the three forms weak, moderate and strong.
He

assessed
the
effect of green taxes
i
n

the

general equilibrium model
and

concluded that green tax

don’t
have
strong double benefit

and
green

taxes
don’t

cause a reduction in
environme
ntal
problems and unemployment
.

Liang

et al

(1998),
were investigated
the effects of green
tax

on

national income, social
welfare and
e
nvironmental
quality
with two tax plan (the same
tax and
a different
regional
taxes
).
They
measured

reduce consumption of fertilizer

with the aim of reducing water
pollution levels

by
multi
-
regional and multi
-
sector
general
equilibrium model
(computable).
The
ir

results

indicated that Under the 500%

tax
,
national income

has
decreased 0.1%, if the

consumpt
ion of
fertilizer
3%
decrease
.

A
lso
, environmental
quality
improved

3 percent if

there is
the linear relationship between
changes in fertilizer

and
improving the quality of environmental
.


Economic impact of green tax

In this study, similar studies B
ohringer

and Rutherford (1997 and 2002), Hill (1998);
Labandeira

et al (2004) and B
ohringer

et al (2002), goods and services has been

divided
into

two
commodity groups
,
energy
(E) and
non
-
energy

(NE
)
.
Production technology in all
sectors exhibits a constan
t return to scale and is characterized by nested constant elasticity


of substitution (CES) production functions.
Demand for
energy (
fossil fuels
)

and produce
changes
h
as been considered

as

economic effects of

green
tax
.


Social and e
nvironmental impacts


T
he welfare effects

have been
investigated

as
s
ocial

effects of green tax
.
If the

environmental effects are

not

considered
,

by evaluate the utility changes resulting from
consumption, welfare changes
has been

calculated

(
Welfare
has been

considered a
functi
on of consumption

or

leisure
)
.

F
or considering environmental impacts of
green

taxes,

the

second component should be
added to the utility function
.

Pollution as a commodity is supposed that to reduce utility
.

Therefore,
e
nvironmental damages associated with

emissions from consumption of energy are
represented by means of the

v (e)
with
v

<
0.

For simplicity, a linear relationship between energy
use and emissions is assumed. Furthermore, utility from consumption and dis
-
utility from
environmental damages are
assumed to be separable. In this case, utility function is as follows:



(1)









(





)




(

)






































,








As,
Consumption of fossil fuels

increase
,
emissions

increases
also
.

The
coefficient of
increases

emissions

is
determined
according to energy balance
2001

and the effect of
emissions

from two
aspect
s
h
eating and
h
ealth

is

studied.
In

h
eating

aspect
,

variations of 3
pollutants carbon dioxide
(CO
2
),

methane

(CH)

and

nitrogen oxides
(NOx)


and

in

h
ealth

aspect
,

sulfur dioxide
(SO
2
),

carbon monoxide

(CO)

and

particles

(SPM)

are calculated
with variations of energy
.


Each share of fossil fuels

in the
production of
emissions is presented in the table below
.


Table (
1
). Share of fossil fuels in emission.

SPM

CH

CO

NO
X

SO
2

CO
2

Fossil fuels/ emission

5.6

0.4

*



60.9

14.9

Fuel oil

81.2

24.9

1.9



35.1



Gas oil

-

-

0.1

0.4

1.8

7.2

Kerosene

8

74.4

97.9

22.7

2.2

12.9

Petrol

5.2

0.3

0.1

16.9

*



Natural Gas

㄰1

㄰1

㄰1

㄰1

㄰1

011

total


Resource: Department of Energy 2001.


*: Negligible
.


Based on the information on balanced energy from 2001, the
shares of
pollutants of
CO2, SO2, NOX, CO, CH, and SPM in total pollution generated by sectors are

about 97%,
0.37%
,
0.3
%,
1.8
%,
0.45%

and
0.08
%

respectively
.

Thus
, the

chang
e of
different

pollutants

due to changes in consumption of petroleum
products (EO) and natural gas (EG) can be calculated as follows:


































































































(
2
)























































































































(
3
)
































































































(
4
)





























































































(5)





























































































(
6
)


























































































(
7
)




T
he total
changes
of

pollution (ΔP) and the changes

of
health (ΔP
1
) and heating
aspect
s

(ΔP
2
) is calculated as follows
:




















































(
8)
















































































(


)



















































































(

)


The
data required

to

this
study
in

general equilibrium model
,
are summarized in

the
micro social

accounts matrix (
Micro SAM
)
(Annex 2).

I
n this matrix
,

Productive sectors
are include
: agriculture,
food
industries
, textile
s
,
wood and paper and printing industries, chemical industries, metal industries, mineral
and
non
-
metal
industries, other industries, building, water, transport, trade and services,
electricity, gas and petroleum products.
This paper
surveys the
economic,
wel
fare and
environmental effects on the green tax

in

7

scenarios

(Scenario I: impose a 1% tax on gas
and oil; scenario II: impose a 5% tax on gas and oil; scenario III: impose 10% tax on gas
and oil; scenario IV: impose a 15% tax on gas and oil; scenario
V
:
impose
2
0% tax on gas
and oil; scenario V
I
: impose a
2
5% tax on gas and oil

and

scenario
V
II: impose
3
0% tax on
gas and oil).


The computational general equilibrium (CGE) model has been programmed in general
algebraic modeling system/ mathematical
programming system for general equilibrium
(GAMS/MPSGE) and we calibrated the model following the procedure in Rutherford
(1999) by using the solver MCP.


Results and discussion



Changes in
fossil fuels’ demand


The results

of v
ariation of fossil fuels’
demand

are given in Table
2
.


Table (
2
). Variation of fossil fuels’ demand.

Oil demand

Gas demand

Scenario/ variation

0.5
-

-
0.5

Scenario I

2.2
-

2.4

-

Scenario II

0.6
-

5.3
-

Scenario III

2.7
-

7.3
-

Scenario IV

-
4.7

-
9.2

Scenario V

-
6.5

-
11.0

Scenario VI

-
8.3

-
12.7

Scenario VII

.

Resource: The paper’s findings


As shown in Table
2
, in all
seven

scenarios, a green tax reduces demand for fossil fuel
both as an intermediate input and as a final good.
I
f impos
ing a

1
%
green tax
, oil and gas
demand will decrease
0.5
%.
F
ossil fuels’ demand

decrease
s as the tax rate increases
.

In
the
seven
th scenario, gas demand is reduced
12.7% and oil demand
is reduced

8.3%
.

T
he highest rate of
v
ariation of
gas
’ demand

(
2.9
%)
is the 1
0
% tax rate
(scenario I
I
)

but
T
he highest rate of
v
ariation of
oil
’ demand

(
2.1
%)
is the 1
5
% tax rate
.



C
hanges
in p
roduction

W
hen green taxes have

imposed,

the

results

of
production changes in different sectors
are g
iv
en in Table

3
.




Table (
3
).
change

of
produc
tion
in the different activities.

VII

VI

V

IV

III

II

I

Sectors/ Scenarios


-
2.6

-
2.6

-
2.6

2.6

-
2.6

-
2.6

-
2.6

Agriculture

-
4.5

-
4.5

-
4.4

-
4.4

-
4.4

-
4.4

-
4.3

Food

I
ndustries

-
4.0

-
4.0

-
4.0

-
4.0

-
4.0

-
4.0

-
4.0

Textile

-
18.7

-
18.7

-
18.7

-
18.7

-
18.7

18.7

-
18.7

Wood
and

Paper

I
ndustries

-
51.9

-
51.7

-
51.7

-
51.7

-
51.7

-
51.6

-
51.5

Chemical

I
ndustries

-
15.0

-
15.0

-
15.0

-
15.0

-
15.0

-
15.0

-
15.0

steel
and

metal

I
ndustries

5.6

5.6

5.6

5.6

5.6

5.6

5.6

Mining

-
5.5

-
5.5

-
5.5

-
5.5

-
5.5

-
5.5

-
5.5

Other
industries

18.7

18.6

18.6

18.6

18.7

18.6

18.5

Construction

0

0

0

0

0

0

0

water

-
4.2

-
4.1

-
4.1

-
4.1

-
4.1

-
4.1

-
4.0

Transport

-
0.6

-
0.6

-
0.6

-
0.6

-
0.5

-
0.5

-
0.3

Trade
and

Services

-
6.0

-
6.0

-
5.9

-
5.8

-
5.7

-
5.6

-
5.4

Electricity

-
16

-
14.5

-
12.8

-
11.8

-
9.2

-
7.2

-
6.0

Gas

51.1

50.2

49.4

48.8

48.0

47.1

45.9

Oil

Resource: The paper’s findings


As shown
in

the table above, green
tax on fossil fuels reduces

production of

sectors:

agriculture, food industr
ies
, textile, wood and paper, chemical industr
ies
, steel

industr
ies
,
other industries, electricity
,

natural gas
,
transport and
trade and services
.

While
production of
mining
, construction and petroleum product increase
s
.

As

the

tax
rates increase, the
production of sectors

(
except for gas and oil sectors
)

is

little changed
.

In all of the scenarios
,

n
atural gas

of

production

respectively 6%,

7.2
%,
9.2
%,
11.8
%,

12.8
%,
14.5
% and 16% will decrease

and
oil production, respectively,
45.9
%,
47.1
%, 48%,
48.8
%,
49.4
%,

50.2
%,
51.1
%
will
increase.
Although

the production of the
water

sector

has not changed
, but

t
he highest increase is related to production

of oil sector and

the

highest
decrease

is related to production

of
chemical Industries
.

Changes in air pollution

Based on the
share of fossil fuels in pollutant emissions, the
variation of

six

pollutants for each
of the
seven

scenarios is calculated. The results are given in Table
4
.


Table (
4
). Variation of
pollutant emissions

SPM

CH

CO

NO
x

SO
2

CO
2

Scenario/ variation

0.5
-

0.
6
-

0.5
-

0.5
-

0.5
-

-
0.5

Scenario I

2.2
-

2.
9
-

2.
4
-

2.2
-

2.2
-

2.3

-

Scenario II

0
.
8
-

2
.
2
-

1.
1
-

1.4
-

0.6
-

2.6
-

Scenario III

2
.
9
-

4
.
8
-

3.
4
-

3.5
-

2.7
-

4.7
-

Scenario IV

-
4
.
9

-
7
.
3

-
5.
6

-
5.5

-
4.7

-
6.6

Scenario V

-
6
.
7

-
9
.
6

-
7.
5

-
7.3

-
6.5

-
8.4

Scenario VI

-
8
.
5

-
11
.
9

-
9.
5

-
9.0

-
8.3

-
10.2

Scenario VII


Resource: The paper’s findings
.



As shown in Table
4
,

a
s
demand

for

fossil fuels

decrease
,
emissions

decr
ease also
.
If

a
1
%
tax is imposed, CO
2
, SO
2
,

NO
X
,

CO
,

SPM

emissions reduce by
0.5
%, and
CH

emission

reduces

0.6
%
.

B
y increasing the tax rate to

5%,
the variation

of emission reduction
in t
hese
pollutants

is
2.3%, 2.2%, 2.2%, 2.4%, 2.9% and 2.2%
, respectively
.

I
n the third scenario
,

the rate of reduction in
emission

is less (
except for
CO
2
).




Based on the results
,

the
rate of reduction in
emission
s
increases

as

the rate of green tax
increase

(except the third scenario)
. In

the

fourth

scenario
-

the highest
rate of reduction in


emission
s
-

the variation

of emission reduction

for

CO
2
, SO
2
,

NO
X
,

CO
,CH and

SPM

emissions is
4.7%, 2.7%, 3.5%, 3.4%, 4.8%
and 2.9%
, respectively
.


I
n all scenarios
,

t
he highest change in emissions related to the

CH

pollutant

and the

lowest level

is
related

to
SO
2

pollutant
.


Changes in
welfare

Effects of green tax on welfare, in two cases with and without the environmental
impact
have

been computed
.
The results of each

case

are presented in Table 5.

Table (
5
). Variation of welfare with and without environmental effects by different tax scenarios.

heating
aspect

health
aspect

with
out

environmental effects

Scenario/ variation

0.5
-

0.012

-
0.
1

Scenario I

2.2
-

0.030

-
0.1

Scenario II

2.6
-

0.025

-
0.1

Scenario III

4.6
-

0.096

-
0.1

Scenario IV

-
6.4

0.027

-
0.1

Scenario V

-
8.1

0.065

-
0.1

Scenario VI

-
9.9

0.008

-
0.2

Scenario VII







Resource: The paper’s findings
.



If the utility is
a
function of
goods'

consumption

only (
first case
)
,

welfare decreases
0.1
%

i
n

all

scenario
s,

a
lthough

welfare will decrease

0.2
% for the last scenario
.

The results are that
increasing tax rates, the slight decrease in welfare has
increased

In the second case,

that the assumed welfare or utility is a function of goods’ consumption and
environmental impact
s (particularly air pollution).
In all of the scenarios, welfare changes have been
positive

in health
aspect

because

increased welfare
c
aused by
decreased emissions
, is more than the
decreased welfare
caused by
decreased
goods’ consumption

and thus increase total welfare
.

As the
results show in

Table 5
, under the 1% tax rate on fossil fuels, although welfare has
decreas
ed 1%, if the
environmental

effects are not considered, but if the
environmental

effects are
considered, the welfare increase about 0.012% of the
health
aspect

and increase about

0.5%

in

the
heating
aspect
.

A

5
%
green
tax

would
increase
welfare
about 0.03% of the health
aspect
.

Generally, in the health aspect,

the highest welfare rate is 0.07% in the fourth scenario. In this
scenario, welfare changes 0.096%, therefore, the optimal tax rate is 15% rate.

In the heating aspect, A 15% green tax woul
d increase welfare to
2%, and CO2,
NOX and
CH

emissions decrease 4.7%, 3.5%
and
4.8% respectively.

In all of the scenarios, welfare changes have
been
negative
; as the tax increases the welfare will also
decrease

by an increasing rate.

So, in

the
last
scenario
,

variations of welfare are 9.9%.


S
ummary and Conclusions

This research has intended to investigate
welfare and environmental effects in different sectors
of Khorasan Razavi
,

in the
seven

scenarios
(Scenario I: impose
a 1
% tax on gas and oil
;

scenario II:
impose
a 5
% tax on gas and oil
;

scenario III: impose
10
% tax on gas and oil
;

scenario IV
: impose a
15% tax on gas and oil;
scenario
V
: impose
20
% tax on gas and oil
;

scenario V
I: impose a 25% tax
on gas and oil and

scenario
V
II: impose
30
% ta
x on gas and oil).


Using MCP and software GAMS
welfare changes with and without environmental impact,
changes in energy demand and changes in
emissions
have been studied
.

In all seven scenarios, a green tax reduces demand for fossil fuel both as an interm
ediate input
and as a final good. The highest rate of variation of gas’ demand (2.9%) is the 10% tax rate
(scenario II) but The highest rate of variation of oil’ demand (2.1%) is the 15% tax rate
.




As the tax rates increase, the production of sectors (exce
pt for gas and oil sectors) is little
changed. The highest increase is related to production of oil sector and the highest decrease

is
related to production of chemical Industries.


I
n all scenarios
,

t
he highest
share

in emissions related to the

CO2

pollutant

(97%),

and
this

is affected
by

oil

consumption. Therefore,
should be more serious decisions about
reducing oil consumption, and

by green tax on oil can minimize consumption
of these
products
.

The highest consumption of petroleum related by transp
ort sector and the highest
consumption of gas related by services sector.


The
Savings in this sector and reduce
demand for them has a great effect on the amount of air pollution.

According to the
results, under

the 15% tax rate on fossil fuels, although welfare has
decreased 1%, if the environmental effects are not considered, but the welfare increase
about
0.096
% in the heating aspect,
and decrease

about 4.6
% in the heating aspect.

Therefore government
can
rece
iv
e

15% of energy
carrier's

price
as green tax

and allocation

in order to reduce air pollution.


R
eference


1.

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2.

Boehringer, C., and Rutherford, T.(1997) "Carbon
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Environmental Economics and Management, 32: 189
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203.

3.

Boehringer, C., and Rutherford, T. (2002) "Carbon Abatement and International
Spillovers
", Environmental and Resource Economics, 00: 1
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27.

4.

Bohringer, C., Wolfgang Wiegard,H. and Starkweather,C.(2002) "Green Tax Reform
Computational Economics: A Do


it


yourself Approach", Computational Economics,
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109.

5.

Department of Energy (2001). Ene
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6.

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906

7.

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the Cost of
Tax Exemptions", Economics Department, Stockholm School of Economics and The
Beijer Institute, Stockholm, Sweden.

8.

Hwan Bae, J. and Shortle, J. (1995) "The Welfare Consequences of Green Tax Reform
in Small Open Economies", Department of Agricult
ural Economics and Rural
Sociology the Pennsylvania State University.

9.

Kemfert, C. and Welsh, H.(2000) "Energy


Capital

Labor Substitution and the
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no 22, p641
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660.

10.

Koske
la, E,H.and Sinn,W. Schob, R. (1995) "Green Tax Reform and
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11.

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12.

Liang, C. Lovejoy, S.

an
d Lee,
J. (
1998) "Green
Taxes:

Impacts on National
Income, Social Welfare, and Environmental Quality", Department of Community
Development and Applied Economics,
the

University of Vermont, Burlington,
Vermont.