Progressive Carbon Taxation as an EU Tax: Socio-Economic Impacts Kurt Kratena, Mark Sommer Fairtax Conference: “Options for an EU Tax as an EU Own Resource” 19th September 2016, Vienna, WIFO

Taxing CO2 footprint Proposals for an own EU tax: non distorting taxes, sustainability criteria  environmental taxes (Schratzenstaller and Krenek, 2016) Rising inequality and global environmental sustainability as ‘hot issues’ Large part of the literature shows regressive impacts of environmental taxation The EU consumer is responsible for global emissions  taxing the CO2e footprint Lump-sum compensation schemes can mitigate the regressive impact Lump-sum compensation schemes with threshold are equivalent to a progressive CO2e footprint tax

Taxing CO2e footprint Calculating the CO2e footprint of different income groups, traditionally via MRIO (induced intermediate demand), as in Chancel and Piketty (2015) Taxing the CO2e footprint of households proportionally (Kratena and Sommer, 2014) or progressively (Chancel and Piketty, 2015) This study makes a first attempt of quantifying the socio-economic impact of a progressive CO2e footprint tax

Methodology Integrating the econometric analysis into IO by using a hybrid model between CGE and dynamic econometric IO Integrating household behaviour (econometric model) into the IO model: total consumption (income, wealth and liquidity constraints), energy demand of households (durables), other household demand Other final demand components are endogenous as well The footprint in this paper is determined by induced intermediate demand, induced consumption in other (domestic) income groups, induced investment, etc.

Methodology The CO2e footprint comprises: consumption of each household group induces consumption in the other groups (inter-relational income multiplier) consumption of each household group induces wage and price effects due to the demand pull The same model is used for quantifying the socio-economic impact of taxing CO2e footprint First exercise, taxing household income according to the footprint progressively (as in Chancel and Piketty, 2015)

Simulations with EU 27 DYNK Model DYNK (DYnamic New Keynesian) model: Hybrid between econometric IO and CGE; ‘New Keynesian’: full employment in the long-run, short-run rigidities (liquidity constraints, wage bargaining) EU 27 as one economy, 59 industries, five household income groups, 47 consumption categories Public budget constraint (stability programme) as model closure Detailed modelling of consumption activities  link to physical energy/emission flows  direct, indirect and imported CO2e footprint

Demand functions and demand systems 5 groups of disposable income Consumption Model Demand functions and demand systems 5 groups of disposable income Consumption Durables Houses Vehícles Non Durables Heating Electricity Other ND Food Clothing etc. Public Transport Fuels

Consumption Model Sensitivity of consumption to (lagged) income growth (marginal propensity of consumption)

Consumption parameters Price and expenditure elasticity of energy and non-energy demand of EU households

Direct household emissions Total consumption by quintile (q) & category Energy consumption: monetary  physical units Direct GHG emissions:

Indirect household emissions K,L,E,M model of production and factor demand (Translog model) as first nest Total energy demand (E) in production (5 energy types): inter-fuel substitution as second nest Emissions in production Indirect domestic GHG emissions by quintile (q):

Calculating the CO2-e footprint The total CO2-e footprint of a quintile is the sum of direct (energy related), indirect domestic (production) and indirect imported CO2-e footprint: Calculation of the CO2-e footprint of quintile q = adding the consumption vector of quintile q exogenously This will deliver double counting by the model : inducing (endogenous) consumption in quintile q.

Calculating the CO2-e footprint Correcting for double counting: Subtracting the indirect domestic and indirect imported footprint from the induced consumption in the same quintile q.

Calculating the CO2-e footprint Macroeconomic impact and CO2-e footprint of consumption by quintile (in %) The direct induced CO2-e footprint by quintiles sums up to 100% The indirect induced CO2-e footprint contains imported footprint and sums to 228%.

Calculating the CO2-e footprint Cross quintile income impact of consumption by quintile (in %) Consumption of high income groups generates income in low income groups, used for consumption Consumption of low income groups generates income in high income groups, used for savings

Calculating the CO2-e footprint Income, consumption and CO2-e footprint by quintile (shares in %)

Calculating the CO2-e footprint Absolute CO2-e footprint by quintile (in t/capita)

Taxing the CO2-e footprint The Chancel and Piketty (2015) proposal: taxing the footprint progressively, i.e. proportionally to its difference from a tax-free threshold (four different versions) This paper: two thresholds, (i) the world average footprint (6.2 t CO2e/capita), (ii) the EU average footprint (15 t CO2e/capita) Total tax revenue finances 100% of EU budget (150 bill €): (i) 30 €/t CO2 and taxing quintile 2 to 5, (ii) 75 €/t CO2 and taxing quintile 4 and 5 The tax burden on high incomes: (i) 39 bill € (quintile 4) and 73 bill € (quintile 5), and (ii) 35 bill € (quintile 4) and 115 bill € (quintile 5)

Taxing the CO2-e footprint Macroeconomic impact (%) of (i) , EU threshold

Taxing the CO2-e footprint Macroeconomic impact (%) of (ii) , World threshold

Taxing the CO2-e footprint Impact (%) on households of (i) , EU threshold

Taxing the CO2-e footprint Impact (%) on households of (i) , World threshold

Taxing the CO2-e footprint Impact (%) on employment of (i) and (ii)

Conclusions Similar macroeconomic impact of (i) and (ii), but different redistributive impact Employment double dividend due to substitution of EU member countries contribution to EU budget (higher public expenditure) Feedback from labour market: wage increase and loss in price competitiveness of EU Future research: Taxing the CO2 footprint of products consumed by different income groups Dealing with practical problems of product taxes (e.g. Danish fat tax)

Thank you for your attention Kurt.Kratena@cesarecon.es Mark.Sommer@wifo.ac.at