IV-A 1 IV. Analytical extensions and policy issues

IV-A 2 Is there a ‘double dividend’ from environmental taxation? A ‘green’ tax may do more than merely reduce emissions; its revenues may also permit reductions of more distorting taxes. –First dividend: improved environmental quality. –Second dividend: welfare gain from a more efficient tax system. Insight: an uncorrected externality (pollution) is a distortion; correcting it raises welfare. To this can maybe add additional welfare gain from reduction in the average level of distortion in the tax system.

IV-A 3 Implications (if correct): apply taxes to polluting industries and welfare will improve: a "win-win" policy scenario –also averts controversy over the value of env. gains. In GE, however, we must ask about the effects of the environmental tax on costs in other industries. –E.g. energy price effect of a carbon tax. Will it reduce real wages, eroding the base of the income tax?

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IV-A 11 Partial equilibrium DD analysis suggests that no matter how uncertain the value of environmental gains, a green tax would be a good thing to adopt by virtue of the second (fiscal) dividend. –Because it ignores indirect effects on the supply of labor However, in debates over the welfare implications of environmental taxes general equilibrium analysis places the burden of proof back onto their advocates. –If the green tax reduces real wages, 2nd dividend < 0

IV-A 12 Applicability to LDCs A tax increase can only be passed on as higher prices under some sets of conditions. Sectoral responses to an emissions tax may --> factor market adjustments (including further wage changes). –In most LDCs, emissions taxes will hurt mfg much more than agric., and could even cause real wages to increase under some conditions. Other taxes (e.g. trade taxes) may be more important in terms both for environment and revenues…

IV-A 13 S-S theorem: A rise in a price raises real returns to the intensively used factor and reduces those to the other factor. This is regardless of the source of the price rise. A tax on the output of a polluting industry is equivalent to a producer price reduction unless the tax can be fully passed on. Thus if the polluting industry is K-intensive, a green tax will raise w and reduce r in real terms. Thai data suggest environmental gains from trade liberalization…

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IV-A 15 Conclusions The prospects for a ‘double dividend’ from tax reform in LDCs appear reasonably good. –The assumptions made in the literature are not transparently the most appropriate to the “small country case” that is typical of Asian LDCs, and the DD results are shown to be sensitive to these assumptions. –However, green taxes are minor in LDC tax systems. Conversely, the reform of tax systems in ways that reduce overall distortions has the potential to generate environmental benefits. –Trade liberalization can be good for the environment-- but only if other policies and conditions are also right.

IV-A 16 Discussion Role of environmental taxes in the fiscal systems of LDCs Practical and institutional challenges to incorporation of environmental policies in fiscal systems