11 th Global Conference on Environmental Taxation Issues 3 – 5 November 2010 Bangkok, Thailand Paper #24 Assessment of Fiscal Intervention Measures: Perspectives from Environmental Macroeconomics Authors Seck TAN Dodo J. Thampapillai

Presentation Outline Objective Conceptual Framework Analysis Overview of Findings Empirical Analysis Case for Environmental Capital Investment Conclusion 2

Objective Demonstrate the distinction in policy intervention when environmental macroeconomic framework is applied as opposed to the standard macroeconomic framework Illustration made in terms of: Policy intervention via environmental taxes, and reinvestment in environmental capital China is used as a case study 3

Conceptual Framework Policy intervention is usually made based on standard macroeconomic frameworks. There is no consideration given to environmental capital (KN) and its depreciation (D KN ) When the environmental macroeconomic framework is used, KN is acknowledged and D KN is internalized The income determined from the environmental macroeconomic framework is more sustainable than that determined from the standard framework 4

Conceptual Framework There are two different frameworks which comparison is based on. Standard Macroeconomic Framework At equilibrium, GDP  Y Equilibrium income, Y * is defined as a function of marginal propensity to consume (  ), taxes (  ), and propensity to invest (  ) Y * = f ,  ) Environmental Macroeconomic Framework At equilibrium, GDP – D KN  Y Equilibrium income, Y ** is defined as a function of marginal propensity to consume (  ), taxes (  ), propensity to invest (  ), and proportion of environmental degradation (  ) Y ** = f  ,  ) 5 aggregate expenditure national income depreciation of environmental capital national income aggregate expenditure

Conceptual Framework We also estimate the EXTRA TAX that has to be levied in the standard framework to obtain the same income outcome as in the sustainable framework The tax illustrates the extent of divergence between the sustainable and the unsustainable time paths If the extra tax revenue is returned as investment to the environment, D KN in future time periods could reduce permitting the economy to expand and achieve some sustainability 6

Analysis In this simple Keynesian analysis, KN refers to the depreciation of the air-shed in terms of air pollution and the depreciation of agricultural soils in terms of fertilizer usage D KN is the sum of the costs of abating air pollution and applying fertilizers The extra tax in the standard framework that makes the result resemble those of the environmental macroeconomic framework range from 43% - 56% The level of tax in this analysis is 10% and it will be levied for three years. The extra taxes considered will be for the first four years (T+1) 7

Overview of Findings Y A Actual GDP Y * Standard Y Y ** Sustainable Y No  no re- investment  and re- investment 2004Marginally above Y * Markedly above Y ** Significantly below Y * Below Y * 2005Marginally above Y * Markedly above Y ** Significantly below Y * Below Y * 2006Marginally above Y * Markedly above Y ** Significantly below Y * Below Y * 2007Significantly above Y * Markedly above Y ** Significantly below Y * Below Y * Overtakes Y * 2008Significantly above Y * Markedly above Y ** Significantly below Y * Below Y * Markedly above Y * 2009Significantly above Y * Markedly above Y ** Significantly below Y * Below Y * Markedly above Y * 8

Empirical Analysis 9 Standard and Sustainable Framework (no extra taxes)

Empirical Analysis 10 Standard and Sustainable Framework (extra taxes in the sustainable framework) BUT accounting practice does not include KN investments from extra taxes

Empirical Analysis Standard and Sustainable Framework NO extra taxes Standard and Sustainable Framework WITH extra taxes 11

Empirical Analysis The graph on the left shows the variation between the standard and the sustainable income with consideration to extra taxes The variation is exponential when there are no extra taxes On the other hand, the variation is relatively less pronounced with extra taxes 12

Empirical Analysis Accounting includes KN investment from extra taxes When taxes collected are re-invested, the sustainable income will surpass the standard income in three years The variation between the two increases steadily beyond the third year If there were no re- investment, the sustainable income will stay below the standard income Standard and Sustainable Framework with Taxes Re-Invested 13

Case for KN Investment There are four areas of closed loop production options available for China – amongst several others 1. Sewerage Treatment 2. Air-Conditioning and Heating 3. Energy Supply 4. Methods of Commodity Development 14

Conclusion Policies within a government’s portfolio must provide allowance for the restoration of environmental capital The policies should cater towards a wide range of options for maintaining and/or restoring environmental capital Levying additional environmental taxes over a limited period of time allows for the financing of these policies 15

The End Questions & Answers 16