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11th 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 (DKN)
• When the environmental macroeconomic framework is
used, KN is acknowledged and DKN 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
aggregate
expenditure
•
aggregate
depreciation of
expenditure environmental capital
national
income
• Equilibrium income, is defined
as a function of marginal
propensity to consume (b), taxes
(t), and propensity to invest (d)
Y*
Y* = f(b, t, d)
Environmental
Macroeconomic Framework
At equilibrium,
GDP – DKN

Y
•
national
income
Equilibrium income, Y** is defined
as a function of marginal
propensity to consume (b), taxes
(t), propensity to invest (d), and
proportion
of
environmental
degradation (g)
Y** = f(b, t, d, g)
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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, DKN 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
DKN 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)
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Overview of Findings
YA
Y*
Y**
Sustainable Y
Actual GDP
Standard Y
No Dt
Dt, no reinvestment
Dt and reinvestment
2004
Marginally
above Y*
Markedly
above Y**
Significantly
below Y*
Below Y*
Below Y*
2005
Marginally
above Y*
Markedly
above Y**
Significantly
below Y*
Below Y*
Below Y*
2006
Marginally
above Y*
Markedly
above Y**
Significantly
below Y*
Below Y*
Below Y*
2007
Significantly Markedly
above Y*
above Y**
Significantly
below Y*
Below Y*
Overtakes
Y*
2008
Significantly
above Y*
Markedly
above Y**
Significantly
below Y*
Below Y*
Markedly
above Y*
2009
Significantly
above Y*
Markedly
above Y**
Significantly
below Y*
Below Y*
Markedly
above Y*
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Empirical Analysis
Standard and Sustainable Framework (no extra taxes)
7E+13
6E+13
5E+13
4E+13
Y* = [F / (1-b*(1-t)-d)]
Y** = [F*(1-g)] / {1-(1-g)*[b*(1-t)+d]}
3E+13
YA = GDP (constant value)
2E+13
1E+13
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
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Empirical Analysis
Standard and Sustainable Framework (extra taxes in the sustainable
framework) BUT accounting practice does not include KN investments
from extra taxes
7E+13
6E+13
5E+13
4E+13
Y* = [F / (1-b*(1-t)-d)]
Y** = [F*(1-g)] / {1-(1-g)*[b*(1-t)+d]}
3E+13
YA = GDP (constant value)
2E+13
1E+13
0
1
2
3
4
5
6
7
8
9
10
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12
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14
15
16
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Empirical Analysis
Standard and Sustainable
Framework NO extra taxes
Standard and Sustainable
Framework WITH extra taxes
7E+13
7E+13
6E+13
6E+13
5E+13
5E+13
4E+13
Y* = [F / (1-b*(1-t)-d)]
4E+13
3E+13
Y** = [F*(1-g)] / {1-(1g)*[b*(1-t)+d]}
3E+13
2E+13
YA = GDP (constant
value)
1E+13
2E+13
1E+13
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17
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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
Variation between Y* •
and Y** (Taxed)
when there are no extra
Variation between Y*
and Y** (No Tax)
taxes
• On the other hand, the
variation is relatively less
pronounced with extra
taxes
1.2E+13
1E+13
8E+12
6E+12
4E+12
2E+12
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
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Empirical Analysis
8E+13
Standard and Sustainable
• Accounting includes KN
Framework with Taxes Re-Invested
investment from extra taxes
7E+13
6E+13
5E+13
Y*
4E+13
Y**
3E+13
2E+13
1E+13
0
• 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 reinvestment, the sustainable
income will stay below the
standard income
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
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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
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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
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The End
Questions & Answers
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