A carbon tax to reduce CO2 emissions in Europe

A carbon tax to reduce CO2 emissions in Europe Paola Agostini, Michele Botteon and Carlo Camaro

This paper examines the effects of introducing a tax on carbon dioxide emissions produced by combustion processes in OECD-European countries. A sectoral model of energy consumption is constructed to examine energy-saving and inter-fuel substitution eflects induced by the introduction of various carbon taxes. The simulation period is 1989-94. Our results provide a mild support to the environmental role of a carbon tax. Energy-saving or inter-fuel substitution processes, that result from the introduction of environmental taxation, stabilize emissions at the 1988 level only in the electricity generation sector, and only if high tax rates are assumed ($lOO/ton.C). By contrast, total emissions (all sectors and all fuels) keep growing, and the implementation of a tax of $lOO/ton.C can only reduce the emission growth rate. These results would recommend the introduction of several coordinated environmental instruments. The last part of the paper compares results concerning OECD-Europe with those obtained when examining a single country (Italy). The comparison does not seem to be in favour of a umform carbon tax; it rather indicates that environmental policy should be designed taking into account the spectjic economic situation and Country-spec$c coordinated technological choices of each single country. environmental policies are to be recommended, where international coordination ought to concern environmental targets rather than instruments. Keyw0rd.s: Carbon tax; CO, emissions; Europe

interventions in the energy sector has arisen. Several policy instruments have been proposed (see Hoe1 [ll]). However, a carbon tax seems to be the easiest way to face the problem.’ Environmental taxes have some advantages over other instruments2 First, taxes indicate the cost of a good ‘environment’; second, they provide an incentive to introduce new technological processes promoting efficiency and energy conservation;3 third, they allow producers to choose where pollution abatement has to be implemented, thus

Scientific evidence suggests that the increasing concentration of carbon dioxide, observed since the late 1950s has probably contributed to increasing the average world temperature. Even if the relative power of carbon dioxide is much lower than that of the other ‘greenhouse gases’ (chlorofluorocarbons, methane and nitrous oxide etc) the emitted quantity of CO, is much larger: its contribution to global warming is close to 60%. As the combustion of fossil fuels is largely responsible for carbon emissions, a widespread demand for policy

‘See Hoeller et al 1121 in which the authors survey many recent models that assess the cost of abating greenhouse emissions. See also Amano [2]. The design of carbon taxes and their distributional consequences are particularly considered in Poterba

Paola Agostini and Michele Botteon are Research Fellows, GRETA, Venice; and Carlo Carraro is Professor of Econometrics, University of Venice, and Research Fellow, CEPR, London.

1251. ‘A good review can be found in [28]. Nordhaus specific problem 3New results on and technological [7] and Carraro

Financial support from the Ministry of Environment is acknowledged. We are grateful to Ignazio Musu and to participants at seminars at GRETA, the University of Udine and the University of Paris for helpful comments and suggestions. Final manuscript

received

0140/9883/92/040279~12

23 April 1992.

0

1992 Butterworth-Heinemann

Ltd

of economic policies in the environmental field Nicolaisen and Hoeller [16] and in Tietenberg [17] describes the economic options for the of greenhouse warming. the relationship between environmental taxation innovation can be found in Carraro and Topa and Soubeyran [6].

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A carbon tax to reduce CO2 emissions

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Table 1. Energy requirement (toe x 106).

Fossil fuels 1 Industry 2 Power plant 3 Residential 4 Transport Total (4 sectors) Total requirement”

1978

1983

1988

283.6 246.61 241.31 195.32

243.64 235.0 202.46 205.98

250.7 225.23 224.14 249.72

966.84 1102.57

887.08 1004.8

950.39 1068.26

Nuclear energy

37.41

84.56

154.80

Other energy sources

87.59

93.92

106.25

1227.63

1183.28

1329.31

Total energy requirement “For all use, transformation Source: OECD.

and non-energy

use included.

contributing to reducing environmental damage at minimum economic cost; finally, taxes provide new revenue that could be used to subsidize environmental technological innovation. Obviously, carbon taxes have some drawbacks. The most important concerns their distributional effects:4 this aims to find a way of reducing the potential regressivity of such taxes. Moreover, as each individual national contribution to global CO, emissions is relatively small,’ the problem of CO, accumulation ought to be faced in an international context. However, at present, an international agreement about policies to be implemented and management and destination of revenues seems very difficult to achieve (some possibilities are explored in Carraro and Siniscalco [4]). This paper examines how a carbon tax could affect the level of carbon emissions, the demand for fuels, and the substitution process between more polluting and less polluting fuels. We choose to study the effects of introducing a carbon tax in all European countries (OECD-Europe).6 We thus model Europe as a single country, and we compute the European demand for fossil fuels in four different sectors: industry, power plant, residential and transport. As the purpose of this paper is to analyse fiscal policies for reducing CO,

“See Johnson et al [13]; Poterba 1251. See also Smith 1261. 51n 1988 the four major European countries (West Germany, France, UK and Italy) were responsible for, respectively, 3.1%, 1.6%, 2.6% and 1.6% of worldwide CO, emissions. See OECD

c221.

‘See, for a discussion of international incidence of carbon taxes, Whalley and Wigle 1291. ‘In a previous paper (see Agostini et al [1] we simulated the effects of the introduction of various types of environmental taxes in Italy: the results of ad uolarem taxes suggest that adopting more differentiated rates (such as taxes based on a toxicity index of fuel combustion) is always preferable than using a tax based on carbon dioxide emission coefficients. This helps understanding why a standard carbon tax approach may not be the best instrument to reduce atmospheric emissions.

2x0

emissions, we consider a tax that increases the fuel price proportionally to the fuel CO, emissions.7

The model The model considers four sectors: industry, power plants, residential, and transport. Table 1 shows the consumption of fossil fuels in these sectors, in 1978, 1983 and 1988: they constitute nearly 90% of fossil fuels’ total requirement. Table 1 also shows the amount of nuclear energy produced in OECD-Europe countries for electricity generation: its growth in the decade 1978-88 was enormous. The massive investments in nuclear plants in France and the UK in these years have greatly changed the energy structure of these countries, reducing their dependence on oil supply. This would ask for an econometric model that explicitly takes into account possible substitutions between fossil fuels and nuclear power. However, we exclude this possibility for two reasons. First, the substitution between fossil fuels and nuclear power can hardly be thought to depend on prices. It is mainly a strategic long-term choice. Second, as we consider Europe as an aggregate, we prefer to focus on inter-fuel substitution, because some European countries do not own nuclear power plants at all. The most important fuels in each sector, according to consumption shares, have been considered: in the industrial and electricity generation sectors, we modelled the demand for fuel oil, natural gas and coal; in the residential sector, for gasoil and natural gas; in the transport sector, for gasoline and diesel gasoil. Selected fuels cover about 95% of fuel consumption in each sector. For each sector, a system of equations describing the demand for different fuels has been calibrated. Each equation describes demand for fuelj in sector i as a function of its own price, prices of substitute fuels

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A carbon tax to reduce CO2 emissions in Europe: P. Agostini et al utilized in the same sector and an activity indicator. Lagged variables were introduced through an error correction mechanism. The functional form is linearlogarithmic. Price elasticities are thus assumed to be constant. The general equation of demand for fuel j in sector i can be written as: In C(i, j) = Cij+ aijIn p(i, j) + CksijkIn p(i, j) +fiijlny(i)+C$jlnC_r(i,j)

(1)

where : C(i, j) = consumption for fuel j in sector i p(i, j) = price of fuel j in sector i aij = own-price elasticity p(i, k) = price of fuel k in sector i a,, = cross-price elasticity between fuelj and fuel k y(i) = activity variable (output) pii = output elasticity

The data set The chosen sample covers the period 1978-88. The economic area is OECD-Europe. Fuel consumption time series are provided by the OECD publication Energy Statistics. Fuel prices are taken from Energy Prices and Taxes (OECD): they are deflated by the producer price index in the first two sectors; by the consumer price index in the residential and transport sectors (1985 = 100). Carbon dioxide emissions have been computed using specific emission factors indicating the amount of carbon (C) emitted by each toe of fuel burned in the combustion process.8 CO, emission factors are reported in Table 2. Let us briefly describe the crucial features of fuel consumption data. As can be seen in Figures 2-5, the demand for fuel-oil in the industrial sector has largely decreased in the period 1978-88, whereas consumption of nuclear energy in the electricity generation

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Botteon

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Carraro

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[l]

Oil products

Natural gas

Coal

0.82

0.63

1.05

sector has increased; we also observe substitution of gasoil with natural gas in the residential sector, and the steady increase in consumption of both gasoil and gasoline in the transport sector. CO, emissions are mainly produced in the electricity generation and transport sectors (see Figure 6).

Calibrating the model

In the equations describing the electricity generation sector a dummy variable for 1984 has been introduced (the miners’ strike in Britain caused a fall in coal consumption compensated for by an increase in the consumption of both fuel oil and natural gas). The activity indicator chosen for the first sector is the industrial production index (1985= 100); in the power plant sector and in the transport sector the output variable is GDP; finally, for the residential sector the activity indicator is per capita GDP. In the transport sector, the model also considers the average monthly registrations of new cars.

‘See Poterba 1251 or Agostini, more details about sources.

Table 2. Emission coefficients (tons of carbon/toe).

for

The model parameters have been calibrated using annual data for OECD-Europe in the period 1978-88. This sample has been chosen to protect parameter estimates from structural breaks. As starting values for calibration, we used parameter estimates derived from previous studies on energy demand [9,10,24,27]. A calibration procedure that minimizes the distance between moments of the actual and simulated endogenous variables has been implemented to revise initial estimates and to evaluate some free-parameters [8,14] (cross-price elasticities for which little information was available). This iterative procedure has performed very well, producing more efficient estimates than those that could have been obtained using standard econometric methods (given the small sample we used). Table 3 summarizes the estimated parameters of fuel demand in each sector. As can be seen from Table 3, the estimated price elasticities are generally low (the exception is natural gas own-price elasticity in the electricity generation sector); there is, however, some variability across sectors. Higher elasticities can be found in the industry and electricity generation sectors. Notice that all figures in Table 2 represent short-run elasticities.

Designing the carbon tax In this section we introduce the environmental variables: CO, emissions and carbon tax. CO, emissions are indicated as the main source of the greenhouse effect. Reducing CO, emissions is a difficult task that can partly be tackled using fiscal instruments. A carbon tax has already been proposed in several countries.9 Political options in the European Community concerning the introduction of specific taxes on energy ‘Poterba [25] describes the present situation in which Sweden, the Netherlands and Finland have unilaterally adopted such policy. See Pearson and Smith [23] for a detailed report of the debate in the European Community.

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A carbon tax to reduce CO2 emissions

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Table 3. Estimated elasticities.”

6 11 6 22 I?33 I?44 6 55 6 12 6 21 6 13 6 31 6 23 6 JZ fi24 6 42 6 45 6 54 6 lY 6 ZY 6 6:: 6 5Y Note: Index 1 denotes

Industry

Power plant

Residential

-0.19 -0.55 -0.19

-0.3 -2.4 -0.2

-0.28 -0.42 -0.15

-0.13 0.30 1.40 0.30 0.20 0.50 -0.08

-0.02 0.33 0.13 -0.13 0.12 0.29

0.05 0.35 0.20

0.05 1.5 1.5 0.5

1.5 0.8 1.0

0.45 0.3 0.5

0.10

oil, 2 is natural

gas, 3 denotes

coal, 4 is gasoil and 5 is gasoline.

products were initially two: (i) the taxation of all energy sources (nuclear power included) except for the renewable ones; (ii) the implementation of a standard carbon tax on fossil fuels. More recently, the debate tends to propose a policy that combines the two options; part of the tax (50% in the EEC proposal) would be uniformly levied on all energy sources, whereas the remaining tax would be proportional to the carbon content of each fuel. In this work, we are mainly interested in exploring the possibility of substitution effects across fuels. This is why, in accordance with most empirical literature on environmental taxation, we do not consider the energy tax; we rather focus on the specific environmental tax, ie the carbon tax, in order to evaluate its effects on inter-fuel substitution. We consider three different scenarios: a tax of $S/ton.C, $SO/ton.C, $lOO/ton.C. These values are close to those proposed in The Netherlands, Sweden and the USA respectively. This also makes it possible for a comparison of our results with those presented in Poterba [25] for the USA. A carbon tax should favour the substitution process between more polluting (and therefore more taxed) and less polluting fuels. The effect on fuel price of the tax is the following: combustion of fuel i produces a quantity Ei of CO,. Emissions are related to fuel consumption according to an emission coefficient ei, ie Ei=ei.Ci, where Ci denotes consumption of fuel i. Without the environmental tax, the fuel total cost is pi.Ci, where pi is the fuel price. When the carbon tax is introduced, the total cost becomes (pi+ t’e,). Ci, where t is the tax on CO,

282

Transport

Table 4. The carbon tax (%/toe).

Oil Natural gas Coal Gasoil and gasoline

Low tax

Medium tax

High tax

4.1 3.1 5.2 4.1

41 31 52 41

82 62 105 82

emissions; t.e, is the tax on each fuel according to its own polluting power. As the tax is proportional to CO, emissions, it is not affected by price shocks, as in the case of environmental ad valorem tax. Table 4 shows the tax on different fuels in the three scenarios. Figures represent the tax per ton of oil equivalent (toe) corresponding to a given tax per ton of carbon emissions in each sector. As we can see in Figure 1, the incidence of a carbon tax on fuel price varies across fuels and sectors: price increases are very high in the industrial and power plant sectors; they are quite low in the other two sectors. The average percent changes that the carbon tax induces on fuel taxation are shown in Table 5. Simulation results In this section, we use the estimated model to simulate the impact of introducing a carbon tax on fuel consumption, emissions and fiscal revenue in the period 1989-94. Forecasts of exogenous variable dynamics have been designed after the Gulf crisis. Table 6 shows the foreseen annual percent changes of the exogenous variables in the period 1990-94; the data for 1989 were available. The source for fuel price

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A carbon tax to reduce CO2 emissions

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80 70

0 0 0

60

SIM. SIM. SIM.

$5 $50 $100

50 da

40 30

0 Pll

P12

P13

P21

P22

P23

P31

P32

P41

P42

1. Average percent changes of gross prices Note: Pll, P12, P13=price of fuel oil, gas and coal in industry; P21, P22, P23 = price of fuel oil, gas and coal in power plant sector; P31, P32 = price of gas oil and gas in residential sector; P41, P42 = price of gasoline and diesel oil in transport sector. Figure

Table 5. Average percentage changes of fuel taxes (1989-94). Industry

Low tax

Medium

Oil

8.13 54.10 370.00

81.3 541.0 3706.0

162.5 1081.0 7412.0

Power plants Oil Natural gas Coal

38.20 56.00 410.00

382.0 560.0 4101 .o

765.0 1121.0 8202.0

Residential Gasoil Natural gas

2.57 5.70

25.7 57.2

51.4 114.5

Transport Gasoil Gasoline

1.10 0.50

11.6 5.3

23.2 10.5

Natural Coal

gas

WEFA provided forecasts for is ENI;” macroeconomic variables. The demographic growth rate comes from Eurostat and the average registration of new cars from the International Road Federation. We assumed that, in the simulation period, the excises on fuels remain constant at their average 1988 level. For this year, we have constructed the average tax on fuel prices in OECD-Europe countries as a weighted average of taxes on fuel consumption in each single country. In the benchmark scenario, this average tax is assumed to be constant. The simulation period is restricted to 1989-94. The scarce validity of long-run forecasts, particularly for energy prices, and the short-run structure of the model, that does not take into account the possibility of technological innovations, makes it necessary to restrict the’simulation time-horizon. In the benchmark scenario, no environmental policy

forecasts

“ENI

(Italian

Oil Company),

third

forecast,

1990.

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15 September

tax

High tax

is implemented. Three carbon taxes have then been simulated, and the results have been compared with those of the benchmark scenario. The assumed carbon taxes are $S/ton.C, $50/tan, and $lOO/ton. The results of the simulations are as follows. Consumption In the industrial sector (see Figure 2), coal consumption decreases significantly in each simulation, natural gas consumption increases and oil consumption is not affected by the introduction of the carbon tax. In the electricity generation sector, the effects of introducing a carbon tax on fuel consumption are very important (see Figure 3). The decrease in coal consumption is compensated for by a large increase in natural gas and a small increase in fuel oil consumption. In the residential sector (see Figure 4), environmental taxes have an energy-saving effect: we observe no substitution between gasoil and natural gas.

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A carbon tax to reduce CO2 emissions

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;;;;

~~~:,~

1978

80 000

1980

1982

1984

1986

1988

1990

1992

1994

1978

1978

1980

1982

1984

1986

1988

1990

1992

1978 1980 sector:

1978

190000 m

1986

1988

1990

1992

1994

1982

1984

1986

1988

1990

1992

Real

Benchmark

(

, ,

,

1980

1982

1984

1986

1988

1990

1992

1994

1980

1982

1984

1986

1988

1990

1992

1994

sector:

3. Simulations

of consumptions in the power plant (a) fuel oil; (b) natural gas; (c) coal.

130000c

X

, , ,

-

1978

Figure

a A

, ,

.__““”

1994

of consumptions in the industrial (a) fuel oil; (b) natural gas; (c) coal.

t

( ,

180000170000-

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130000

1984

%EJ, , , , ,

1994

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1982

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1980

b

data

+

SIM.

0

SIM.

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$100

m

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x

42

80000 700001 1978

Figure

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” 1980

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4. Simulations

“1 1984

1986

”

’

1988

of consumptions

1990

Macroeconomic variables GDP Per capita GDP Industrial production index Consumer price index Gross price index Vehicles Prices of energy products Fuel oil, natural gas, coal Gasoline Diesel gas oil

284

1992

1994

in the residential

Table 6. Benchmark hypotheses for simulations:

:“,“,“,i:

“‘I

1978

sector:

1980

1982

(a) gas oil; (b) natural

1984

1986

1988

1990

1992

1994

gas.

199&94 (annual percent changes).

1990

1991

3.4 2.8 2.1 6.1 9.6 3.0

2.4

9.9 31.6 23.5

1992

1993

1994

2.5 5.7 6.6 3.0

2.7 2.1 2.6 5.2 2.5 3.0

3.0 2.4 3.1 4.5 4.1 3.0

3.2 2.6 2.5 4.2 5.1 3.0

8.3 7.6 16.9

~ 1.6 ~ 11.3 ~ 10.6

6.2 4.2 4.8

6.7 4.4 5.0

1.8

ENERGY

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A carbon tax to reduce

I 150000

CO2 emissions

in Europe:

P. Agostini et al

a

145000 140000 135000

" m x

125000 130000

I

::::::I

1978 1980 1982

Figure 5. Simulations

z&.f( 1984

1986

1988

of consumptions

1990

1992

in the transport

Finally, in the transport sector (see Figure 5), gasoil consumption decreases; however, gasoline consumption increases. The small effects in the residential and transport sectors can be explained by the small price changes induced by the various carbon taxes in these sectors. Emissions

The emission growth rate is reduced by the introduction of the carbon tax (see Figure 6). The sector which is more affected by the environmental policy is the electricity generation sector where, in the high tax case ($lOO/ton.C), emissions are reduced below their 1988 level. However, if we consider total emissions in all sectors (see Figure 6) our simulations show a growing trend; the introduction of a tax of $S/ton.C hardly affects the emission growth rate, whereas the other two simulated policies (ie $SO/ton.C and $lOO/ton.C) slightly reduce the emission growth rate (with respect to the benchmark simulation). A tax of $lOO/ton can reduce emissions by about 4% (with respect to the benchmark). Finally, notice that no simulated policy reduces the emission level below the 1988 level. These results are summarized in Table 7. Fiscal revenue

The fiscal revenue that environmental policies can collect (see Figure 7) is high in the first two sectors, and small in the residential and transport sectors. Notice that fuel consumption is slightly taxed, at present, in the industrial and power plant sectors. If we consider all sectors, the additional, per year, fiscal revenue is the following: $2.5 billion in the hypothesis of a small tax ($S/ton.CO,), $32 billion (+25%) in the hypothesis of a $50/tori tax, and $66 billion (+ 50%) if a $lOO/ton tax is introduced.

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1978

1994

sector:

1980

(a) gasoline;

,,, , ,, , ,,

1982

1984

1986

1988

1990

1992

1994

(b) diesel oil.

Table 7. Percent total emission changes (comparisons level and the benchmark level).

with the 1988

1988 level

Sim.$S

Sim.$SO

1989 1990 1991 1992 1993 1994

+ 1.89 f4.01 +5.38 +7.78 +9.98 + 12.21

+ 1.30 +2.95 +4.12 +6.17 +8.17 + 10.22

+0.73 + 1.99 f2.91 f4.65 +6.43 +8.29

-0.67 -1.17 - 1.37 - 1.73 - 1.92 ~ 2.08

- 1.23 - 2.09 -2.52 -3.14 -3.50 -3.79

Benchmark 1989 1990 1991 1992 1993 1994

Sim.$lOO

level -0.08 -0.15 -0.18 -0.24 -0.24 -0.30

Symmetry

These results have been obtained by considering Europe as a single country, and by assuming a uniform carbon tax in all European countries. It is thus interesting to compare the above results with those obtained by simulating a country specific carbon tax. This comparison could provide information on the optimality of a uniform environmental policy in Europe. In a previous paper [ 11, we designed a carbon tax for a single country (Italy) by simulating various country specific environmental policies (we used an econometric model for the energy sector in Italy). The results for the Italian case can be summarized briefly. The introduction of a carbon tax strongly decreases the consumption of all fuels in the industrial and power plant sectors. Energy saving effects seem to prevail over substitution effects, whereas previous results for Europe seemed to indicate a prevailing role for substitution effects. Fuel demand in the Italian residential and transport sectors does not seem to be affected by the carbon tax (see Figure 8).

285

A carbon tax to reduce CO2 emissions

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a A x

Real

b

data

Benchmark

+

SIM.

$5

0

SIM.

$50

n

SIM.

$100

250

-

210

-

200

-

120

-

190

-

110

-

180

-

100 1978

'1' 1980

' 1982

'1' 1984

"'I 1986

"I' 1990

1988

' 1994

1992

170 1978

160 tc

”

1980

”

”

1982

”

1984

”

1986

’

1988

”

1990

’

1992

”

1994

240 td

“I

100 1978

1980

”

1982

”

1984

“I

1986

1988

”

1990

I”’

1992

220

-

200

-

180

-

160

-

:‘,:t-----1978

1994

1980

1982

1984

1986

1988

1990

1992

1994

e 740

t

720 700 680 660 640 620 I

600 I 1978 Figure

sector;

I 1980

Emissions (d) transport

6.

I

I 1982

I

I 1984

I

I

of carbon dioxide (million tons of carbon): sector: (e) all sectors.

These results imply that implementing a carbon tax in Italy would cause a large decrease (both in the high tax and medium tax cases) of emission levels in the industrial and power plant sectors through production contractions: as emissions in the residential and transport sectors do not vary (with respect to the benchmark scenario), total emissions decrease. By contrast, in Europe, the $lOO/ton carbon tax slightly affects total emissions. Finally, in Italy, fiscal revenue increases by about +30% in the high taxation hypothesis, and about + 15% in the medium taxation hypothesis. Both these changes are lower than those obtained in the European simulations (see Figure 9).

286

I

1986

I 1988

I

I

I

I

(a) industrial

sector;

I

1992

1990

I i994

(b) power plant sector; (c) residentia.1

The main differences between the effects of a carbon tax in Europe and in Italy can be summarized as follows: (i) in Europe, the introduction of a carbon tax has a large impact on emissions only in the $lOO/ton case, whereas in Italy lower tax rates can significantly reduce total emissions. However, the negative effects on industrial production would be larger in Italy than in Europe; (ii) in Europe, environmental taxes have a low global effect, but each sectoral demand for fuel is affected by the tax. In Italy, we observe a strong effect in the industrial and power plants sectors, whereas no changes seem to occur in the other two sectors. The above comparison leads to the following

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A carbon tax to reduce CO2 emissions 0

a

in Europe: P. Agostini

et al

SIM.$5

I2 SIM.

$50

0

$100

SIM.

b 25 t

10 01 "

X +r

a 6

5 2 0

0 1989

1990

1991

1992

1993

1989

1994

C 16

1990

1991

1992

1993

1994

1990

1991

1992

1993

1994

d 25

t

t

14 12 01 " x *

10 a 6

5

1989

70

1990

1991

1992

0 1993

1994

1989

I e

60 01 z x tA

50 40 30 20 10 0 1990

1989

Figure 7. Carbon

tax revenue:

1992

1991

(a) industry;

(b) power plant;

(c) residential;(d)

1994

1993

transport;

(e) all sectors.

conclusion: environmental policies have a different impact in Italy (with respect to Europe) because of the specific economic, technological and fiscal structure of Italy (no nuclear power, high taxation of fuel consumption in the residential and transport sectors, no energy saving programme in the industrial sector); hence a uniform carbon tax would be inefficient.’ 1 A preferable solution could be a country specific, coordinated, carbon tax. Each country should optimally choose its own environmental instruments in order to achieve a coordinated environmental target. l2

In the previous sections we have analysed, using a calibrated model of the energy sector in OECDEurope, the effects on CO, emissions of a uniform European carbon tax. Three policy scenarios have been simulated (a $5, $50 and $100 tax per ton of carbon emitted by fuel). Our main findings are the following: first, a carbon tax is effective in reducing emissions only in the case of high tax rates. In all examined sectors, particularly

“This conclusion is supported Carraro and Siniscalco [4].

“Coordination problems [4]; see also Hoe1 [II].

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by several

October

country

1992

studies.

See

Conclusions

are discussed

in Carraro

and Siniscalco

287

A carbon tax to reduce CO2 emissions

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A

Real

x

Benchmark SIM.

26

et al

data

b

$5

31 -

24 26 -

22 20 18 16

16 -

14

!?!?, , , , , , , , , , , , , , , , l$,, , , , , , , , , , , , 1978

1980

1982

1984

1986

1988

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1982

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1986

1988

1990

(

,

1992

, 1994

d

I c 22 24 -

20 -

22 20 -

18 -

18 16,

1978

1980

1982

1984

1986

1988

I

I

1990

1992

1994

1978

1980

1982

I

I

1984

1986

1988

1990

1992

1994

e 100

-

95 90 85 80 -

.

75 70 65 60

-

55 50 1978

I

I 1980

I

1982

I

I

Figure 8. Italy ~ emissions of carbon residential sector; (d) transport sector;

I

I

1986

1984

dioxide (million (e) all sectors.

g

10 9

.: -

7

5

6

'z _o g c

SIM.

$50

0

SIM.

$100

a 5 4 3 2 1 0 1989

1990

1991

Figure 9. Italy - tax revenue

1992

(benchmark

1993

1994

level = 100).

in the electricity generation and residential sectors, a $lOO/ton.C carbon tax reduces carbon emissions with respect to the benchmark simulation in which no environmental policy is introduced. Nonetheless, a

288

I

tons of carbon):

Cl SIM.95 B

I 1988

1990

I

I

(a) industrial

I 1994

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sector;

(b) power

plant

sector;

(c)

$100 carbon tax would stabilize emissions at their I988 level in the power-plant sector only. On the aggregate (all sectors and all fuels), total emissions keep growing (a $lOO/ton.C tax can only reduce the emission growth rate).’ 3 This has important implications: a carbon tax cannot be the unique instrument to reduce emissions; on the contrary, its effects are enhanced if other environmental policies are implemented. For example, direct regulation is likely to have larger effects in the residential and transport sectors; emission permits would reduce contractionary effects induced by taxation in the industrial sector. For the same reason, it would be appropriate to introduce incentives to technological energy-saving innovation. ‘jFor a discussion Botteon and Carraro

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Second, although our study is limited to some fuels, the fiscal revenue from the manoeuvre is very large (about $60 billion per year in the $lOO/ton.C case); this raises coordination problems for the utilization and distribution of this fiscal revenue across countries. On the other side, high fiscal revenues would make it possible to finance a European programme for energy conservation and environmental innovation that subsidizes firms’ environmental investments. Third, as shown by several country-specific studies, a uniform carbon tax is unlikely to be efficient. It would rather be appropriate to introduce countryspecific coordinated environmental policies, where coordination concerns targets rather than instruments. Several issues involving environmental taxes have still to be investigated: first, an analysis based on panel data would be preferable to capture the individual characteristics of each country. As we noted earlier, the differences in the energy structure of European countries (eg the massive use of nuclear energy in France versus the prevailing dependence on oil in Italy) ought to be taken into account in the specification of a model of energy demand in the European countries. This will be the outcome of future work on environmental taxation (see MERGE, A Macroeuropean Model of Energy Resource and Global Environment). Another further development would be the design of more differentiated carbon taxes. Instead of parametrizing the tax to the fuel carbon content, it would be more effective to use a fuel toxicity index (including SO, and NO, emissions) as in Agostini et al [l]. Another suggestion would be to parametrize the tax to the substitution possibilities of each sector. The effect of a more differentiated carbon tax would be to enhance substitution effects thus reducing negative effects on output. Finally, it would be interesting to estimate both distributive and macroeconomic consequences of environmental taxes: there is no doubt that a large tax on fossil fuels could have negative effects on a country’s industrial systems, and negative social impacts if no corrective mechanism, aimed at reducing tax regressivity, is introduced. This is a further argument to strengthen our previous conclusion: a carbon tax should be coordinated with other environmental instruments and policy interventions; this would enhance the positive effects of the tax on emissions control, and reduce its negative effects on income distribution and growth. Moreover, given the low impact of each country’s intervention on global warming, international coordination of countryspecific policies would be required (see Carraro and Siniscalco [S]).

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References 1

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P. Agostini, M. Botteon and C. Carraro, ‘Fiscal policy to reduce air pollution in Italy’, Ricerche Economiche, Vol 4, 1991. A. Amano, ‘Energy prices and CO, emissions in the 199Os’, Journal of Policy Modeling, Vol 12, No 3, 1991, pp495p510. M. Botteon and C. Carraro, ‘Is the European carbon tax really effective?‘, in C. Carraro and D. Siniscalco, eds, The Carbon Tax: An Economic Assessment, Kluwer Academic Publishers, Dordrecht, 1992. C. Carraro and D. Siniscalco, Strategies for the International Protection of Environment, E. Mattei Foundation, Discussion Paper No 4.92, 1992. C. Carraro and D. Siniscalco, eds, The Carbon Tax: An Economic Assessment, Kluwer Academic Publishers, Dordrecht, 1992. C. Carraro and A. Soubeyran, Environmental Policy and the Choice of Production Technology, E. Mattei Foundation, Discussion Paper No 7.92, 1992. C. Carraro and G. Topa, Taxation and the Environmentul Innovation, E. Mattei Foundation, Discussion Paper No 4.91, 1991. A. W. Gregory and G. W. Smiths, ‘Calibration as estimation’, Econometric Reviews, Vol 9, No 1, 1990, pp 57-89. J. M. Griffin, ‘Inter-fuel substitution possibilities: a translog application to intercountry data’, International Economic Review, Vol 18, 1977, pp 775-770. J. M. Griffin and P. R. Gregory, ‘An intercountry translog model of energy substitution responses’, American Economic Review, Vol 65, pp 845-857. M. Hoel, ‘Global environmental problems: the effects of unilateral actions taken by one country’, Journal of Environmental Economics and Management, Vol 20, No 1, 1991, ~~55-70. P. Hoeller, A. Dean and J. Nicolaisen, ‘A survey of studies of the costs of reducing greenhouse gas emissions’, OECD Economics and Statistics Department Working Paper ‘No 89, December 1990. P. Johnson, S. k cKay and S. Smith, ‘The distributional consequences of environmental taxes’, IFS Commentary, No 23, July 1990. B.-S. Lee and B. F. Ingram, ‘Simulation estimation of time-series models’, Journal qf Econometrics, Vol 47, 1991, pp 117-205. MERGE, Macroeuropean Energy Resource Global Environment Model, E. Mattei Foundation and GRETA Associates, 1992. J. Nicolaisen and P. Hoeller, ‘Economics and the environment: a survey of issues and policy options’, OECD Economics and Statistics Department Working Paper, No 82, July 1990. W. D. Nordhaus, ‘Economic approaches to greenhouse warming’, in R. Dornbusch and J. M. Poterba, eds, Global Warming: Economic Policy Responses, MIT Press, Cambridge, 1990. OECD/IEA, Energy Balances, Paris, various issues. OECD/IEA, Energy Prices and Taxes, Paris, 1990. OECD/IEA, Energy Statistics, Paris, various issues. OECD, Main Economic Indicators, Paris, various issues. OECD, Environmental Indicators, A Preliminary Set, Paris, 1991.

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