The Eighth Annual Global Conference on Environmental Taxation
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Workshop 3: Impacts of environmental fiscal reform on emissions

Reducing emissions from coal in Australia:
Fiscal and related instruments

Prof. Peter Gillies, Macquarie University, Australia;
Patricia Blazey, Head of Dep. of Business Law, Macquarie University, Australia

Coal is, in Australia as elsewhere, the primary source of electricity and a major source of greenhouse gases. Additionally, Australia is a major coal exporter. Greenhouse gas abatement necessarily requires that coal’s contribution to the energy mix be reduced in relative real terms, or that effective means of sequestering the carbon dioxide produced by its combustion be developed. The standard technologies for emission reduction include a greater reliance on renewable energy sources such as wind, hydro and thermal, carbon sinks, and the introduction of clean coal technologies. Less polluting natural gas could be substituted for coal.

At present, some 77% of Australian electricity is sourced from coal, with 7% coming from renewables. The Australian Bureau of Agricultural and Resource Economics (ABARE) forecasts that by 2030 renewables’ share will have increased to only 8%, given current policy settings (which include a mandatory green electricity targets in some states). Coal’s contribution will have declined to 68%, with much of the shortfall being made up by natural gas. Coal use will still increase by 43% in gross terms.

This proposed paper examines the role of coal in power generation in Australia, the growth rate in demand for power and the contribution of coal in the future to the energy mix, (1) with and (2) without changes to taxation and associated policies. The present tax status of coal producers and power generators and consumers will be evaluated, following which the impact upon emission levels of such instruments as a carbon tax and an emissions trading scheme (neither of which are presently applied in Australia) will be reviewed. Current proposals for coal emissions reduction will be examined, including two recent proposals from the energy industry and Australia for reductions in emissions of between 50% between 2000 and 2030 and 70% between 2010 and 2050.

The focus will be on Australia’s coal and power generation industries, but relevant developments in other coal-dependent economies will be examined.

Industrial emissions and CO2 related taxes in Italy:
a microsimulation analysis of energy demand

Prof. Rossella Bardazzi, Prof. Maria Grazia Pazienza, University of Florence, Italy; Dr. Filippo Oropallo, ISTAT

An international debate on which economic instrument should be used to reduce pollutant emissions has begun since the nineties when the awareness of climatic risks aroused and first attempts to introduce a European carbon tax were made. Although this project failed, several national programmes of carbon/energy taxes have been developed with a common concern for industrial competitiveness of energy and/or carbon-intensive firms. Therefore, double dividend schemes have been applied to reduce existing distorsive taxes while introducing a higher burden on energy products. Starting from a review of the most important European case studies, in the first part of the paper we analyze the introduction of a carbon tax in Italy. This tax has been introduced in 1998 and should have progressively increased up till 2005 while social contribution tax rates should have progressively decreased. However, this process halted in the year 2000 – as the world energy process increased – and the ultimate rates have never been applied. On the basis of an ex ante approach, the paper discusses some effects on energy expenditure and on the competitive consequences on industrial firms. Existing empirical analyses have usually been carried out at aggregate or sectoral level, but the effects on cost of both carbon taxes and compensative measures differ at firm level, thus it’s significant to study the impact on economic profitability on individual unit of analysis. The study is performed with a microsimulation model (Diecofis***) that allows an analysis on sectoral, dimensional and localization basis. On the other hand, an ex post approach has been employed to assess the efficacy of environmental taxes, Using the Italian NAMEA air emissions accounts linked with enterprises economic microdata, we explore the effects of existing energy taxes on gas emissions levels. Finally, a fixed effects model for industrial consumption of selected energy inputs is estimated to evaluate the sensitivity of energy demand to energy tax changes. In particular, the study evaluates the effect of energy taxes on CO2 emissions and on energy input demand at firm level.
*** Detailed information on Diecofis Model can be found at:

Environmental Taxation on Fuel and Vehicles. The case of Brazil

José Marcos Domingues, Rio de Janeiro State University, Brazil

After briefly presenting the basic concepts, constitutional and legal provisions concerning environmental protection in Brazil as well as revisiting the polluter-pays principle in connection with the characteristics and merits of taxation as an adequate instrument for the fulfillment of that fundamental goal (the protection of the environment), the paper will focus on Brazilian taxation on fuels and on motor vehicles (trucks, buses, motorcycles and automobiles) where the greening of taxes has reportedly been quite effective.

The article will go through the main features of the Brazilian tax system and the respective principles and limits, specially considering the division of taxing competences in the country’s federation, which justifies the existence of a federal excise tax on industrialized products (IPI), which is imposed on engines and on vehicles, and a state value-added tax on goods and some services (ICMS), which is imposed on fuels, engines and vehicles, besides another state annual property tax on motor vehicles.

Federal and State taxes generally respond to clean-air policies. Tax rates have varied according to the size and horse-power level of engines and vehicles, type of fuel and use of vehicles. So, the paper will introduce the evolution and results of such green-tax policies in Brazil.

Finally, the essay presents the Author’s critical views on the above environmental taxation, the potential of which is much broader than what has been implemented, showing other options that might be brought into the existing scenario in order to better meet sustainable development goals.

A Carbon Tax or an Environmental Tax Reform?
-- A Difficult Homework for Japan--

Park Seung-Joon, Faculty of Economics, Kyoto Sangyo University, Japan

For world citizen who is familiar with the efficient Japanese high-tech products, it may be a bit of a surprise that Japan emits yearly 8% more greenhouse gases than its target of Kyoto-protocol. In fact, the ability of its government to realize the effective climate policy is limited unlike the innovative performance of its business.

The Ministry of Environment Japan has presented its own Carbon Tax proposals three times since 2004 in vain, because of lacking civic support, of resistant business lobby and of Financial Ministry’s indifference. Proposed is the low-rate carbon tax earmarked for anti-global-warming measures.

Actually, this proposal is a fruit of internal discussion of several working groups in the Environmental Ministry which studied theoretical and practical aspect broadly, including the research of foreign examples, since late ’80s. These groups have executed some computer experiments on the macro-economic effect of several carbon tax varieties. As the most important result, a policy mix of low carbon tax and subsidy is allegedly as effective as a high-rate carbon tax if the revenue can be allocated perfectly efficiently by the government. Interestingly, any environmental tax reform (ETR) scenario which can result in “positive double dividend” has never experimented.

The Carbon Tax of Japan is now in a political stalemate. But as the aged society is before our very eyes, the shift of taxation from labor to environment is very important. The share of environmentally related taxes in the government’s revenue (including social security contributions: SSC) is only about 6%, which is relatively low among OECD countries. The share of labor taxes and SSC is relatively low, about 50%, but it will certainly rise drastically in the future without any policy change.

The resistance of industrial lobbies, such as Keidanren, is the most crucial factor which blocked the implementation of the carbon tax, but interestingly the Japan Association of Business Executives basically approves the idea of ETR. Although some NGO members in the Carbon Tax Study Group presented their proposal on ETR, most of other groups are not interested in economic solution of environmental problems. According to the government’s opinion poll, 32.4% of population is against the carbon tax, only 24.8% is for it, and two-thirds of the proponents prefer the total revenue earmarking for subsidy. These facts show the necessity of better public understanding on ecological tax reform, or first of all, on simple economic rules.

Environmental and Technology Policies for Climate Mitigation

Dr. Carolyn Fischer, R. Newell, Resources for the Future (RFF), USA

We assess different policies for reducing carbon dioxide emissions and promoting the innovation and diffusion of renewable energy. We evaluate the relative performance of policies according to incentives provided for emissions reduction, efficiency, revenue raising, and other outcomes. We also assess how the nature of technological progress through learning and R&D, and the degree of knowledge spillovers, affect the desirability of different policies. Due to knowledge spillovers, optimal policy involves a portfolio of different instruments targeted at emissions, learning, and R&D. Although the relative cost of individual policies in achieving reductions depends on parameter values and the emissions target, in a numerical application to the U.S. electricity sector, the ranking is roughly as follows: (1) emissions price, (2) emissions performance standard, (3) fossil power tax, (4) renewables share requirement, (5) renewables subsidy, and (6) R&D subsidy. Nonetheless, an optimal portfolio of policies achieves emissions reductions at significantly lower cost than any single policy.

The Productivity and Technical Change Effects of Tradable Sulfur Permits in the US Electricity Generating Industry: 1990-2004

Lindsay Tuthill, University of Oxford, Great Britain

This paper examines the response of US electricity generating firms to the tradable sulfur emissions scheme established in 1995 by the Clean Air Act Amendments (CAAA) of 1990 in terms of productivity, technical change and optimizing behavior. We use both parametric and non-parametric cost function estimation techniques to analyze the fuel choice, technical change and cost inefficiency effects in response to the tradable sulfur permits, and we assess the implications for fuel markets, technology and future environmental policy.

Fossil fuel input prices are modeled as having two distinct components: 1) the fuel’s standard market price (¢/mmBtu) and 2) the price associated with the fuel’s emissions, which is a function of the allowance price ($/ton of SO2 in the case of sulfur allowances) and firm-specific characteristics (percentage of capacity falling under regulation, percentage of capacity covered by scrubbers, etc.). The objective is to estimate the cost and allocative efficiency effects of the allowance scheme and to determine when efficiency changes occurred (before, after, or at the onset of the emissions program), whether technical change was due more to efficiency improvements or to changes in technology, and what direction this technical change took.

With a dataset containing monthly observations for 182 electric utilities for the years 1990-2004, the analysis is performed on a system of short-run translog variable cost and fuel cost share equations via iterated seemingly unrelated regression (ITSUR) and analyzed via stochastic frontier analysis (SFA). We also analyze the data using nonparametric data envelopment analysis (DEA) techniques. The results allow us to describe the short-run technology of the US electricity generating industry, its response to the first successful application of market-based environmental policy, and its likely reactions to future environmental policy in terms of fuel demand, technology and cost efficiency.