The Eighth Annual Global Conference on Environmental Taxation
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Workshop 2: The double dividend: Effects of environmental taxation on employment

 Can Transition Economies implement a carbon tax
and hope for a double dividend? The case of Estonia

Prof. Anil Markandya, Prof. Olga Kiuila, Economics Department, Warsaw University, Poland

This paper presents a simulation of the impact of the carbon tax reform on the Estonian economy using a computable general equilibrium model. Carbon taxation helps to reduce energy-related carbon dioxide emissions by placing a financial cost on emissions. As a consequence, it creates an economic incentive to reduce carbon intensity in production processes and shift production to less carbon intensive sectors. In recent years a number of countries have introduced some form of carbon tax.

To be able to select the best way of implementation of carbon tax reform in Estonia, we have to decide the priorities first: economy, society or environment. The model calibrated for the base year 1997 provides results for the year 2012. Nine different scenarios or tax options have been considered. Based on the outcomes we can state that the long-term results of the proposed tax reform should not hamper the country’s economic development, provided that the appropriate tax option is used. The sectors which are directly bearing the burden of tax reform (i.e. wood industry, mineral industry, transportation, municipal services sector, shale oil industry, heating and electricity generating industry) will not break down even if carbon taxes at levels similar to other EU countries are introduced. The fact that Estonia is an economy in transition does not appear to impede it in responding effectively to a carbon tax.

The reform has to be implemented in Estonia as a package of changes in the entire tax system. If the explicit aim is to reduce carbon emissions by a certain amount, then that target it should be built into the model and the value of the carbon tax chosen to achieve that reduction.

The paper is divided on five parts. The first part reviews international experience of the carbon taxation. The tax might make some of the economic sectors uncompetitive. In order to address these questions to Estonia, we developed the model described in part 2. Part 3 shows a number of scenarios looking at different tax rates and tax recycling mechanisms. Part 4 describes the results from the model runs and Part 5 provides some conclusions. The paper is concentrated on employment issue and double dividend. Our outcomes do not provide an ultimate solution for Estonian economy, but they are positive and convincing enough to initiate a serious public debate on conditions and potential ecological benefits of carbon tax reform in the country.


Environmental Fiscal Instruments and the Development of the
Environmental Management Services Industry in Australia

Prof. Natalie Stoianoff, Prof. Mary A. Kaidonis, University of Wollongong, Australia

In previous papers the authors have considered the development and impact of taxation concessions for the rehabilitation of mining sites. Parallel to these concessions have developed more general incentives for the protection of the environment by the business sector at large while others specifically relate to the primary industry sector. What each of these incentives provides is, in essence, the fiscal integration of the expenditure associated with environmentally responsible activities into business-related expenditure.

What has been observed over the past ten to fifteen years is a steady increase in environment protection expenditure. This expenditure, in turn, has seen the development of an environment management services industry to assist in the implementation of environmentally responsible behaviour. This industry has been defined narrowly by the OECD to include:

“activities which produce goods and services to measure…or correct environmental damage to air, water and soil as well as problems related to waste, noise and ecosystems. This includes cleaner technologies, products and services that reduce environmental risk and minimise pollution and resource use.”

A wider view has subsequently been adopted in Australia as the industry sector has grown evidenced through the statistics gathered by the Australian Bureau of Statistics. These statistics have shown a doubling of expenditure from the Australian fiscal years of 1996-97 to 1999-2000, and there is an expectation in the Environment Industry Action Agenda that this industry sector will grow such that it will achieve an “annual turnover of more than $ 40 billion by 2012 measured in GDP terms”.

This growth can be attributed to the ever increasing demand for improved standards of environmental management in industries that have typically been the polluters of the earth. Enforcement of stricter environmental regulation has been recognised as achieved “through a mix of government incentives and economic instruments”. These fiscal measures, together with increased public and political pressure and the evolution of corporate responsibility, have in turn attributed to the growth of the environment management services industry in Australia. This paper explores the correlation between the eligible activities for which tax concessions have been provided and the nature of the environment management services industry that has developed in Australia.


The employment effects of an ecological tax reform

Dr. Károly Kiss, Clean Air Action Group, Corvinus University, Budapest, Hungary

According to the idea of double dividend, an ecological tax reform simultaneously improves the state of the environment and increases employment. This study gives a theoretical survey of the employment impact of the tax reform.

Reducing labour costs increases the employment level in a country in general but the effect on the different sectors greatly varies. The lower is the labour intensity of a sector, the less this change affects employment and vice versa. E.g., in power generation fixed capital and energy cannot be replaced with labour, so lower labour costs will not induce the management to hire more labour. While, in industries with high labour intensity the tax shift from labour will result in more employment (if market conditions make possible output increase).

Besides, we have to clearly differentiate the change in the components of labour costs as being those affecting the employer and the employee. The more simple case is when that part of the labour cost is reduced which is born by the employer (typically the social contribution covered by the employer). In such cases the labour is cheaper for the employer and, as a result, demand for labour increases and employment also increases.

Cases, when labour costs born by the employee are reduced, are more complicated. The employment effect depends on the social layer, income group, unionization and general welfare gratification. In a family with one earner (typically the husband), wife and children the husband’s work propensity is not elastic downwards, lower labour costs (which result more net wage) will not induce him to work less. In contrast, in families belonging to higher income groups and with two earners, the work propensity of the second earner (typically the wife) may be influenced by changing labour costs. If, e.g., labour costs are very high, the wife will not go to work, and a decrease in them may induce further employment.

In countries with high marginal tax rates and generous social gratification systems the employment effect of tax shift from labour to the environment may be also negative for those unemployed and belonging to the lower social layers: because the income increase, due to employment, could be cancelled by the high marginal income tax and the loss of welfare assistance. (This phenomenon is called “poverty trap” or “unemployment trap”.) As a result, prospective employment effects of an ecological tax reform need thorough studying.

To illustrate the above cases, the paper will analyse prospective employment effects of a fictional labour cost decrease in Hungary.


A comparative study of the effects of environmental
taxation policies on the oil and gs industry in Canada and Norway

Deborah L. Jarvie, University of Lethbridge, Canada

The purpose of this paper is to examine two high-income OECD countries that are similar in terms of their global proportion of oil production, but are considerably opposed with regard to their positioning amongst environmentally responsible countries.

Canada and Norway produce similar quantities of the world’s oil supply, (3.7% and 3.5% respectively).  (BP – 2005 statistics).  The environmental ranking of Canada and Norway, within the thirty member countries of the OECD, is considerably opposed, however, with Norway ranking 14, and Canada 28.  (David Suzuki Foundation).

The environmental tax policies (both past and present) of these two nations will be compared in order to analyze their similarities and differences.  Canada is currently embarking on a large scale movement towards environmental fiscal reform, and these reforms will be compared to those currently used in Norway.  The impact of these tax policies and other EFRs on the implementation of new technologies within the energy sector will be examined.  Differences and similarities between the two countries, with respect to offshore, onshore, and mineral sand extraction, and the political economies of the two countries will be discussed. 

The paper will extend into Pigou’s double-dividend theory, and examine how the implementation of this type of tax reform could impact the environmental rankings of the two countries, and further encourage the use of more efficient technology.  The tangible benefits that could be attained 1) through an improvement to Canada’s environmental tax policies, and 2) to both countries through tax reform using a double-dividend system, will be examined.

The paper will examine the taxes imposed on both the industries producing the oil and the consumers of energy.  Incentives offered (and their take-up) for environmental protection will be discussed at both levels, also.

To summarize, the anticipated outcome of the paper will be 1) the examination of the effects of current tax policies within the oil and gas sector in Canada and Norway; 2) a discussion of the correlation between current tax policies and the use of improved technologies within these two countries; 3) an analysis of the changes that would be necessary for the implementation of a double-dividend tax policy within the oil and gas sector, as applied to both industry and consumers; 4) the determination of the tangible benefits that environmental fiscal reform of this nature could provide; and 5) an understanding of the lessons that can be learned by the two countries from each other’s tax system.


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