Water Right Fee and Green Tax Reform A Computable General Equilibrium Analysis

Transcription

1 Rght Fee and Green Tax Reform A Computable General Equlbrum Analyss Abstract Chang-Erh Chou, Shh-Hsun Hsu, Chung-Huang Huang, Png-Cheng L, and Chung-Mn Tseng 1 Comment [T1]: Ths study uses a sngle-country water resources CGE model, WATERGEM, to nvestgate the double dvdend effect of mposng water rght fees. WATERGEM s developed based on ORANI model wth a SAM data structure. The water resources consdered n the model are tap water, surface water, and ground water. company s treated as a sector, surface water and ground water are treated as two prmary nputs. The substtuton among three water resources s also formulated. The green tax reform s gettng ts popularty n the advanced countres. Due to the envronmental concerns, more and more envronmental taxes have been leved. The collected envronmental tax revenue could be used to reduce the dstorted taxes. Ths generates two effects, mprovement n envronmental qualty and reducton n dstorton, known as double dvdends. The water rght fee s usually collected under the user pays prncple to ncrease the effcency of water use. We consder t as an envronmentally-based tax. For polcy smulaton, we assume that the water rght fee revenues could be earmarked, or used to deduce household ncome tax, corporate proft tax. The results of smulaton show that the double dvdend effect does exst, and the double dvdend effect of deducton n corporate proft tax s hgher than the others. In the meanwhle, the smulaton results also show that water demand reduces when water rght fee s mposed. 1 Chang-Erh Chou s the drector of Dvson IV at Tawan Insttute of Economc Research, Chh-Hsun Hsu s a professor n the Department of Agrcultural Economcs at Natonal Tawan Unversty, Chung-Huang Huang s a professor n the Department of Economcs at Natonal Tsng Hua Unversty, Png-Cheng L s an assocate professor n the Department of Industral Economcs at Tamkang Unversty, and Chung-Mn Tseng s a secton chef at Resources Bureau. We are grateful for the fnancal assstance provded by Resources Bureau grant 88EC2B Any errors reman the responsblty of the authors.

2 1. Introducton There has been a great concern about the envronmental ssues snce the last few decades. Dfferent polcy nstruments have been appled to correct economc neffcences caused by envronmental externaltes. Lately, more and more envronmental taxes and fees such as carbon taxes, energy taxes, dsposal fees etc., are mposed to nternalze the externaltes assocated wth producton and consumpton actvtes. In 1995, the envronmentally related taxes accounted for between 3.8% and 11.2% of total tax revenue n OECD countres. These taxes count for between 1% and 4.5% of GDP. (Zhong and Majocch, 1999) It was ntally beleved that envronmental taxes have a double dvdend. Accordng to the double-dvdend hypothess, the ntroducton n envronmental taxes combned wth revenue neutral reductons n exstng dstortonary taxes (such as ncome or factor taxes) can mprove the qualty of envronment and reduce the exstng tax dstortons. Ths s known as revenue-neutral green tax reforms. Due to the persstent hgh unemployment rates, some advanced countres have started to conduct the green tax reforms. For example, n her 1991 tax reform, Sweden mposed several envronmental taxes and reduced ncome taxes n a revenue-neutral fashon. Furthermore, Swedsh government formed the Swedsh Green Tax Commsson n 1995 to provde an evaluaton of a tax system wth a stronger envronmental profle. (Brannlund & Gren, 1999). Whle the green tax reforms have been puttng n practces, the exstence of double dvdends, on the other hand, s stll puzzlng the researchers. The double dvdend effect s not so promsng as prevously thought. Bovenberg and de Mooj(1994), Bovenberg and van der Ploeg (1994), and Pearce (1991) suggest the shft of green taxes to dstortonary taxes would reduce the neffcency n the economy. Nordhaus (1993) concludes that the effcent use of green taxes has a substantal gan. Under the revenue-neutralty assumpton, some authors (for example, Goulder (1995), Koskela and Schob (1999), Schob (1996)), conclude that the double dvdend may not be the case f the exstng tax system and the choce of tax rate cuts are consdered.

3 The focus of current research on green tax reforms has been put n envronmental taxes. In ther work, Repetto et al. (Repetto et al., 1992) suggest that substtutng green fees, such as charges on polluton, waste and congeston, for exstng taxes could brng a cleaner envronment and reduce economc dsncentves of current taxes. The green taxes normally refer to the polluter pays prncple type of taxes and fees. However, when the eco-system has become an ncreasng concern of the publc, we beleve that the green tax reforms should nclude not only polluter pays prncple type of taxes/fees, but also nclude user pays prncple type of taxes/fees. Therefore, n ths study we nvestgate the double dvdend effect of water rght fee and ts mpact on mprovng water use effcency. Secton 2 descrbes the water resources n Tawan and assocated ssues. In secton 3, we outlne a sngle-country water resources general equlbrum model, WATERGEM, n whch three water resources are formulated. Secton 4 dscusses the data structure, polcy smulaton desgn, and smulaton results. Fnally, we conclude n secton 5 that the recycle of water rght fee has a double dvdend effect. In addton, the water rght fee would also reduce the use of water n all sectors. 2. Resources n Tawan Lke all of the other natural resources, water resources are very lmted n Tawan. s unevenly dstrbuted n terms of season, regon and user. Ranfall vares wdely, from an annual average n excess of 2100mm n the north to less than 1800 mm n the south and 1500mm n the mddle. In addton, t s dffcult to retan water due to the mountanous terran and steep slopes. To solve the water-scarcty problems, the efforts had been put n ncreasng water supply by constructng nfrastructure, such as dams and reservors, n the early stage. The rapdly economc and populaton growth has contnuously ncreased pressures on water avalablty and on the water development potental. It becomes harder and harder to fnd new stes for dams and reservors. In the meanwhle, the changes n the value system and soco-economc goals push water management toward water conservaton and effcency use. In partcular, water transfer/tradng and water fees are two man mechansms desgned to mprove the effcency of water

4 use. transfer refers to the trade of the rght to use water. It s a market mechansm n allocaton and reallocaton of water to enhance water use effcency. transfer has been mplemented n the areas wth hgh water scarctes, and t has been proved to be an effectve way n mprovng the effcency of water use. However, t has dffcultes beng accepted by the socety and law n Tawan because the majorty s stll consderng water as a common and publc good nstead of a tradable commodty. On the other hand, when water s recognzed as a scare resource, the water fee s desgned, based on the user pays prncple, as an nstrument for water ratonal use and conservaton. Both of water transfer and water fees are beleved to be useful mechansms to encourage economcally effcent water applcatons. In Tawan, whle water transfer stll s not accepted by the majorty, water rght fee s mandated by the water law. Accordng to the Law, water users need to apply a water rght for use of surface water and groundwater. Under the same law, water rght fees should be leved, and the revenues are earmarked to secure the publc fundng for constructng nfrastructure amed at mprovng the water effcency. Although water rght fee s mandated by law, government s not able to collect the fee manly due to the resstance from the water users, partcularly the agrcultural and ndustral users. One of the man reasons to aganst the mposton of water rght fees s that the water rght fees would ncrease cost, and thus brng a negatve mpact on the economy. The mposton of water rght fees would, no doubt, ncreases the economc cost on effcency grounds. However, f the revenues of water rght fees could be used to replace exstng dstortonary taxes and brng a double dvdend effect, then t may ncrease welfare level of the economy and reduce the resstance of mposton of water rght fees. 3. The Model WATERGEM A computable general equlbrum model, known as WATERGEM (water resources general equlbrum model), s constructed under the fnancal support of Resources Bureau n Tawan. The purpose for constructng WATERGEM s

5 to provde Tawan water authorty, Resources Bureau, an analytcal nstrument for evaluatng the economc mpact of varous water polces. In order to utlze the analytcal results for further polcy mplementaton and water management, WATERGEM has also been lnked to a geographc nformaton system (GIS). Though t s an ongong project, a sngle-country water resources CGE model (WATERGEM) and a mult-regon water resources CGE model (MR-WATERGEM) have been establshed. Ths study uses WATERGEM to evaluate the mpact of mposton of water rght fees and the revenue recycle effect. WATERGEM s a sngle-county CGE model adopted from the Australan ORANI model (Dxon, Parmenter, Sutton and Vncent, 1982). The structure of WATERGEM s dscussed as follows: 3.1 Producton Technology We assume that each ndustry produces only one commodty. The producton technology can be descrbed by fgure 1. The lower part of fgure 1 represents the nput-output relatonshp. It contans a four-level nested structure. At the frst level of the lower part, we assume that there s no substtuton between ntermedate-nput compostes and the prmary-factor composte. At the second level, we assume that ntermedate nputs are a combnaton of domestcally produced and mported nputs. However, the composte of prmary factors (ncludng labor, captal and land) and water resources composte are combned by a specfcaton. At the thrd level, we assume that prmary factory nput s a composton of labor, captal and land, and water resources s a composton of surface and ground water. At the last level, the labor composte s a aggregaton of O types of labor, ncludng managers, professonal specalsts, whte-collar workers, sklled workers and unsklled workers. The top part of fgure 1 shows the specfcaton of ndustres transformaton fronters. It conssts two levels wth standard ORANI assumptons and specfcatons.

6 Local Market Foregn Market Local Market Foregn Market CET CET LEVEL 2 Good 1 Good C CET LEVEL 1 Actvty Level Leontef LEVEL 1 Good 1 Good G Other Costs Composte Prmary Factor and Composte LEVEL 2 Domestc Good 1 Imported Good 1 Domestc Good C Imported Good C Prmary Factors Composte Labor Land Captal LEVEL 3 Functonal Forms Inputs or Output LEVEL 4 Surface Ground Labor Type 1 Labor Type O Fgure 1. Producton Technology of WATERGEM

7 2.2 Resources We consder three types of water resources,.e., surface water, ground water and publc water. Due to a low substtutablty between composte water (ncludng surface water and ground water) and other prmary factors, we separate composte water from the other prmary factors. Surface and ground water are combned by a specfcaton nto composte water. The publc water provder, water company, s treated as a sector. The demand for and the prces of surface and ground water are specfed as follows: x1wat,w = x1wat _ σ ( p1wat p1wat _ w,w w ) p 1wat _ w *VWPUR _ I w = VWPUR,w * p1wat,w where and w represents ndustry and water type respectvely, xlwat and p1wat are quantty demanded and prces of water resources respectvely, x1wat_ and plwat_ are water quantty demanded and prces of water by ndustry, σ s the elastcty of substtuton of surface water and ground water, VWPUR s ndustry nput demand for water resources n value term. Though water company s treated as a separated sector, we take the substtuton of publc water and composte water nto account, and formulate the substtuton relatonshp as below: x1wat _ w 1 2 = x1prm σ ( p1wat _ w p1prm ) σ ( p1wat _ w p1wat _ t ) 2 x1 _ s (" Publc " ) = x1tot σ ( p1 _ s (" Publc " ) p1wat _ t ) p 1wat _ t * (V1PUR (" Publc " ) + V 1WAT _W ) = V 1PUR (" Publc " )* p1_ s (" Publc " ) + V 1WAT _W * p1wat _ w where x1wat_w s the sum of surface and ground water, p1wat_w s the prce of composte water, x1_s( Publc ) and p1_s( Publc ) are the quantty demanded and prce of publc water respectvely, x1prm and p1prm are the quantty

8 demanded and prce of composte prmary factors respectvely, p1wat_t s the weghted prce of publc water and composte water, V1PUR( Publc ) s ndustral nput demand for publc water, and V1WAT_W s ndustral nput demand for composte water. rght fees are mposed n a specfc tax manner. Consequently, the mposton of water rght fees ncreases the prce of ndustral water use. 2.3 Fnal Demand Household consumpton demand s specfed by a smplfed verson of the lnear expendture system. The lnear expendture demand functon s derved from maxmzaton of a Klen-Rubn utlty functon subject to houshold s budget constrant. Industral demand for fxed captal s assumed to be created accordng to the Leontef producton functon. The goal of government, based on the medan voter model, s to provde the amount of government servces preferred by the medan voter at the least cost, gven the tax revenues. The taxes consdered n the model nclude household ncome taxes, corporate proft taxes, commodty taxes, water rght fees, and varous transfers. We assume Tawan s a small open economy, and apply the Armngton assumpton on the mport demand. 4. Data and Polcy Smulaton The database of WATERGEM s compled from 1994 Tawan s Input-Output tables and relatng data. The ndustres are aggregated nto 24 sectors (see table 2). The manufacturng sectors use of surface and ground water s collected and estmated by a survey (Chou et al., 1999). The optmal water rght fees are adopted from a study by Huang(1997). Accordng to Huang s study, water rght fees are suggested to be leved by water type and by ndustry. rght fee for ground water s hgher than for surface water because the use of ground water tends to have hgher envronmental costs. In order to evaluate the green tax reforms by mposng water rght fees, the data structure of WATERGEM has been changed nto a SAM database nstead of an

9 ORANI. The current tax structure of Tawan economy s represented n the SAM table, and taxes nclude household ncome taxes, corporate proft taxes, tarffs, commodty taxes, water rght fees and varous transfers between publc and prvate sectors. The data structure of WATERGEM can be descrbed by fgure 2. In fgure 2, household ncome s generated by provdng prmary factors and recevng transfers from government or ndustral sectors. Household s oblgated to pay ncome taxes, water rght fees and receve transfers. On the other hand, ndustry s oblgated to pay corporate proft taxes, commodty taxes, water rght fees and pay or receve transfers. Government generates revenues from collectng taxes and transfers. The ncomes of nsttutons n excess of expendtures are saved. 4.1 Polcy Smulaton Scenaroes In order to evaluate the double dvdend effect of green tax reforms by mposng water rght fees, we assume revenue neutralty, and the collected water rght fees could be used (1) to earmark fundng for constructon of water nfrastructure (refers to as smulaton 1); (2) to reduce corporate proft taxes (refers to as smulaton 2); (3) to replace household ncome taxes (refers to as smulaton 3); and (4) a half to refund corporate proft taxes and a half to refund household ncome taxes (refers to as smulaton 1). Based on the double dvdend hypothess, the second dvdend s the cost reducton obtaned by usng the green tax revenues to cut an ordnary, dstortonary taxes. Ths s the reason that we choose household ncome taxes and corporate taxes as the targets for tax recyclng. Besdes, accordng to the Law n Tawan, the revenues from water rght fees are supposed to provde funds for water nfrastructure constructon. Therefore, we also nclude the earmarkng n the polcy smulaton for a complete evaluaton and comparson. 4.2 Closure Closure s the mechansm to solve the problem of over-dentfcaton of the model. In ths model we use Keynesan closure to set money wage and captal as

10 Intermedate Inputs Domestc Goods Imported Goods Producton Technology of Producton Leontef Prmary Factors Labor Captal Land Actvty Consumpton Fnal Demand Investment Import Foregn Sector Export Household Consumpton Government Expendture Income Taxes/Transfers Taxes/Transfers Household Income Government Net Income Savngs Physcal Flow Money Flow Fgure 2. Data Structure of WATERGEM

11 exogenous varables due to the short-run nature of the green tax reforms. That s the labor employment and the rate of captal return are set endogeneously. In addton, the prces of composte water and mported commodtes, exchange rate, tarff rates, water rght fees are set to be exogenous varables. 4.3 Smulaton Results The smulaton results are presented n Tables 1 through 3. From table 1, we can fnd that the real GDP s reduced n smulatons 1 and 3, but real GDP ncreases n smulatons 3 and 4. Smlar patterns can be detected n varables of total output and employment. From the results, we can conclude that the replacement of green taxes for dfferent dstortonary taxes has dfferent mpacts. In other words, the replacement of green taxes for corporate proft taxes has hgher postve mpacts on major macro varables than the other smulatons. Earmarkng as the current water law regulated has the least effect on the macro varables. To be more specfc, we do fnd the second dvdend of green tax reforms on employment. Table 2 gves the smulaton results of green tax reforms on each sngle sector. The double dvdend of green tax reforms s not so conclusve as the macro results, f we look nto the ndvdual sector. Some sectors have negatve mpacts on employment, whle the others have postve mpacts. Thus we may conclude that the second dvdend may be affected by not only the exstng tax structure, but also by the ndustral characterstcs. The frst dvdend of green tax reforms,.e., reducng the use of water, or ncreasng water use effcency, s presented n Table 3. For ground water, the wthdrawal reduces n almost every ndustry. However, for surface water, the mpact s not conclusve due to the varous water rght fees and the substtutablty between surface water and ground water. 5. Conclusons In ths study, we use a sngle-country water resources CGE model to nvestgate double dvdend effect of green tax reforms by mposng water rght fees. Under tax

12 revenue neutralty assumpton, we found that green tax reforms have a double dvdend effect. However, the magntude of the effect depends on not only the exstng tax structure, but also the structure of ndustry. In the meanwhle, the smulaton results also show that the water demand reduces as the water rght fees are collected.

13 References Bovenberg, A.L. & R. A. de Mooj, Envronmental Leves and Dstortonary Taxaton, Amercan Economc Revew, 84, 1994, Bovenberg, A. L. & F. van der Ploeg, Envronmental Polcy, Publc Fnance and the Labour Market n a Second-Best World, Journal of Publc Economcs 55, 1994, Brannlund, R. and I.M. Gren, Green Taxes, Edward Elgar, Cheltenharn, UK, Dxon, P.B., R.R. Parmenter, J. Sutton, and D.T. Vncent, ORANI: A Multsectoral Model of the Australan Economy, North-Holland, Amsterdam, Goulder, L.H., Energy Taxes: Tradtonal Effcency Effects and Envronmental Implcatons, Tax Polcy and the Economy, 8, 1994, Koskela, E. and R. Schob, Allevatng Unemployment: The Case for Green Tax Reforms, European Economc Revew, 43, 1999, Nordhaus, Wllam D., Optmal Greenhouse-Gas Reductons and Tax Polcy n the DICE Model, Amercan Economc Revew, May 1993, Pearce, Davd, The Role of Carbon Taxes n Adjustng to Global Warmng, Economc Journal, 101, July 1991, Repetto, R., R.C. Dower, R. Jenkns and J.Geoghegan, Green Fees: How a Tax Shft Can Work for the Envronment and the Economy, World Resources Insttute, Schob, R., Evaluatng Tax Reforms n the Presence of Externaltes, Oxford Economc Papers, 48, 1996, Zhong, M. and A. Majocch, Rapporteurs Report, n Envronmental Taxes: Recent Developments n Chna and OECD Countres, OECD, Pars, 1999.

14 Table 1 Macro Economc Impacts of Green Tax Reforms (percentage change) Macro Varables Sm 1 Sm 2 Sm 3 Sm 4 Nomnal GDP Real GDP GDP Deflator Total Output Investment Household Consumpton Import Export Employment

15 Table 2 The Impact of Green Tax Reforms by ndustry (percentage change) Sector No Sector Employment Total Output Volume Investment Smu. 1Smu. 2Smu 3 Smu 4 Smu. 1 Smu. 2 Smu 3 Smu 4 Smu. 1 Smu. 2 Smu 3 Smu 4 1 Paddy Rce Other Cereal Lvestock Forestry Fshery Mneral Processng Food Textle Leather Wood, Bamboo and Rattan Products Pulp, Paper and Paper Products Chemcal Materals Chemcal Products Non-Metalc Products Iron, Steel and Alumnum Metallc Products Machnery Electronc Products Transport Equpment Precson Instruments and Other Manufactures Electrcty Constructon Servce

16 Table 3 The Impact on Use by Industry (mllon tons) Sector no. sector Smulaton 1 Smulaton 2 Smulaton 3 Smulaton 4 Surface Ground Surface Ground Surface Ground Surface Ground 1 Paddy Rce Other Cereal Lvestock Forestry Fshery Mneral Processng Food Textle Leather Wood, Bamboo and Rattan Products Pulp, Paper and Paper Products Chemcal Materals Chemcal Products Non-Metallc Products Iron, Steel and Alumnum Metallc Products Machnery Electronc Products Transport Equpment Precson Instruments and Other Manufactures Electrcty Constructon Servce TOTAL USAGE