Distributional implications of carbon and environmental

taxation: a case study for Spain

Xaquín García-Muros

Global Climate Change (GCC)

Local Air Pollution

(LAP)

Two significant, interrelated environmental problems:

“LAP control combined with GCC policy creates an extra early-kick-off for the transition towards climate friendly energy supply”

Bollen et al., 2009, page 179

Who pay mitigation policies?

Most studies find regressivity in GCC related taxes, but this conclusion cannot be taken as a rule because it depends on the case study.

GCC tax

LAP Tax

Here, we conduct a distributional analysis of an LAP tax (based on the

internalization of the external costs of several pollutants) and compare it in

a compressive way with a GCC tax (tax on CO2)

The distributional implications of a revenue-neutral tax reform are also explored.

Environmental taxes allocated to

producers

∆ Consumer prices

Income impacts of

households

INPUT-OUTPUT MODEL

DEMAND MODEL (AIDS)

Methodology

Scenarios Description Tax Equivalent

GCC tax Tax on CO2 emissions levied on

producers.

€25/t CO2

LAP Tax Tax on NH3, NOX, SO2, NMVOC,

and PM10 emissions levied on

producers.

We use the external

cost of CASES project

but only internalize

47.2% of external

costs

Revenue-Recycling Reduction in social security

contributions paid by employers

7.5% reduction in SS

contributions

Scenarios

0.00 2.50 5.00 7.50 10.00

Electricity, water and gas production

Food Sector

Energy sector

Industries

Mining and quarrying

Sanitary and vetinary activities; social services

Real estate activities and entrepreneurial services

Education

Financial intermediation

Homes that employ domestic staff

top

5B

ott

om

5

GCC tax LAP tax

Change (%) in production prices. Top and bottom sectors

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1 2 3 4 5 6 7 8 9 10

LAP tax GCC tax

Cost impacts change (EV, %) by expenditure deciles

The importance of consumption pattern

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10

Other services

Restaurants and hotels

Education

Leisure and culture

Communication

Transport

Health

Home furnishing and home maintenance

House

Clothing and footwear

Alcoholic beverages, tobacco and narcotic

Food

Second exercise: Revenue recycling

-1.5 0.0 1.5 3.0 4.5 6.0 7.5 9.0

Electricity, water and gas production

Food Sector

Energy sector

Industries

Mining and quarrying

Sanitary and vetinary activities; social services

Real estate activities and entrepreneurial services

Education

Financial intermediation

Homes that employ domestic staff

top

5B

ott

om

5

GCC tax LAP tax

The impact of revenue recycling on price change

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

1 2 3 4 5 6 7 8 9 10

LAP tax GCC tax

Cost impacts after recycling per expenditure group

Conclusion

•LAP taxes are more regressive than GCC taxes. LAP is more linked to goods that are consumed by low incomes groups than GCC taxes, where its potential regressive effect is compensated by the higher consumption of transport and energy of the higher income groups. •The result does not improve with the revenue-recycling effect because, again, the beneficiaries of this policy are labour-intensive and non-polluting goods that are consumed proportionally more by high income groups. •Although these results are of course an empirical matter, they can be extrapolated to countries with similar production and consumption profiles.

•Although it was thought that LAP taxes might be easier to implement because their effects (mainly on health) are felt more immediately by citizens and by low-income households than those of GCC taxes, this may not be the case if the distributional issue is factored into the policy maker’s equation •If it is wished to correct the distributional effect of this type of tax reform the standard approach, i.e. reducing taxes on labor, may not improve the distributional effect. However given that the overall regressivity of these taxes is low, various specific combinations of policies could be design to compensate the households or groups that are most affected.

Policy implications:

Thanks For Your Attention!!