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Modelling Environmental Tax Reform in Spain

Periodic Reporting for period 2 - METRES (Modelling Environmental Tax Reform in Spain)

Reporting period: 2018-01-01 to 2018-12-31

An Environmental Tax Reform (ETR) is the switch of the national tax system from “classical economic taxes”, such as those on labour (personal income tax and social contributions), capital and consumption (VAT and indirect taxes) to taxes on environmental pressures and natural resources use, without necessarily affecting the overall revenues from taxation. This would provide better signals to economic agents leading to a better functioning of markets and therefore increasing welfare. The METRES (Modelling Environmental Tax Reform in Spain) project aims to evaluate the double dividend hypothesis for environmental taxation in Spain. This hypothesis claims that is possible to benefit the environment and at the same time the economy by transitioning towards an ETR. To do this, the researcher is developing a set of energy-environment-economic dynamic models. The overall objective of the project is to test the double dividend hypothesis for different forms of environmental taxation in Spain, and, more generally, provide proposals to reduce environmental problems with the use of economic instruments. The project started in July 2016, and it consists in an outgoing phase of 1.5 years in Harvard University (USA), working with Prof. Jorgenson and Dr. Mun Ho at the Department of Economics, and a return phase in ENT Environment and Management (Spain), working with Dr. Ignasi Puig. The overall conducted research has concluded with different dynamic economic-energy-environmental models developed for Spain. With these models, different fiscal configurations have been tested. An Environmental tax reform, a carbon tax, energy taxes, waste taxes and productivity taxes. For all of them, current taxation and potential reforms have been tested. The double dividend hypothesis have been confirmed in many cases leading to a potential new way to implement fiscal policies. The action has concluded with six research articles and two more for dissemination purposes, among other actions.
During the first part of the project of 1.5 years at Harvard University, the researcher has conducted different tasks, first a deep analysis of the literature on the effects of environmental taxation using different forms of CGE modelling methods. As a result of this review he obtained a detailed report of the state-of-the-art in the field and some potential research gaps he tries to fill during the overall period. The result of this review ended up with a research article: “Environmental taxation and the double dividend hypothesis in CGE modelling literature: A critical review”, already published in the Journal of Policy Modeling.
A second line of work consisted in looking for the data to develop and feed the models and the development of a highly detailed Social Accounting Matrix (SAM) for Spain. A third line of work consisted in developing a set of models to provide different possibilities of analysis: Static models, dynamic models, for industry tax and subsidies analysis, for externality taxation analysis, only for CO2, for a set of 31 emission pollutants, etc. This period ended with an article called “Carbon Taxes and the Double Dividend Hypothesis in a Recursive-Dynamic CGE model for Spain”, accepted in Economic Systems Research. Finally, another line of work consisted in developing different scenarios in order to test them in the models and analyse the results obtained. This period ended with an article called “Environmental Fiscal Reform and the Double Dividend: Evidence from a Dynamic General Equilibrium Model”, published in Sustainability Journal.

During the second part of the project of 1 year at ENT Environment and Management, different tasks have been conducted, first a deep analysis of the literature on environmental taxes in Europe and Spain. A second line of work has been developing scenarios of the different current taxes in electricity and waste, coherent with their current situation. In a third line of work we have developed different scenarios new other possibilities to change the economic and environmental impacts of taxes. Finally, a fourth line of work has consisted in developing additional improved scenarios to test them into the models and improve both the economic and the environmental effects of these taxes. Different policy implementations have been proposed.

This second period of research has concluded with three new publications for scientific journals: “Reformulating taxes for an energy transition”, already published in Energy Economics journal; “Assessing Waste Taxation: an Empirical Study in a CGE Multi-Pollutant Framework”, that is being reviewed and “Energy taxation policies can counteract the rebound effect: empirical evidence” that is also being reviewed. Two progress reports have also been produced. Another article for a Spanish journal (Ambienta) and another for a Spanish newspaper (Diario16) have been published for dissemination purposes.

Besides, the results of the action have been presented in two conferences: the 8th Atlantic Workshop on Energy and Environmental Economics, the 21st and the 22nd June 2018 in A Toxa, Spain, and The Energy Modelling Platform for Europe (EMP-E) 2018 – Modelling clean energy pathways, from the 25th and the 26th September in Brussels. Also, for dissemination purposes, eight interviews with policy-makers, practitioners and scientists have been conducted, a blog with 20 posts and a specific Twitter profile has been developed. The action has also been disseminated via the host social network profiles, website and newsletter.
Several innovations have been conducted during the period, like an innovative Social Accounting Matrix (SAM), with a high detail level. It has 101 industries and 101 commodities, with specific detail on electricity generation technologies (12 industries) and waste treatment technologies (19 industries). It also has a lot of detail regarding the description of the tax system, not usual in SAMs: taxes on capital, labor, and dividends; property taxes; value-added tax (VAT) on products; special taxes on alcohol, tobacco, hydrocarbons, electricity, and retail hydrocarbons; sales tax; other taxes on production; social security contributions; and imports taxes, or tariffs. Most of the other innovations come from the development of physical links based on LCA/environmental extended Input-output modelling methods, and the introduction of 31 different pollutant emissions. Many other small innovations were introduced during the modelling phase. The work carried out contributes towards the European policy objectives and strategies, particularly in those related to environment and climate change. One of the aims of the work is to assess the use of economic instruments to tackle climate change and improving other environmental parameters. European Union legislation has established more than 130 separate environmental targets and objectives to be met between 2010 and 2050. Some of them are addressed by the project. The work carried out contributes towards energy and climate change European objectives. The research conducted shows that different forms of environmental taxation could improve the environment and the economy at the same time at Spanish level, but the results can be extrapolated at European level.