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Notes for Chapter 12
ECON 2390
2
Taxes to reduce pollution
Basic Tax Structures Income taxes (progressive, regressive,
proportional or flat tax) Consumption (Sales and GST) Ad valorem (property, inheritance)
The concept of cost minimization for abatement is related to the concept of elasticity in demand
The basic math rests on geometry and the area defined by the rectangle that shows the marginal abatement cost/tax and emission level
Total costs minimized
(area a + b)
Area b
Area a
3
Total cost of damages foregone = e + f (total cost of abatement + avoided losses to the pollutee)
The net benefit is f
Total tax paid by the polluter is a+b+c+d, plus the abatement cost.
Taxes are more costly to the firm than standard
Cost of a standard (set at E*) is just e.
Why tax?
What dangers exist in using a tax
4
A tax imposed on industry will cost differentially depending on abatement costs.
Total abatement is 80 + 20 Kg/mo
The book shows that an emission tax may have a lower social compliance cost than a uniform standard
When abatements costs vary a tax may be more cost-effective ($/kg controlled)
5
Cost of tax + abatement creates an incentive to invest in new technology
Industry 1: total cost = a+b+c+d+e
Industry 3: total cost = b+d+e
If the difference is technology the gain is a+ c
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Taxes to reduce pollution
Basic Tax Structures Income taxes (progressive, regressive,
proportional or flat tax) Consumption (Sales and GST) Ad valorem (property, inheritance)
8
Green Taxes
Some advocate replacing existing taxes on employment, incomes and profits (‘goods’) with taxes on energy use (‘bad’)
This is claimed to result in better overall national economic performance; higher levels of employment; and a cleaner environment.
The goal is to shift the balance between human resources and natural resources.
Taxes are well known to shift resources: Income taxes tend to reduce work effort Sales taxes reduce consumption (cigarettes) Carbon taxes are intended to reduce use of fossil
fuels
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Green Taxes
Problems green taxes are regressive because they hit
poorer people relatively harder than richer. A tax on natural gas raises the cost of
heating, cooking and lighting, it will consume a higher proportion of disposable income and poor people would find it harder to pay.
The effect is greater if we reduce income and taxes to really force the shift for which there are many exemptions.
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Rehabilitating the Green Tax
1. Some studies show that redistributing the surplus as an eco-bonus creates a progressive tax.
2. Green taxes at the retail level are regressive, but imposed at the upstream are less so it affects all incomes – salaries, rents, profits, dividends, which tend to fall more of richer households.
3. Green taxes should form part of a broader tax reform. For example a general shift to wealth taxes and a move to value added taxes (GST) and away from income taxes.
Caution: Progressivity in taxation is not the only goal. Other goals must be sustainability (resource allocation is not disturbed to erode the tax base), ease of administration, and enforcement.
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Incentives and subsidies
The reverse of taxation are rewards for good behaviour
Subsidies are design to lower the costs of adopting new technologies or uses that are more expensive (private costs), but are believed to create social benefits.
Common examples Incentives to insulate Cash for hybrid purchase
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Wind Power
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Mike De Souza reported that Canada's wind energy sector is among the groups losing out in the federal budget which will maintain hundreds of millions of dollars in subsidies for fossil fuel industries in Western Canada.
Robert Hornung, president of the Canadian Wind Energy Association, said the budget's failure to continue a federal incentive program for new projects will lead to jobs and investments heading to the United States. Mr. Hornung said he was "shocked and disappointed" that the government failed to renew the program.
Steven Guilbeault of Equiterre, said "We're abandoning our commitment for the development of wind energy in Canada as opposed to our other G8 competitors or even countries like China and South Korea. It's not just an environmental catastrophe. It's a series of missed job creation opportunities" (Edmonton Journal, A4, 05 March 2010; Montreal Gazette, A4).
Oilpatch to benefit from green initiatives, but alternatives left out
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Costs of alternative energy
Table 1: Price range of renewable electricity by technology (2007) Technology Cents / kWh*
Wind 5.6 – 9.5
Geothermal 6.1 – 11
Biomass 4.5 – 13
Solar PV 23 – 42
Wave power 27 – 96
Tidal 20 – 39
Hydro power (including large-scale) 2.2 – 11 * Figures were converted to Canadian dollars using the exchange rate of June 8, 2009 (1.1161).
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Canada’s Clean Air Agenda The Government of Canada committed to reducing
Canada’s total GHG emissions by 20% from 2006 levels by 2020 and by 60–70% by 2050;
In addition, to several other actions including: a goal of having 90% of Canada’s electricity provided by
non-emitting sources such as hydro, nuclear, clean coal, or wind power, by 2020
continuing to advance the Clean Energy Dialogue with the US Administration
investing more than $2 billion through our Economic Action Plan to protect the environment, especially through technological transformation, while stimulating the economy
playing an active and constructive role at the UN climate change talks leading up to the Copenhagen conference in December –18, 2009
Environment Canada. Retrieved September 21, 2009, from http://www.ec.gc.ca/cc/default.asp?lang=En&n=18BA6889-1
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Industry Associations
http://www.canwea.ca/index_e.php
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ecoEnergy for Renewable Power
NRCan program that offered 1¢ per kWh Capacity Installed Canada
0
200
400
600
800
1000
1200
1400
1600
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
Year
MW
Cumul. Total (MW)
Cumul. Commiss. WPPI (MW)
NRCan Programs
Other subsidies
and “natural growth)
Programs
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Ontario Feed-in Tariff
http://fit.powerauthority.on.ca/
