El aire como comburente

Revenue raised by the federal government from the taxation of emissions or from the sale of emissions permits can be handled in VURM5 in one of two broad ways.

 The revenue raised can feed through into the finances of the federal government (consolidated revenue) to fund its other activities. In this case, the revenue from the emissions module feeds through into the existing federal government revenue equations in the model core and into the government finance module (outlined in chapter 6).

 The revenue raised can be handed back to:

o domestic and foreign households, who are the ultimate owners of the emitting firms;

o domestic households, through lump-sum transfers; o domestic households, through a consumer subsidy; or

o domestic workers, through a reduction in taxes on labour income (PAYE). Retaining the change in revenue as part of consolidated revenue

If the first approach is adopted, the revenue from the pricing of emissions would be modelled as feeding into consolidated revenue of the federal government in the model core. This is achieved by linking the price on emissions into the existing federal government tax variables for non-GST ad valorem taxes on:

 production (equation E_d_t1Fgas); and

 household consumption (equation E_d_t3Fgas).

These equations were discussed in section 8.3.1.2, which dealt with the change in the specific tax rate on emissions.

Returning the change in revenue to producers and consumers To the owners of emitting firms (E_d_grandinc to d_wgfsi_600)

Equation E_d_grandinc determines the change in federal government revenue in each region from changes to the grandfathering arrangements. Grandfathering of emission permits involves the federal government issuing free permits (typically a one-off issue) to emitting firms (which is equivalent to providing them with a subsidy equal to the permit price). This equation can be activated by making the shift variable d_fgrandinc exogenous and setting it to zero, and d_grandinc endogenous. When the shift variable is exogenous, the change in the amount of revenue grandfathered (d_grandinc) is equal to the change in the revenue collected from the pricing of emissions (d_etaxrev).

Equation E_d_grandinc # Grandfathered emissions permit income #

(all,q,REGDST)

d_grandinc(q) = d_etaxrev(q) + d_fgrandinc(q);

Equation E_d_whinc_400 models the change in permit income from grandfathering flowing to Australian households. Based on the domestic and foreign ownership shares in the model database, it is assumed that, as the ultimate owners of the emitting firms that receive the free permits, 80 per cent of the change in permit income accrues to Australian households and 20 per cent to non- residents. Changes in the permit income accruing to Australian households feeds through into change in gross household income in the household income accounts (whinc_000).

Equation E_d_forestinc models the change in permit income from grandfathering flowing to non- Australian resident owners of emitting firms. Given the foreign ownership shares in the VURM5 model database, it is assumed that 20 per cent of changes in income from grandfathering accrue to non-residents. This income feeds through into the change in the foreign income account (d_IAB) of the balance of payments in VURM5 and, ultimately, into the percentage change in the nominal value of gross national product (w0gnp). Equation E_d_forestinc was discussed in section 8.3.2 with regard to the receipt of income from the sale of permits overseas by Australian households.

Equation E_d_wgfsi_600 models the change in the change in government revenue lost from grandfathering (denoted by the variable d_wgfsi_600). This loss in revenue is modelled in VURM5 on the income side of the government fiscal accounts (rather than as a notional outlay) to cancel out the increase in ad valorem tax revenue from the issuing of permits and to leave overall government revenue unchanged.

The d_lumpsum term in equation E_d_wgfsi_600 relates to changes in government revenue from handing back revenue to households through lump-sum transfers. This term is discussed in the next section.

Equation E_d_wgfsi_600

# Loss in tax revenue from grandfathering of emissions permits #

d_wgfsi_600 = -sum{q,REGDST, d_grandinc(q)} - sum{q,REGDST, d_lumpinc(q)}; To domestic households through lump-sum transfers (E_d_lumpinc)

The modelling of handing back of changes in government revenue through lump-sum transfers is similar to that used for grandfathering, with the variable d_lumpinc playing a similar role to d_grandinc. As a result, many of the same equations used are also used.

Equation E_d_lumpinc determines the amount of revenue handed back to Australian households through lump-sum transfers. The equation can be activated by making the shift variable d_flumpinc exogenous and setting it to zero, and d_lumpinc endogenous. When the shift variable is exogenous, the lump-sum transfers (d_lumpinc) equal the revenue collected from the pricing of emissions (d_etaxrev).

Equation E_d_lumpinc # Lump-sum payment to household of permit income #

(all,q,REGDST)

d_lumpinc(q) = d_etaxrev(q) + d_flumpinc(q);

Equation E_d_whinc_400 models the changes in lump-sum transfers received by Australian households. In VURM5, lump-sum transfers are assumed to flow to domestic (not foreign) households. Consequently, all permit-related lump-sum transfers feed directly into the domestic household income accounts (d_whinc_400), with no income flowing into the foreign income account of the balance of payments (equation E_d_FORESTINC). Equations E_d_whinc_400 and E_d_FORESTINC were discussed previously in section 8.3.2 with regard to the receipt of income from the sale of permits overseas by Australian households.

Equation E_d_wgfsi_600 deals with the loss in government revenue from lump-sum transfers. It was also discussed in the previous section on the grandfathering of permit income.

To domestic households through a consumer subsidy (E_d_fauction_GST to E_d_t3GST) In VURM5, handing back the change in revenue from the sale of emissions permits back to domestic households through a consumer subsidy is modelled in terms of a reduction in the rate of GST paid by households.

Equation E_d_fauction_GST calculates the percentage point change in the rate of GST on household purchases (d_t3Fcomp) needed to return the change in revenue from emissions pricing. This equation can be activated by making the shift variable d_fauction_GST exogenous and setting it to zero, and d_t3Fcomp endogenous.

The required change in the rate of GST on household purchases needed to return the revenue from emissions pricing (d_t3Fcomp) feeds into equation E_d_t3GST in the model core which determines the overall change in the rate of GST paid by households.

Equation E_d_fauction_GST

# Handing back of revenue to households through a consumer subsidy # d_natetaxrev = -sum{c,COM,sum{s,ALLSRC,sum{q,REGDST,

V3BAS(c,s,q)*0.01*[d_t3Fcomp + TAX3FCOMP*[x3a(c,s,q) + p0a(c,s)]] }}} + d_fauction_GST;

Equation E_d_t3GST

# %-Point change in tax rate on commodity sales to 3: GST #

(all,c,COM)(all,s,ALLSRC)(all,q,REGDST)

d_t3GST(c,s,q) =

{0 + IF(V3GST(c,s,q) gt 0,1)}*[d_tGST + d_tGSTq(q) + d_t0(q) + d_t3Fcomp];

8.5.1.1.1 To domestic workers through a reduction in taxes on labour income (E_d_fauction_PAYE)

In VURM5, the handing back of changes in revenue to domestic workers is modelled through a reduction in the tax rate on labour income.

Equation E_d_fauction_PAYE calculates the percentage point change in the tax rate on labour income needed to return the revenue from emissions pricing (d_tlabinc). This equation can be activated by making the shift variable d_fauction_PAYE exogenous and setting it to zero, and d_tlabinc endogenous.

Equation E_d_fauction_PAYE

# Handing back of revenue to households through a reduction in PAYE tax # d_natetaxrev = -VGFSI_131@1*100/TLABINC*d_tlabinc + d_fauction_PAYE;