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environmental taxes might be expected to have the most significant impact, the poor avaiiabiiity of data on past spending and prices tends to restrict the scope for more detaiied modeiiing of environmentai taxes on narrowiy-defined commodities, or on commodities (such as ieaded petroi) defined by particular environmental attributes.

With the exception of the literature on the economic effects of a carbon tax, most of the empirical research has focused on estimating the impact of environmental taxes on the use of the taxed commodity, and occasionaiiy on ciosely-reiated sectors, and has paid iess attention to wider economic effects including macroeconomic adjustment and générai equiiibrium effects. The studies which seek to estimate eiasticities of demand and substitution can be divided into time-series estimates at an aggregate ievel, and estimates using micro data on individuai firms, industries, or househoids.

(i) Estimates at an aggregate level have included time-series estimates of aggregate energy use by industry, by consumers, or by the economy as a whoie, time series models of motor vehicle ownership and vehicie fuei expenditure, of agricultural fertiliser use, etc. The data requirements of such studies are comparatively small, but there are frequently difficulties in distinguishing price effects from other trended variabies such as income, output price ieveis, etc. For the UK, a number of studies of aggregate energy demand are summarised in Hunt and Manning (1989).

Branniund and Kristrom (1991) study the impact of a tax on chiorine effiuent from the bleaching process in the pulp industry, using a model which takes into account possibie effects on forestry and the sawn timber industry. They found that a tax which increased the price of chlorine by 50% would reduce the quantity of chiorine used by some 14 per cent, but that it would have negligible repercussions for forestry and the timber industry.

The Iikeiy impact of a tax on agricuitural fertilisers can be derived from a number of studies of the price eiasticity of the demand for fertiiisers. Burreil (1989) provides a useful survey of this literature. Estimates from linear programming modeis and from econometric models have tended to diverge widely, with rather higher elasticities being obtained from the latter.

Time-series modeis can often be particulariy informative about the time-scale of likely responses to an environmental tax. One recent study which has generated important new information about the iikeiy dynamics of changes in energy use in response to an energy tax is the paper by Ingham and Ulph (1990), which modeis the age ("vintage structure") of the capitai stock in considerabie detaii. It points out that the scope for changing energy efficiency is much iess with existing plant and machinery than when new machinery is instailed, and shows that to achieve quick results, a much higher ievel of taxation wouid be required than if energy consumption changes were sought over a longer time period.

(ii) Estimates at a micro ievei using data for industries or individual firms tend to be seriously constrained by the iack of reievant data. Changes in the ciassification of industry or trade statistics mean that industry-ievei data rareiy contain an adequate number of yearly observations for robust estimation, and detaiied data on individuai firms’ expenditures on inputs is frequentiy unobtainable for reasons of commercial confidentiality.

3. Tax and Environment: Survey

There has been a growing amount of research on the spending patterns of individuai households, using data from large-scale household surveys which can be used to assess the impact of environmentai taxes on consumer goods. Household expenditure and income data from a number of years of budget surveys are now available for a number of OECD countries, and allow elasticities of demand and substitution to be estimated at a micro-level for a range of goods (e.g. Blundell, Pashardes and Weber, 1989; Decoster and Schokkaert, 1989). Usually the models operate at a comparatively broad degree of aggregation although domestic energy spending and spending on vehicles and petrol are usually separately distinguished. Blundell ef a/(1992) provide a comparative analysis of the impact of a "carbon tax" using consumer spending modeis from five European countries (Belgium, France, Italy, Spain and the UK), whiist other, single-country, studies of energy taxes or carbon taxes using these models have included Johnson, McKay and Smith (1990) and Symons, Proops and Gay (1992). Whilst all of these papers are based on a model which treats domestic energy purchases as a single aggregate, and which cannot therefore model the substitution between household fuels that might occur as the result of a carbon tax. Baker and Blundell (1991) present separate equations for household spending on gas and on electricity, based on micro-data from the UK Family Expenditure Survey.

Wider economic effects have been investigated using economic modeis of two sorts. As Boero, Clarke and Winters (1991) describe each approach has particular strengths and weaknesses, and these need to be borne in mind in assessing the results obtained.

(i) Simulation using macroeconomic modeis. Macroeconomic modeis can be used to investigate the economy-wide repercussions of environmental taxes, by embedding estimated models of commodity demands in a full system of equations representing supplies and demand for all commodities and factors of production, and financial relationships. These modeis can then be used to simulate the wider implications of environmentai taxes and the revenues raised from them - including effects on prices, international competitiveness and the exchange rate, employment, etc. Linked macroeconomic modeis for a number of countries can be used to investigate how these effects might be altered if policies to introduced environmentai taxes were subject to international co-ordination, rather than introduced by a single country acting alone. Linked simulations of the macroeconomic effects of a carbon tax are reported in Detemmerman et ai (1991) and Standaert (1992) and a range of international estimates are surveyed in Hoeiier, Dean and Nicolaisen (1991) and Bradley and Fitzgerald (1992). Barker and Lewney (1990) use a sectoral macro model of the UK economy to simulate the macroeconomic effects both of a carbon tax, and of the regulation of water quality. Lanza and Scabeilone (1991) use a sectoral model of Italian energy demand to simulate the impact on an index of atmospheric poliution of the European Community’s proposal to harmonise the structure of indirect taxes (which would require changes to the taxation of petroi and other energy), and Agostini, Botteon and Carraro (1991) simulate the impact of various ad valorem and specific energy taxes on energy-related pollution in Italy.

The principal uses made of most macroeconomic models have been to study and forecast short-run changes in economic conditions, and there is an obvious question about the extent to which they are suitable for simulating the longer-term implications of major structural changes in the economy.

3. Tax and Environment: Survey

that would be implied by substantial "carbon taxes" for example. Considerable recent research effort, however, has gone into improving the long-run dynamics of a number of models, to allow them to be used for longer-run simulation exercises.

(ii) Simulation using computable general equilibrium models. CGE models are, by contrast, designed to investigate the long-run process of economic adjustments to policy changes, by examining how relative prices of all goods and factors of production would have to adjust to achieve equilibrium in all markets’^. CGE models tend to pay little attention to the short-run dynamics of the economic adjustment process, in contrast to most macroeconomic models. Also, estimation can play quite a small role in the construction of CGE models; relevant elasticities may be gathered from a range of existing sources or simply assumed, and the model "calibrated" so that it is consistent with data for a particular "benchmark" year. As a result, statistical criteria to evaluate the reliability of the models and the precision of simulation results are difficult to obtain; the models, in effect, calculate the implications of policy change, given a particular structure of the economy, supply and demand elasticities, etc. Because of their long-run focus, however, CGE models have been increasingly applied to the analysis of major environmental taxes.

This literature has grown explosively in the last two years. Proost and van Regemorter (1990), for example, look at the impact of a carbon tax using a CGE model for the Belgian economy, and Conrad and Schroder (1990,1991 ) describe various aspects of the effects of environmental taxes using a German CGE model. Other studies Include Glomsrod e t a l(1992) for Norway, Blltzer et

a /(1990) for Egypt, Bergman (1991) on Sweden, and Burniaux ef a/ (1992) which discusses the OECD’s global CGE model GREEN, In which a number of regions are modelled.

One particular focus of studies based on CGE models of the effects of a carbon tax has been the international distribution of gains and losses from the tax. Since a move towards substantial policy measures to restrict carbon dioxide emissions is likely to require international agreement on co-ordinated emission reduction measures, knowledge of the pattern of gains and losses across countries is an important prerequisite for international negotiation. Whalley and Wigle (1991 ) show that the form taken by the carbon tax is critical In determining the distribution of gains and losses; a tax based on energy consumption would impose large losses on the major energy-producing countries, whilst a tax based on energy production would substantially compensate energy producers for the reduced demand for their natural resources by entitling them to a substantial share of the carbon tax revenues.

17 See Shoven and Whalley (1984) and Borges (1986) for surveys of this approach.

3. Tax and Environment: Survey