Three essays on fiscal and environmental policy interactions : theories and applications

Abstract

This thesis consists of three essays that analyse environmental and fiscal policy interactions. In particular, these essays explore three trade-offs in policy making using small theoretical models as well as a large computable general equilibrium model. The first essay (Chapter 2) considers the trade-off between economic growth and environmental control by studying an optimal fiscal plan of taxation and composition of government spending in an endogenous growth model. The trade-off is shaped in such a way that a government has to allocate its tax revenue between emission reduction spending and growth-inducing infrastructure spending. The composition of government spending has important policy implications. Without the availability of such composition the economy could end up with a lower economic growth and a higher emission growth. The relative size of the efficiency between the infrastructure spending and emission reduction spending determines the tax rate and the composition of government spending. The second essay (Chapter 3) studies an overlapping-generations model in which private decisions exert externalities on an environmental public good. The age-dependent tax rates and public expenditure are determined by agents with income-heterogeneity. Therefore, the conflict of interest between agents imposes policy restrictions that distort the allocation of resources and reduce welfare. In particular, it is shown that the environmental public good may be inefficiently over or under allocated relative to the Ramsey benchmark model. The presence of the private externality further distorts the allocation of private externality and public components in the environmental public good as a consequence of politico-economic equilibria. Moreover, the different Markovian equilibrium regimes in this model provide a possible interpretation of existing disagreements in empirically estimated relationships between average income and environment. The third essay (Chapter 4) addresses the climate policy issues for China. In particular, it considers the policy trade-offs of setting an intermediate target for emissions intensity, as China's Twelfth "Five-Year Plan" does, in the course of achieving its emissions intensity target under the 2020 Copenhagen Commitment. Under a fixed rule that the carbon tax rate increases by the real interest rate each year, there is likely to be a jump in the tax rate in the transition from 2015 towards 2016 if both targets are to be achieved. This jump indicates that more mitigation efforts are needed in the later period, from 2016 to 2020. The jump is qualitatively robust relative to future economic uncertainties and may be even higher if cumulative emissions are controlled. While potentially lowering the costs in cumulative real GDP terms during 2013-2020, the intermediate target creates policy uncertainties beyond 2015. In addition, an intermediate target may give more flexibility to policy makers under intensity targeting. However, this would impose a constraint on the emissions mitigation path under the cap-and-trade system, which causes inefficiency of mitigation. But in accordance with the theoretical studies, intensity targeting is likely to incur more costs compared with level targeting when there are negative future shocks to the economy. This is because the negative shocks on economic output will be translated into more pressure on emissions mitigation as emissions intensity is determined by both emissions and economic output. Show more