“Multiple Dividends with Climate Change Policies: Evidence …
99
an ETR will reduce emissions only through changes in the scale (reduction of GDP
keeping the share of every industry constant) or through the change in the composition
of value added (changes in the sectoral structure of GDP).
Closures. The model is tractable to introduce different closure assumptions for
factor markets. In the case of the labour market, we assume three alternatives
of closures: (i) full employment, (ii) positive unemployment rate (10.2%) due to
constant wages in real terms; i.e. wages are indexed to the price of the consumption
basket of a poor household, and (iii) positive unemployment due to fixed nominal
wages in terms of the foreign currency. Depending on how wages are determined,
institutionally or by the market, additional costs due to an ETR could be passed
through to wages and therefore increase unemployment. In this sense, the costs of
implementing an ETR to reduce carbon emissions will be greater under initial unemployment conditions than under full employment. Concerning the capital factor, the
model assumes three types of capital: fixed or sector-specific capital, on one side,
and on the other side, mobile domestic and foreign capitals, allocated across sectors
according to their rates of return. Capital mobility is assumed to be initially low
according to the characteristics of the Argentinean economy (i.e. only 12.5% of
domestic capital of free mobility across sectors); but, given the flexibility of the
model programming, a greater percentage of mobile capital (50%) could be implemented. When an ETR increases relative costs for polluting sectors, a greater capital
mobility across sectors makes it possible to reduce economic costs (i.e. capital is
reallocated to environmental cleaner sectors) and enables a better performance of
the environmental policy. The tractability of the model is also applied to allow for
(or not) the FDI, which is also a key assumption of the model for the implementation
of an alternative cleaner production technology, which is not costless due to the presence of sunk capital and positive opportunity costs for foreign capital. We will also
evaluate the consequences of an ETR under a higher degree of international capital
mobility, allowing for the mechanism where higher capital mobility across countries
would lead to a negative impact for a country’s own economy with a potential carbon
leakage problem. The foreign capital remuneration is considered as the numeraire
of the model. Finally, in accordance with Walras’ law, we find the equilibrium of
the balance of payments by combining the solutions of the optimization problems of
firms, households and the government in this economy and assuming market clearing
conditions under perfect competition for goods and factors.
Dividends of an ETR. In order to evaluate the presence of multiple dividends of an
ETR, we consider the following indicators associated with each dividend. Testing for
the presence of a double dividend, we explore how the GDP and a carbon emission
index respond to a change in the ETR (including both taxes on domestic goods
and imports). The third dividend test inquires additionally whether the ETR reduces
the rate of unemployment, poverty and income distribution indexes. And the fourth
dividend also looks into the performance of exports. For instance, if exports have
to be increased significantly as a consequence of a carbon tax, the environmental
programme could fail. Even though most of the exported goods are commodities, a
sudden increase in exports is unrealistic, and the lack of exports could put the foreign
reserves of the economies under stress.
99
an ETR will reduce emissions only through changes in the scale (reduction of GDP
keeping the share of every industry constant) or through the change in the composition
of value added (changes in the sectoral structure of GDP).
Closures. The model is tractable to introduce different closure assumptions for
factor markets. In the case of the labour market, we assume three alternatives
of closures: (i) full employment, (ii) positive unemployment rate (10.2%) due to
constant wages in real terms; i.e. wages are indexed to the price of the consumption
basket of a poor household, and (iii) positive unemployment due to fixed nominal
wages in terms of the foreign currency. Depending on how wages are determined,
institutionally or by the market, additional costs due to an ETR could be passed
through to wages and therefore increase unemployment. In this sense, the costs of
implementing an ETR to reduce carbon emissions will be greater under initial unemployment conditions than under full employment. Concerning the capital factor, the
model assumes three types of capital: fixed or sector-specific capital, on one side,
and on the other side, mobile domestic and foreign capitals, allocated across sectors
according to their rates of return. Capital mobility is assumed to be initially low
according to the characteristics of the Argentinean economy (i.e. only 12.5% of
domestic capital of free mobility across sectors); but, given the flexibility of the
model programming, a greater percentage of mobile capital (50%) could be implemented. When an ETR increases relative costs for polluting sectors, a greater capital
mobility across sectors makes it possible to reduce economic costs (i.e. capital is
reallocated to environmental cleaner sectors) and enables a better performance of
the environmental policy. The tractability of the model is also applied to allow for
(or not) the FDI, which is also a key assumption of the model for the implementation
of an alternative cleaner production technology, which is not costless due to the presence of sunk capital and positive opportunity costs for foreign capital. We will also
evaluate the consequences of an ETR under a higher degree of international capital
mobility, allowing for the mechanism where higher capital mobility across countries
would lead to a negative impact for a country’s own economy with a potential carbon
leakage problem. The foreign capital remuneration is considered as the numeraire
of the model. Finally, in accordance with Walras’ law, we find the equilibrium of
the balance of payments by combining the solutions of the optimization problems of
firms, households and the government in this economy and assuming market clearing
conditions under perfect competition for goods and factors.
Dividends of an ETR. In order to evaluate the presence of multiple dividends of an
ETR, we consider the following indicators associated with each dividend. Testing for
the presence of a double dividend, we explore how the GDP and a carbon emission
index respond to a change in the ETR (including both taxes on domestic goods
and imports). The third dividend test inquires additionally whether the ETR reduces
the rate of unemployment, poverty and income distribution indexes. And the fourth
dividend also looks into the performance of exports. For instance, if exports have
to be increased significantly as a consequence of a carbon tax, the environmental
programme could fail. Even though most of the exported goods are commodities, a
sudden increase in exports is unrealistic, and the lack of exports could put the foreign
reserves of the economies under stress.