Local air pollution and global climate change taxes: a distributional analysis for the case of Spain

Abstract

Global climate change measures are difficult to implement. In this context, local air pollution measures may play an important role in the political agenda since their effects are felt more immediately by citizens. Distributional implications are one of the main barriers for implementing environmental policies. This paper explores the distributional implications of air pollution taxes and compares them to climate change taxes. For the comparison, both tax schemes were set to yield the same revenue. Methodologically, the study uses a top–down approach linking a macro model to a micro model. We find that taxes on local air pollutants are more regressive than those levied on CO₂. This is because the goods implicitly taxed have a greater weight in the consumer basket of low-income groups, even if the tax revenues are recycled. Furthermore, the revenue-neutral recycle scheme increases both taxes efficiency, but, at the same time, can increase regressivity.

Keywords:

• environmental tax reform
• distributional impact
• cocal air pollution taxes
• global climate change taxes
• taxes regressivity

Acknowledgements

Authors are thankful to Miguel Buñuel and Iñaki Arto for their valuable help in the development of IO model.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. According to WHO estimates, LAP is also one of the leading causes of death in developing countries (WHO 2009).

2. The differences between the results for annual income and other proxies of lifetime income are due to the fact that many households initially included in the lowest income group do not remain poor permanently (e.g. students). Other papers show that annual income overestimates distributional effects. See for example, Feng et al. (2010), Metcalf (1999), Sterner (2012) and Wier et al. (2005). Only Rausch, Metcalf, and Reilly (2011) fail to find evidence that annual income overestimates distributional impacts. Most of these studies look at snapshots of taxes in one year relative to a proxy for lifetime income, which is often current consumption.

3. Other studies find regressive effects in some countries (e.g. Metcalf, Mathur, and Hassett 2010, for the US, Wier et al. 2005, for Denmark; Feng et al. 2010, for the UK; Kerkhof et al. 2008, for The Netherlands and Brannlund and Nordstrom 2004, for Sweden) because the tax is levied on goods which are consumed in greater proportions by low income households, especially consumption linked to home energy use.

4. Ekins et al. (2011), Barker and Köhler (1998) and Metcalf (1999) also find that revenue recycling through distortional taxes could be more regressive than other types of revenue recycling. Additionally, Gonzalez (2012) finds that in Mexico and the US, recycling through tax cuts on manufacturing is regressive, while recycling through food subsidies is progressive.

5. However, the results of Metcalf (1999) are not definitive because if impacts are studied with lifetime income measures the results are different; with lifetime income measures, an air pollution tax is more regressive than a motor fuel tax.

6. However, there are studies assessing the economic effects of the internalisation of the external costs of local air pollution. See for example Kiulia et al. (2013).

7. Although environmental taxes must be complemented with other instruments in the long term, in the short term, they are successful (del Río González 2008).

8. See methodology on Spanish Environmental Satellite Accounts.

9. There are 21 sectors in our IO approach.

10. When it was introduced in 1991, the carbon tax in Sweden was €28/tonne, but it is now estimated to be around €108/tonne, although some sectors are exempted.

11. In 2006, the CASES (‘Cost Assessment of Sustainable Energy System’) project (Markandya, Bigano, and Roberto 2010), funded by the European Commission, compiled a complete, consistent assessment of the social cost of these emissions for EU countries. This project assessed the physical damage caused by these pollutants to human health, crops and buildings/infrastructures and converted it into monetary values. Measurements of this type should be treated with some caution, but they enable taxes to be distributed proportionally among the pollutants.

12. It should, however, be stressed that the benefits of the policy, in terms of increased environmental quality, are not taken into account, and hence, the welfare losses only represent the cost side of changes in total welfare.

13. The excess burden is calculated as the difference between equivalent variation (EV) and revenue (R) generated by households (h): .

14. Both indexes are based on approximations of the Gini index.

Additional information

Funding

Mercedes Burguillo wishes to thank the Ministerio de Economía y Competitividad for the project ECO 2012-32299. This work was supported by the European Union (FP7 program) under the CECILIA2050 project [grant number 308680]. Mikel González-Eguino and Xaquín Garcia-Muros are also grateful for financial support from Science and Innovation Ministry of Spain [grant number ECO2015-68023]. Mikel González-Eguino is grateful for financial support from the Basque Government [grant number IT-799-13].