Jorgenson Summary Chapter.docx

Jorgenson Summary Chapter.docx

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JorgensonSummaryChapter

CHAPTER7

POLLUTIONTAXESANDPUBLICHEALTH

Introduction

ManyrecentstudieshaveputthedamagesfromairpollutioninChinatohumanhealthandtheenvironmentatveryhighlevels.Muchofthisdamageisattributedtoemissionsofparticulatesandsulfurdioxide.Furthermore,thisproblemisexpectedtogrowinthenearfutureasrapidgrowthoutpaceseffortstoreduceemissions.

Inlightofthistherehavebeenmanystudiesexaminingthevariousoptionstocontrolorreducethesepollutants.Theserangefromelectricitygenerationpoliciestoeconomicderegulationtoeliminatesubsidiesondirtyfuels.Fewofthesestudieshowever,makeanintegratedestimateoftheeconomiccostsandhealthbenefitsofthesepollutioncontrolpolicies.Theaimofthisstudyistoexaminesomepollutioncontrolpoliciesandhowtheymightaffecteconomicperformance.Weshallfocusongeneraleconomy-widepolicies,suchasfueltaxes,ratherthanspecificrulessuchasmandatoryscrubbersorotherdetailedsector-specificpolicies.Weexaminehowthesetaxesaffectfueluseandhenceemissionsandhealthdamages.Atthesametimeweestimatehowthesetaxesaffectoutput,allocationofresources,otherexistingtaxes,andovertime,howtheyaffecteconomicgrowth.

Theestimationofhealthdamagesanditsvaluationisthesubjectofmuchresearchanddebate.WeshalldiscussthesetoexplainhowweusethevariousestimatesthatexistforChina.Therangeofuncertaintyisconsiderablegiventhecomplexityoftheeconomy-environment-healthlinkages,butwebelieveourestimatesareinstructive.

Wefindthatapolicythatimposesevenmoderatetaxesonfuelscouldreducehealthdamagesby20%,lowerGDPby0.1%,andloweraggregateconsumptionby0.5%intheshortrun.Dependingonhowthepollutiontaxrevenuesareused,thelongruneffectscouldbepositiveonGDP.Forexample,iftheserevenuesarerecycledtowardsinvestmentthenconsumptionandGDPoverthelongertermarebothhigher.Thevalueofthehealthdamagereducedbythismoderatefueltaxpolicyisabout1.2%ofGDPintheshortrun.Dependingonhowonewishestoweighpresentversusfutureconsumption,thesacrificeofconsumptionovertimeisaboutanorderofmagnitudesmallerthanthebenefitindamagereduction.ThiscostbenefitratioisinlinewiththediscussionsinWorldBank（1997）.

Amorebroadbasedbutlessefficientpolicywhichtaxesoutputbasedontheamountofpollutiondamageproducedcouldreducehealthdamagesby3.5%ayear,andintheshortrunlowerGDPby0.1%,andlowerconsumptionby0.3%.ThefueltaxpolicyismoreeffectivebutrequirelargeadjustmentsintheCoalsector.Thechoiceofpolicieswoulddependontheabilityofthegovernmenttohelptheheavilytaxedsectortoadjust.Thecostofadjustingtoalowercoaleconomyshouldbeanimportanttopicoffutureresearch.

MethodologyforPolicyDesignandAnalysis

Theuseoftaxestocorrectforexternalitieshasbeenexaminedbymanyrecentstudies.SomeoftheseaskwhetherthetraditionalPigoviantax（i.e.ataxequaltothemarginaldamagecausedbytheexternality）isappropriateifweconsideraneconomythathasmanyothertaxdistortionsalreadyinplace.Thisisrelatedtothequestionwhetheritispossibletohaveadoubledividend,i.e.lowernegativeexternalitiesandhighereconomicefficiency.

Thesepracticalquestionsofoptimaltaxationmustbeansweredwithanexplicitframework,thatis,explicitassumptionsofmarketstructure,productionfunctions,utilityfunctions,etc.Ifonewishestouseanumericalmodeloftheeconomythenoneisimplicitlysayingthattheelasticitiesofsubstitutionusedareappropriatefortherangeofpricechangesthatwillresultfromthetaxesbeingconsidered.Furthermore,oneshouldbecarefultodistinguishbetweentheshortandlongruneffects.

AsystematicexaminationoftherapidlyevolvingtaxsysteminChinamustawaitfutureanalysis.Inthispaperwedonotdirectlyaskwhattheoptimalsystemoftaxestocorrectairpollutionexternalitiesis.Weaskasimplerquestion,whataretheeffectsofemployingtaxesthatarerelatedtothelevelofpollutionemitted,i.e.theeffectsonsectoralprices,output,consumptionandeconomicgrowth.Thereasonsforthisapproacharesimple.Firstly,theestimatedexternalitiesarelargeformanysectorsasdiscussedbelow.AfullPigoviantaxwouldleadtolargechangesinprices,morethan100%.Changesofthismagnitudearenotreliablyestimatedusingmarginalanalysis.Secondly,thedamagetohumanhealthisestimatedusinglinearfunctions,thatis,pollutantconcentrationisalinearfunctionofemissions,andhealtheffectsarelinearfunctionsofconcentration.Theselinearapproximationsarenotgoingtobeveryreliableforlargechangesinpollutionemission.Thirdly,aproperoptimaltaxanalysisshouldtakeintertemporaleffectsintoaccount.Thishastobedoneinamodelthatspecifiesacapitalmarketforsavingsandinvestment.ItisdifficulttogiveanaccuratecharacterizationoftheChinesecapitalmarketstodaywithitsmixofcontrolledcreditmarketsandopenstockmarkets,andwetherefore,useasimplerapproachthatconsidersconsumptiononeperiodatatime.

Weemployamulti-sectormodeloftheChineseeconomythatweusedpreviouslytostudythelocalhealthbenefitsofcarboncontrolpolicies（Garbaccio,Ho,andJorgenson2000）.Ourapproachistofirstestimatethedamagestohumanhealthfromairpollutionduetothecurrentpatternsofoutputandfueluse.Thesedamagesareattributedtotheemissionsfromspecificindustriesandwecanthuscalculatetheaveragedamageperunitoutputofeachsector.Ourinput-outputframeworkalsoallowsustocalculatethedamageperunitofcoaloroilused.Thehealtheffects（e.g.thenumberofcasesofprematuredeaths）aretranslatedtoyuanvalues.Themodelisdynamicandthevalueofdamagesareestimatedeachyearastheprojectedeconomyexpandsandchangesinstructure.

Giventhesenegativeexternalitiesfromproductionofgoodsanduseoffuelsitisnaturaltoimposetaxestoensureeconomicagentsinternalizetheseintheirdecisions.Inthesecondstepweimposetaxesinproportiontothedamagesandexaminethenewtrajectoryoftheeconomy.Weshallexaminetwosetsofpolicies.Thefirstisataxonsectoraloutput,wherethetaxrateisproportionaltothehealthdamagecausedbytheproductionofthecommodity.Thistaxwillcausethebuyersofgoodstofaceapricethatreflectsthepollutionexternalities,forexample,usersofcementwillpayhigherpricesrelativetousersofapparel.Thistaxisnotthemostefficient,butisrelativelyeasytoimplement.Comparedtothenextpolicy,itproducessmallerchangesinpricesandincomes,andmaythusfindbroaderpoliticalsupport.

Thesecondpolicyisataxonprimaryfuels,wherethetaxrateisproportionaltotheaveragedamageperunitoffuel.Ourdata,describedbelow,indicatesthatatonofcoalproducesdifferentlevelsofemissionsanddamagesdependingonwhichindustryburnsit.Anefficientexternalitytaxwouldtaxthesectorsdifferently.However,anindustryspecificfueltaxdoesnotseemtoustobeafeasibleoptionandsoweconsiderataxthatisappliedequallytoallusers.Thiswillcauseproducerstointernalizethedamagescausedbytheirchoiceoffuelsintheirproductiondecisions.

Themostefficientpolicyisofcourseadirecttaxonemissions.However,emissionsofTSParenotcurrentlymeasured（merelyderivedfromfuelinputs）,andcouldbemeasuredonlyathighcost.SO2fromlargesourcesmaybeamenabletoacontrolpolicyliketheU.S.tradingprogram,butthisisnotbelievedtobealargesourceofhealthdamageinChina.Henceweconsideronlythefeasibletaxesonoutputandfuels.

Giventhesizeoftheestimatedhealthdamagesthesepollutiontaxesarelarge,tomaintainrevenueneutralitywecutotherpre-existingtaxes.Thechoiceofwhichtaxestocut,orwhichsectorstocompensateaffectsboththemixofwinnersandlosersinagivenperiod,aswellasthemixovertime.

TheEconomicModel

Sectoraloutputisexpressedasafunctionofcapital,labor,intermediateinputsandleveloftechnology.Let

denotethequantityofoutputfromsectorjinperiodt:

（1）

where

and

arecapital,labor,land,andintermediateinputs,respectively.Theintermediateinputsarepartitionedintoenergyandnon-energyaggregates,andtheleveloftechnologyisrepresentedbyasmoothlyrisingfunction,

.Thetoplevelproductionfunctionisassumedtobeconstantreturnstoscaleandwrittenas:

（2）

where

k=coal,oil,gas,electricity,refinedoil,gasprod

.

k=non-energyintermediategoods.

Givenoutputprice

andinputprices,

thefirstorderconditionsfromprofitmaximizationgivesthedemandsforinputs.（PSdenotesthesupplypriceofinputi）.Forexample,thedemandforcoalinputis:

（3）

Thegovernmentimposesvarioustaxesthatarecapturedinourmodel,in1997theseincludedsalestax,value-addedtax,capitalincometaxandimporttariffs.Thegapbetweenproducerandbuyerpricesforoutputjcausedbythesalestax

andcounterfactualexternalitytax

is:

（4）

Weallowtwodifferenttypesofexternalitytaxes,aunittax（

）,oranadvaloremtax（

）.

Thetotalsupplyofcommoditiescomesfromthedomesticoutputandimports,andthepricepaidforinputs,asgivenin（3）,isanaggregateofthisbuyer'spriceandimportprices（

）:

（5）

Forthefinaldemandsectors--consumption,investment,governmentandexports--wehaveasimilarprocedureofderivingdemandsfromutilitymaximization.Householdsallocateincometosavingsandconsumption.Givenanallocationof