Regional Environmental Tax Reform in a Fiscal Federalism Setting

• Author: Ciaschini, M. - Pretaroli, R. - Severini, F. - Socci, C.
• Position: Department of Communication Sciences, University of Macerata, Italy
• Pages: 25-40

Bulletin of the Transilvania University of Braşov • Vol. 5 (54) No. 1 - 2012

Series VII: Social Sciences • Law

REGIONAL ENVIRONMENTAL TAX

REFORM IN A FISCAL

FEDERALISM SETTING

M. CIASCHINI 1 R. PRETAROLI 1

F. SEVERINI1 C. SOCCI1

Abstract: The increasing attention to climate changes have le d national

Governments to design environmental t ax policies able to face environmental

problems and their associated economic consequences as a negative change

of GDP. The environmental taxation in particular is considered a powerful

instrument of pollution control. More important, it provides public revenue

that can be recycled both at State level and Local level in o rder to attain the

reduction of greenhouse gas em issions and the regional double dividend. In

this respect, we use a Computable General Equilibrium (CGE) model with

imperfect lab our market, to assess the regional effects of an environmental

fiscal reform designed with the aim of reducing the CO2 emissions in a f iscal

federalism setting. In particular, we introduce a local green tax on

commodities output wit h a progressive structure. The tax burden depends on

the commodity pol luting power and the tax revenue is collected by the Local

Government. According to the fiscal federalism principles the Central

Government reduces the transfers to the Local Government by the same

amount of the tax revenue and compensates the transfer reduction with a cu t

in H ouseholds income tax. The application is done on a bi-regio nal Social

Accounting Matrix for Italy and the results highlights the distributional

effects of the reform on macroeconomic v ariables into the bi-regional income

circular flow.

Key words: Environmental taxation, Soc ial Accounting Matrix, CGE

analysis.

1 Department of Communication Sciences, University of Macerata - Italy.

1. Introduction

From the topic of economic

sustainability arises the problem of how to

measure the impact that environmental

reform generates as a fundamental part of

the environmental sustainability issue. In

many respects, the en vironmental policy

can generate costs and earnings that are

both environmental and economic.

Consequently, the economic

sustainability problem requires selection of

the best indicators that are able to assess

the environmental and economic impacts

of a policy characterized by environmental

objects [1]. Moreover sustainable

development should be analysed within the

fiscal federalism reform in order to

understand if it can represent a tool for

reaching a better institutional setting

Bulletin of the Transilvania University of Braşov • Series VII • Vol. 5 (54) No. 1 - 2012

26

besides environmental improvement.

Although according to article 117 of the

Italian Constitution, Central Government

has the exclusive right to ru le on

environmental subject, a recent

jurisprudence assigns to Local Government

a prominent role in protecting and

improving environment [2]. The attention

of economic research should be focused on

the analysis of local policies with respect

to fiscal reforms, especially those that can

promote environmental protection. Fiscal

instruments, which Local Government can

activate in order to reach environmental

objectives, can be represented by

traditional instruments such as Local

Government expenditure or local t axes.

Moreover, the Local Government might

design new incentive mechanisms as

“green” taxes specifically created for

environmental purpose. The opportunity of

using the environmental policy at local

level raises the need t o verify, in terms of

both qualitative and quantitative terms, the

effectiveness of the old instruments of

fiscal policy in order to evaluate the results

obtained by new forms of incentive. An

analysis able to highlight the

interrelationships between all the local

agents in the various phases of t he income

circular flow is therefore required. The

representation of the inter-regional in come

flows allows to quantify the advantages

and di sadvantages of the environmental

fiscal policy fr om different viewpoints.

First of all, the effects can be quantified

looking at the impact of local policies on

major economic aggregates (GDP, Local

and Central Government balances,

disposable income, employment, etc.). On

the other hand, it is possible to verify the

effectiveness of such local policies in

environmental terms. The importance of

determining the impacts generated by the

environmental fiscal policy through

disaggregated analysis depends on the

possibility to evaluate the economic effects

on the private and public Institutional

Sectors within the same region and

between the regions considered. The

debate on effectiveness of environmental

policies both at local or national levels,

refers to the “double dividend” theory

(Pearce 1991). Indeed, the introduction of

new environmental taxes, as well as the

amendment of existing local taxes,

represents an opportunity for local policy

makers to collect tax revenue and use this

income to get positive effects on local

economy and environment. Reaching the

double dividend requires an appropriate

definition of local policy which must be

drawn through the ex ante evaluation of

the possible impacts that the manoeuvre

generates on the local budgets, on the

environment (reduced local emissions of

CO2) and employment [20]. The

assessment of double dividend hypothesis,

especially for the European countries,

mostly concentrated on the employment

second dividend as a consequence of the

high unemployment rate which typically

affects thi s area. Indeed most of these

analysis that aim to quantify the effects of

environmental fiscal refor m on labour

markets, are developed through the general

equilibrium frameworks characterised by

rigidity on wages formation and

involuntary unemployment.

Empirical studies for several countries,

such as Schneider (1997), Bovenberg and

De Mooij (1998), Manresa and Sancho

(2005), Takeda (2007), Glomm et al.

(2008), Bor and Huang (2010) demonstrate

the existence of the second dividend and in

some cases even a triple dividend [3]. Nev-

ertheless the possibility to get a double/

triple dividend through an environmental

policy strictly depends on the existing tax

system, the production t echnology adopted

and above all the structure of tax reform.

According to Takeda (2007), in a country

characterised by economic differences at

local and social level, the double dividend