Theory and Impact
Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Soocheol Lee, Kazuhiro Ueta, Janet E. Milne and Hope Ashiabor
Chapter 2: Environmental taxation for a sustainable future: perspectives from environmental macroeconomics
The aim of this chapter is to present a case for the generalized adoption of the environmental-macroeconomic model for policy analysis – specifically, in fiscal policy analysis. This argument is made comparing the outcomes of a standard macroeconomic model with those of an environmental-macroeconomic model. The hypothesis is that the beneficial effects of environmental taxes are understated in a standard macroeconomic model compared to the environmental-macroeconomic model. This is clearly illustrated in the environmental-macroeconomic model, which explicitly accounts for the depreciation of environmental capital. In this chapter, we consider the context where environmental taxes are used to finance an environmental capital investment, which would offset the depreciation of environmental capital. In this context, the overall macroeconomic gains that include the reduction in environmental capital depreciation would be captured in the environmental-macroeconomic model and not the standard macroeconomic model. The chapter is structured as follows. The next section deals with the presentation of the standard macroeconomic and environmental-macroeconomic frameworks, and the basis for testing the hypothesis. In Section 3, these frameworks are applied and tested with reference to the Australian economy. For this test, we consider the time series data on macroeconomic aggregates spanning the period 1980 to 2011. We then use these aggregates to estimate trends of pertinent coefficients in our frameworks. Such trends enable the resolution and simulation of specific macroeconomic outcomes, namely income (Y) and inflation (p).
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