Effects of a Green Tax Reform in Portugal: a General Equilibrium Analisys

In January 2005 the European Union launched the European Emission Trading Scheme (EUETS) which represents the main policy instrument to achieve the EU Kyoto commitments. The sphere of application of the market is limited, with only certain sectors being subject to it (mostly industries), and tradable permits are grandfathered. Both facts have important consequences in efficiency and distributional terms, also raising (normative) concerns on the actual and desirable regulatory menu. Simultaneously, during the last years industrialized countries verified a high and increasing level of unemployment. Both circumstances, serious and persisting environmental problems coupled with economic concerns call for a hybrid regulation system to tackle these problems: the EU-ETS plus a Green Tax Reform (GTR) for those sectors outside the carbon market. Thus the environmental taxes could be used simultaneously to improve the environmental quality and to diminish the unemployment. The paper mainly focuses on the (positive) efficiency and distributional effects of a GTR, with the use of a static general equilibrium model. First we briefly remind the advantages of a GTR as well as the empirical simulations with best results. Then we present some data on environmental and labour taxes in Portugal, in order to contextualize the simulations. We analyze the environmental and socioeconomic effects of two environmental policies against the climate change analysed usually in empirical literature. Firstly, we study the effects of a new environmental tax within the most general frame of a GTR. The income generated by the environmental tax finances a reduction in the social contributions in charge of the employers, maintaining the public budget balance in real terms. Afterwards, we obtain the effects of an environmental tax when the receipts generated are given back to the citizens, by means of lump sum transfers. This alternative environmental policy is also subject to the restriction of constant public budget balance. In both reforms, the simulation was made for an environmental tax of 20€, because this value is similar not only to other carbon taxes in place in other countries, but also to the prices of carbon allowances in the EU ETS during phase II.The results indicate that carbon taxes would bring wider efficiency and distributional effects on the industrial sectors. The most damaged sectors are Manufacture of refined petroleum products and distribution of natural gas, and the most benefited are Manufacture of leather, Manufacture of electric equipment and optical products and Manufacture of transport equipment. We also found a rise on employment and real wages. A further contribution of this paper is the construction of the first CGE model for Portugal, calibrated through a Social and Environmental Accounting Matrix that allows simulating the economic effects of environmental tax policies.