Search results

This paper explores the relationship between environmental protection and international capital movements, when tax policy is endogenous (through voting). A two-period general equilibrium model of a small open economy is specified to compare the effects of two different constitutions (commitment or no commitment in tax policy), as well as income inequality. Under the commitment regime, the equilibrium is characterised by a lower labour tax, higher environmental tax and less capital moving abroad than in the no-commitment equilibrium. Furthermore, given the degree of commitment, more equal societies are characterised by tougher environmental policy and less capital moving abroad.

The paper explores the hypothesis of a double dividend from environmental taxation i.e. whether shifting the burden of taxation away from labour toward the environment can boost employment and increase welfare. We present a general-equilibrium model where the economy is distorted by labour taxes, monopolistic product-market competition, and union-wage bargaining. We find that employment and welfare always increase when the revenue from the introduction of a Pigouvian tax (imposed on firms and households) is fully recycled to cut the rate of the pre-existing labour tax. Moreover, it turns out that the degree of the imperfections influences the magnitude of the effects of the reform. We also offer numerical results for the case in which the pollution tax is positive at the outset.

Why do Scandinavian countries perform better in terms of environmental protection than other European Union countries? In this paper, we explore the hypothesis that societies characterised by low-income inequality (such as the Nordic European countries) generate political-economic equilibria where environmental policy is more stringent. We model an overlapping-generations economy in which individuals differ in skills to address the question to what extent in modern democracies, income distribution influences the stringency of environmental policy and consequently the growth of a country. Individuals work when they are young and own capital when they are old. Pollution externalities are present due to the use of a polluting factor. The government uses the revenue from a capital-income tax and a pollution tax for a lump-sum transfer to the old generation. The fiscal decision at each point in time is taken by a majority elected representative. In politico-economic equilibrium, the lower the skill of the median individual is relative to the average, the smaller the pollution tax and the capital stock are, and the greater the capital income-tax and the relative use of the polluting factor. We perform both steady-state analysis and examine the transition path. Subsequently, we present an empirical analysis for two panels of seven and ten industrialised countries from the late seventies to late nineties. Our framework is able to explain the stylised facts regarding inequality, environmental protection, and growth.

Tax earmarking imposes a constraint on government policymaking, and may be desirable if it solves a time-inconsistency problem in tax policy. In a two-period economy, in which the policy decisions regarding taxes, public goods provision, and pollution abatement are taken by a majority-elected individual, we show how the time-inconsistency problem in environmental policy arises. We demonstrate that the commitment equilibrium under no earmarking rules cannot be as fully implemented as a no-commitment equilibrium under earmarking rules. However, the earmarking rules do act as a partial commitment mechanism.

This paper investigates how the removal of fossil fuel subsidy affects the welfare of a small, oil-importing country like Bangladesh. In doing so, an energy augmented Dynamic Stochastic General Equilibrium (DSGE) model is developed. The model is calibrated and simulated for the Bangladesh economy under three scenarios, and the results reveal that a 10 per cent reduction in fossil fuel subsidy results in an overall increase in household welfare by 0.36 per cent. However, complete removal of fossil fuel subsidy would increase welfare by 1.89 per cent. The results also show that the subsidy removal schemes improve the country's fiscal burden. We highlight the fact that fossil fuel subsidy acts as a barrier to the development of renewable energy technologies in Bangladesh which can play a significant role in promoting the country's future energy security. So, the paper suggests that the government should use the revenue earned from the fuel subsidy removal to offer incentives to new electricity generators who would enter in the market planning to produce electricity with renewable technology. Following a revenue-neutral subsidy scheme, the government should also encourage the existing electricity generators to adopt renewable technologies in generating electricity.

How should a government arrange taxes on labour and capital over time? To provide an answer, we develop the field of optimal dynamic taxation further by (i) incorporating indivisible labour and (ii) analysing the short‐run dynamics of the capital and labour taxes under the second‐best programme. We derive two classes of preferences for which the optimal capital tax reaches zero in a finite time. If leisure is normal, the labour tax is gradually increased for a period and then kept constant, and, if leisure is neutral, labour is not taxed at all. Finally, we analyse the dynamics of labour supply under the optimal tax programme.

Electricity sectors in many emerging and developing countries are characterised by significant captive industrial generation capacity. This is mainly due to unreliable electricity supplies from state-owned utilities. Integrating the captive capacity with the on-grid supply can improve resource utilisation in the electricity market. We use a Dynamic Stochastic General Equilibrium (DSGE) model to examine the effects of allowing the Bangladeshi Captive Power Plants (CPPs) to sell their excess output to the national grid at regulated prices. We find that opening the grid to CPPs would reduce the industrial output and GDP due to energy price distortions. We also show that the Bangladeshi economy would become more vulnerable to oil price shocks when CPPs are connected to the national grid. These results support the second-best theory, which implies that granting grid access without removing other price distortions can lead to economically inefficient outcomes. We propose that the government should not open the grid to CPPs to minimise energy market distortions yet. Instead, it should first consider alternative reform measures such as taking steps to reduce price distortions and enabling a competitive market environment.

Captive power plants (CPPs) in many emerging and developing countries play a significant role in the electricity sector. This is mainly due to unreliable electricity supplies from state-owned utilities and challenges in accessing the national grid, especially in remote and rural areas. Integrating the captive capacity with the on-grid supply can improve resource utilization in the electricity market. In this study, we focus on the role of CPPs in Bangladesh. We start by providing recent stylized facts and survey the experience of other countries. We then use a dynamic stochastic general equilibrium (DSGE) model to examine the effects of allowing CPPs to sell their excess output to the national grid at regulated prices. We find that opening the grid to CPPs would reduce the industrial output and GDP due to pre-existing energy price distortions. We also show that the Bangladesh economy would become more vulnerable to oil price shocks if CPPs were connected to the national grid. We conclude that the government should not open the grid to CPPs yet. Instead, it should first consider alternative reforms, such as taking steps to reduce the price distortions and enabling a competitive market environment.