Energy conservation and emission reduction effects of fuel tax and assessment of economic impacts-based on the Beijing 3E-CGE model

Abstract

Fuel tax levy is an appropriate measure to reduce motor vehicle pollution since the government can’t directly tax drifting source of pollution. However, this action will affect every part of residents’ life, we should take many factors into consideration. This paper is devoted to the environmental and economic effects of various fuel taxes for different departments based on Beijing economy-energy-environment computable general equilibrium (3E-CGE) model. Researches show that raising fuel tax rates for production & import and consumption contributes to air pollution and emission reduction. However, tax increase may hinder economic growth. Higher tax on production & import will lead to stagflation while on consumption will lead to depression. Besides, the influences on different industries also vary. My conclusion is that government should levy fuel taxes as well as pay subsidies to optimize industrial structure and decrease the impact on economy.

Appendices

Appendix 1: Variable symbols and parameters in 3E-CGE model and description

CC	product
CCEN	energy product
CGCM(CC)	central government consumption
CGS	central government savings
CMTXEXP(CTX)	consumption tax by type
CMTXFO(CTX)	consumption tax by type
CX(PS)	cost of producer
CXEN(PS)	cost of energy of producer
DEXP(CC)	domestic export
DIMPEXP	domestic import
DIMPFO	domestic import
DINV	domestic investment
FMKY	firm capital income from expenditure
FMS	firm savings
HHCM(CC,HH)	household consumption
HHE(HH)	household expenditure
HHKY(HH)	household capital factor income
HHS(HH)	household savings
HHY(HH)	household income
IEXP(CC)	international export
IIMP(CC)	international import
IIMPEXP	international import
IIMPFO	international import
IINV	international investment
INV(CC)	investment by commodity
INVS	investment in stock
K(PS)	capital demand by producer
L(PS)	labor demand by producer
LGCM(CC)	local government consumption
LGS	local government savings
PC(CC)	product price relative price of composite commodity sold in domestic market
POIL(CC)	fuel tax rate of terminal consumption in import link and consumption link
POIL(CCEN)	consumption link fuel tax rate
POIL(PS)	production link fuel tax rate
PIEXP(CC)	price of international export at local currency
PIIMP(CC)	price of international import at local currency
PQDDIMP(CC)	price for domestically-produced commodity sold in domestic market
PQXEN(CCEN,PS)	intermediate input prices of energy
PS	industry sector
PU(PS)	price of composite intermediate input
PUY	price of utility or aggregate consumption by household
PX(PS)	price for activity of domestic production
QC(CC)	quantity of composite commodity supplied to or consumed in domestic market
QDDIMP(CC)	QD + DIMP for use of Armington
QX(CC,PS)	Use table or Intermediate demand of commodity by producer
QXEN(CCEN,PS)	use table or Intermediate demand of energy
R	rental rate
ROCDT	ROC debt
ROWDT	ROW debt
SC(CC)	stock change by commodity
TDIMP	total domestic import
TIIMP	total international import
TINV	total investment
TKE	total capital expenditure
TKY	total capital income
TLE	total labor expenditure
TLY	total labor income from factor
U(PS)	use of composite intermediate input
UEN(PS)	use of composite energy intermediate input
UNEN(PS)	use of composite non-energy intermediate input
UY	utility by household
W	wage rate by region
AA(CC)	Armington scaling parameter of Armington function
AH(HH,REG)	scaling parameter of Cobb–Douglas utility function by household
alphah(CC,HH)	composition of Household consumption
alphai(CC)	investment use of commodity
alphas(CC)	stock use of commodity
AP(PS)	scaling parameter of CES production function for producer
APEN(PS)	scaling parameter of CES production function for energy input
beta(PS)	use Table of intermediate inputs or uses
betaen(CCEN, PS)	use table of intermediate inputs or uses
delta(CC)	Armington substitution rate of Armington assumption
sa(CC)	Armington substitution elasticity of Amington function
sdimpexp	coefficient of export goods in imported goods
sdimpfo	transfer of commodity coefficient into commodities
siimpexp	coefficient of export goods in imported goods
siimpfo	transfer coefficient of goods from imported goods
sp(PS)	substitution elasticity of production
su	substitution elasticity of Utility
spen(PS)	substitution elasticity of energy for production
srocdt	coefficient of debt in other regions of the country
srowdt	foreign sector debt coefficient

Appendix 2: Summary of model assumptions

The theoretical basis of CGE is equilibrium theory, so its main assumptions are derived from equilibrium hypothesis. The details are as follows: Equilibrium module includes labor market equilibrium, capital market equilibrium, commodity market equilibrium, investment-savings equilibrium.

2.1 Labor and capital market equilibrium

The income of labor and capital factors in all sectors is derived from the production function, and the income of labor and capital factors in all sectors is the total income of labor and capital factors. The total income of labor factors flows into the household sector, while the total income of capital factors flows into the household sector and the enterprise sector respectively in proportion. In addition, this paper assumes that wage is an endogenous variable, which can achieve full employment and thus achieve labor market equilibrium. In terms of capital market, this paper assumes that capital price is endogenous and capital can flow freely, so capital market equilibrium can be realized.

$${\text{TLY}} = W * \sum\limits_{PS} {L(PS)}$$

$${\text{TKY = R}} * \sum\limits_{{{\text{PS}}}} {K(PS)}$$

$${\text{TKE}} = FMKY + HHKY$$

$${\text{TLE}} = HHLY$$

$${\text{TLY = TLE}}$$

$${\text{TKY = TKE}}$$

In addition, the total amount of labor factor and capital factor is given externally.

$$\sum\limits_{{{\text{PS}}}} {\text{L(PS)}} { = }\overline{{{\text{TL}}}}$$

$$\sum\limits_{{{\text{PS}}}} {K(PS) = \overline{TK} }$$

Commodity market equilibrium means that the total supply of goods equals the total demand.

$$\begin{gathered} {\text{QC}}(CC) = \sum\limits_{PS} {QX(CC,PS) + } \sum\limits_{HH} {HHCM(CC,HH)} \hfill \\ \, + LGCM(CC) + CGCM(CC)INV(CC) + SC(CC) \hfill \\ \end{gathered}$$

among them

$${\text{INV}}(CC) = \frac{alphai(CC) * TINV}{{PC(CC)}}$$

$${\text{SC}}(CC) = \frac{alphas(CC) * INVS}{{PC(CC)}}$$

Investment-savings equilibrium This paper assumes that investment is determined by savings, and all savings can be converted into investment. Investment includes local government debt, foreign sector debt, domestic debt other parts of the country, commodity investment, inventory investment. Savings include household sector savings, enterprise sector savings, local government savings, central government savings, foreign sector savings, savings in other parts of the country.

$$\begin{aligned} {\text{IINV}} & = TIIMP - \sum\limits_{CC} {PIEXP(CC) * IEXP(CC)} \\ & \quad - \sum\limits_{CTX} {CMTXEXP(CTX)} - IIMPEXP - DIMPEXP \\ \end{aligned}$$

$$\begin{aligned} {\text{DINV}} & = TDIMP - \sum\limits_{{{\text{CC}}}} {{\text{PDEXP}}(CC) * DEXP(CC)} \\ & \quad - \sum\limits_{CTX} {CMTXFO(CTX)} - IIMPFO - DIMPFO \\ \end{aligned}$$

$${\text{IIMPEXP}} = siimp\exp * TIIMP$$

$${\text{DIMPEXP = s}}\dim {\text{p}}\exp * TDIMP$$

$${\text{IIMPFO = }}siimpfo * TIIMP$$

$${\text{DIMPFO = }}s\dim pfo * TDIMP$$

$${\text{TSAV = }}\sum\limits_{{{\text{HH}}}} {{\text{HHS}}(HH)} + FMS + LGS + CGS + IINV + DINV$$

$${\text{ROCDT}} = srocdt * TINV$$

$${\text{ROWDT = srowdt}} * TINV$$

In addition, since the exchange rate is set as the benchmark price in this model, it ensures the automatic realization of trade equilibrium.