PublicDisclosureAuthorizedPolicyResearchWorkingPaper10592PublicDisclosureAuthorizedAssessingtheEfficiencyandFairnessoftheFitfor55PackagetowardNetZeroEmissionsPublicDisclosureAuthorizedunderDifferentRevenueRecyclingSchemesforItalyCarloOrecchiaValerioFerdinandoCalaFabianadeCristofaroHasanDuduPublicDisclosureAuthorizedMacroeconomics,TradeandInvestmentGlobalPracticeOctober2023PolicyResearchWorkingPaper10592Abstractdifferentrevenuerecyclingschemesshiftingthetaxburdenfrommajordirectandindirecttaxestocarbonemissions.OneofItaly’skeyobjectivesistoreformandmodernizetheItfindsthatwell-targetedrevenuerecyclingpoliciesmighttaxsystemtoincreasetaxefficiencyandimproveenviron-significantlyreducethenegativeeffects.Theanalysisadoptsmentalsustainabilityandregionaleconomicoutcomes,intheItalianRegionalandEnvironmentalComputableGen-linewiththeEuropeanUnionstrategy.Withintheframe-eralEquilibriumoftheDepartmentofFinancemodel,workoftheEuropeanGreenDeal,Italyiscommittedtowhichisanew(recursive)dynamiccomputablegeneralcontributingtothegoalofbecomingthefirstclimateequilibriummodeldevelopedbytheItalianMinistryoftheneutralregionby2050(the“Fitfor55”package).AsanEconomywithtechnicalassistancefromtheWorldBank.intermediatesteptowardthe2050target,theEuropeanIthasadetailedenergyspecificationthatallowsforcapital/Unionmustreducegreenhousegasemissionsbyatleast55labor/energysubstitutioninproduction,intra-fuelenergypercentby2030comparedto1990levels.Carbonpricingsubstitutionacrossalldemandagents,amulti-outputandisatthecoreoftheproposal,butitsfullimplementationmulti-inputproductionstructure,anextendedenergyisalsoexpectedtohaveregressiveeffects,harmingpoorersystemwith11differenttypesoftechnologies,multiplehouseholds,andadverseeconomicimpacts,reducingfirms’householdstoaddressdistributionalimpacts,anddetailedcompetitiveness.ThispaperevaluatestheeffectsoftheinformationontheItaliantaxsystem.carbonpricingproposalofthe“Fitfor55”packageonwelfare,sectoralproduction,andincomedistribution.Totackletheadversesocialandeconomiceffects,itcomparesThispaperisaproductoftheMacroeconomics,TradeandInvestmentGlobalPractice.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebathttp://www.worldbank.org/prwp.Theauthorsmaybecontactedathdudu@imf.org.ThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.ProducedbytheResearchSupportTeamAssessingtheEfficiencyandFairnessoftheFitfor55PackagetowardNetZeroEmissionsunderDifferentRevenueRecyclingSchemesforItaly1byCarloOrecchiaa,ValerioFerdinandoCalaa,FabianadeCristofaroa,HasanDudubaDepartmentofFinance;ItalianMinistryofEconomyandFinance,Italy.bInternationalMonetaryFund.HasanDuduwaswiththeWorldBankduringthepreparationoftheworkingpaper.1ThispaperhasbeendevelopedattheDepartmentofFinance-ItalianMinistryofEconomyandFinanceundertheproject‘ImprovingtheevaluationofVATandexcisetaxpoliciesinItaly’,fundedbytheEuropeanUnionincollaborationwithDGReformandtheWorldBank.WeareparticularlygratefultoMariaTeresaMonteduro,MarcoManzo,PaoloDiCaro,SilviaCarta,GavinoMura,JanIgnacyWitajewski-Baltvilks,MariaAlessandraTullio,ElisaFusco,PasqualeGiacobbe,FrancescaLaratta,LorenzoMarchetti,AlessioMarabucci,LouiseWandhal-Jensen.WewishtothankalsoSOGEIspaforthesupport.Theviewsexpressedinthepaperdonotreflectthoseoftheinstitutionsofaffiliation.Theusualdisclaimerapplies.1IntroductionGreentransitionisbecomingmorepressingthanever,bothinthecontextofclimatechangeandintheenergycrisisscenariocausedbytheRussianinvasionofUkraine.Tofacetheclimatechangechallenge,theEuropeanGreenDeal(seeEU2020),adoptedin2020,setsthepathtomaketheEU'sclimate,energy,transport,andtaxationpoliciesfitforefficientlyfacingtheenvironmentaldegradationthreat.AspartoftheEuropeanGreenDeal,withtheEuropeanClimateLaw,EUMemberStatesagreedontheambitioustargetofachievingclimateneutralityby2050,undertheso-called“Fitfor55”package.Inaccordancewiththissetofmeasures,asanintermediatestep,MemberStatesarepledgedtoreduceemissionsbyatleast55%by2030,comparedto1990levels.Thesignificantcommitmentthereofcomesasanopportunityfordevelopingnewpolicyevaluationtools,especiallyinthenewenergycrisisscenariothatseemstounderminetheachievementoftheambitious“Fitfor55”goals.TheincreaseinenergypricesandtheworseningofinternationalrelationswiththeRussianFederationarealreadyinfluencingeconomicactivity,employment,andhouseholdlivingconditionssothatnewpolicystrategiesareneeded.Developingandtestingneweconomicmodelsfeaturingdetailedenergystructurecanplayanimportantroleindesigningquickpolicyresponsesandassessingoptionsfortheenergycrisis.Thispaperhastwomainresearchobjectives,whicharenovelcontributionstotheexistingliterature.Fromamethodologicalperspective,wepresenttheItalianRegionalandEnvironmentalComputableGeneralEquilibriumoftheDepartmentofFinance(IRENCGE-DF,henceforth),whichseekstoanswertothenewcurrentpolicyneeds.Asweshallsee,IRENCGE-DF’sstructuremakesitverytopicalandextremelyusefulforanalyzingdifferentpolicyscenarioscomingeitherfromtheEUlegislationorfromtheinternationalpoliticalscenario.TheIRENCGE-DFisasingle-countryCGEmodelwithregionalandenvironmentalmodules,tailoredtothespecificSocialAccountingMatrix(SAM)builtforItaly.Itisamulti-sector,multi-householdCGEmodel,basedonasetofequationswhichaimtocapturethestructureoftheeconomyandbehavioralresponseofagentssuchasfirms,households,government,andtherestoftheworld.Thisprovidesaveryrichframeworktosimulatethepolicychangesandtracetheimpactonthekeyeconomicvariables,includingincomeandexpenditureflows.Themodelincorporatesanenvironmentalmodulewhichfeaturesadetailedenergyspecificationthatallowsforcapital/labor/energysubstitutioninproduction,intra-fuelenergysubstitutionacrossallthedemandagents,amulti-outputmulti-inputproductionstructure,anenergysystemextendedwith11differenttypesoftechnologiesincludingrenewableandcleanenergy,andanextendedenvironmentalpolicythatcanallowsimulationoftheeffectsofcarbontaxandcarbonemissionondifferentsectors.2Fromapolicyperspective,thecomprehensiveenvironmentalandtaxstructureoftheIRENCGE-DFmodelmakesitwellsuitedforanalyzingawiderangeofpolicyscenarios.Inparticular,the“Fitfor55”packageisanalyzedinthemodelbylimitingthelevelofemissionsandlettingthemodelcalculatetheendogenouspriceconsistentwiththiscap.Thankstotheextensivefocusontaxmodeling,theIRENCGE-DFmodelisabletoproperlyfitscenarioswithnewstructuresoftaxratesbasedontheenergycontentandenvironmentalperformanceofthefuelsandelectricityandalsotosimulatebroadertaxablebasesbyincludingmoreproductsinthescopeandbyremovingsomeofthecurrentexemptionsandreductions.Severalsimulationscenarioswillbediscussedinthefollowingsections.Theremainderofthepaperisorganizedasfollows.InSection2,wepresentthedataandmethodology,reviewingthemainaspectsoftheIRENCGE-DFmodel.IntheSection3,wepresenttheresultsofourpolicysimulations.Thefinalsectionconcludeswithsomepolicyimplications.2DataandMethodology2.1SAMConstructionThemodeliscalibratedonthe2017SAM.Weupdatethebenchmarkdatato2020byusingmacroeconomicvariationsresultingfromthelatestpubliceconomicandfinancialdocuments(i.e.Italianannualbudgetlaw,etc.).TheinformationcontainedintheSAMisobtainedbycombiningnationalaccountdata,suchasthenationalaccountmatrixfor2014,supply-usetablesfor2017,andEurostatdata.Inaddition,weintegratemissinginformationwithdatafromtaxreturnsavailableattheDepartmentofFinance.Nationalaccountsdataprovidedetailedinformationonthefinalandintermediateconsumptionatactivityandcommoditylevels,thoughtheydonotcontaindetailedinformationontaxation.Hence,weusethetaxreturndatatodistributetaxesandsubsidiespercommodity.InTable1,weprovideadescriptionofthesetsandstructureusedintheanalysis.Forthepurposeofthisstudy,theSAMdistinguishesbetween77activities,68commodities,10householdgroupsand10taxcategories.3Table1:SetsusedinmodeldefinitionSetDescription𝒊𝒊𝒊𝒊FullsetofSAMAccounts𝒂𝒂𝒂𝒂(𝒊𝒊𝒊𝒊)SetofArmingtonagents—includesallproductionactivitiesandfinaldemand𝒂𝒂(𝒂𝒂𝒂𝒂)Setofproductionactivities𝒐𝒐𝒐𝒐(𝒂𝒂𝒂𝒂)OtherArmingtonagents—mostlyfinaldemandaccounts𝒇𝒇𝒇𝒇(𝒐𝒐𝒐𝒐)Finaldemandaccounts(excludesthetradeandtransportmarginaccounts)𝒉𝒉(𝒐𝒐𝒐𝒐)Householdaccounts𝒇𝒇(𝒐𝒐𝒐𝒐)Otherfinaldemandaccounts𝒊𝒊(𝒊𝒊𝒊𝒊)CommoditiesEnergycommodities𝒆𝒆(𝒊𝒊)Non-energycommodities𝒊𝒊𝒊𝒊(𝒊𝒊)ConsumedcommoditiesTheenergybundleinconsumedcommodities𝒌𝒌Institutions(fortransfers)𝒏𝒏𝒏𝒏𝒏𝒏(𝒌𝒌)Factorsofproduction𝒊𝒊𝒊𝒊𝒊𝒊𝒊𝒊(𝒊𝒊𝒊𝒊)Laborcategories𝒇𝒇𝒇𝒇(𝒊𝒊𝒊𝒊)Unskilledlabortypes𝒍𝒍(𝒇𝒇𝒇𝒇)Skilledlabortypes𝒖𝒖𝒖𝒖(𝒍𝒍)Landtypes𝒔𝒔𝒔𝒔(𝒌𝒌)Capitaltypes𝒍𝒍𝒍𝒍𝒍𝒍(𝒇𝒇𝒇𝒇)Vintages(OldandNew)𝒄𝒄𝒄𝒄𝒄𝒄(𝒇𝒇𝒇𝒇)𝒗𝒗AgricultureTable2:sectoralcoverageForestrySewerage-WasteFishingConstructionMiningTrade-of-motor-vehiclesCoalWholesale-tradeOilRetail-tradeGasLand-transportFood-productsWater-transportTextilesAir-transportWoodWarehousing-and-stransportationPaperPostalPrintingAccommodation-food-servCoke-and-ppPublishingChemicalsMotion-picture-TVPharmaceuticalTelecommunicationsRubber-and-plasticComputer-prog-Information-servNon-metallic-mineral-productsFinancial-servBasic-metalsInsuranceMetal-productsAux-to-financial-svcs-insuranceReal-estate4Computer-electronicLegal-accounting-consultancyElectrical-equipmentArchitectural-engineeringMachinery-Equipment-necScientific-research-developmentMotor-vehicles-trailersAdvertisingOther-transport-equipmentOther-professional-VeterinaryFurniture-Other-manufacturingRental-leasingRepair-installationEmployment-activitiesTransmissionandDistrib.Travel-agency-TourismCoalBLOther-servGasBLPublic-administrationWindBLEducationHydroBLHealthOilBLResidential-careOtherBLCreative-arts-culturalGasPSportsHydroPMembership-organisationsOilPRepair-of-computers-and-personal-goodsSolarPOther-personal-servGdtHouseholdsWaterTaxesInformationonmajortaxesinItalyisobtainedbyreconcilingtaxreturndatawithinformationfromIstat(theItalianNationalInstituteofStatistics)nationalaccounts.Amongcommoditytaxesinthemodel,thefollowingareexplicitlyconsidered:•ValueAddedTax(VAT),whoseaggregateamountispublishedbytheIstat,isallocatedbycommodityaccordingtotheVATMicrosimulationModeldevelopedbytheDepartmentofFinance(DF).TheVATDFMicrosimulationModelestimatesVATbycommoditydistinguishingbetweenfinalconsumptionofhouseholds,intermediategoodsandcapitalgoods.•Excises,publishedbyIstatwiththedetailsofthegoodstheyareimposedon,havebeenallocatedbycommodityaccordinglyandassociatedtobothintermediateandfinalconsumptionusingtheusetablefromIstat.•TariffsonImportsarecomputedbyapplyingestimatedimporttariffstoimports.•OtherNetTaxonProducts(otherindirecttaxeslesssubsidiesonproducts)arecalculatedasaresidualbysubtractingVAT,excisesandtariffsonimportsbycommodityfromthenetindirecttaxesonproductspublishedbyIstatintheSupplytablefor2017.5Taxesbyactivityexplicitlyconsideredarethefollowing:•CorporateincometaxIRES(“Impostasulredditodellesocietà”)andtheregionalproductiontaxIRAP(“Impostaregionalesulleattivitàproduttive”)areaddedtogetheranddisaggregatedbyactivityusingtaxreturndataavailableatDF(theDepartmentofFinance).Theimplicittaxratesarecalculatedusingtheoperatingsurplusasataxbaseandwillincreasethecostofcapitalusedbyeachfirm.•SocialSecuritycontributionspaidbytheemployer(SSCsEmployer)areretrievedfromtheusetable,definedasthedifferencebetweenemployeeincomeofregularworkersandgrosswagesbysectorofeconomicactivity;subsequently,thisvalueisclassifiedaccordingtothetypeofskillcategory:lowskilled,skilled,andhighskilled.•OthertaxesonproductionarepublishedbyIstatbysector.AsIRAPisconsideredwithIRESasaseparateentryintheSAM,itsamountissubtractedtoobtaintheothertaxesonproductionastheresidualvalue.Finally,households’directtaxesareincludedinthemodelandtreatedasasingleentrythatcombinesincometaxes(impostasuiredditidellepersonefisiche(IRPEF))andIRPEFsurcharges,substitutivetaxes(forfeitmixed,rents,capitalincometaxesetc.)andotherspecialregimesandsocialsecuritycontributionpaidbytheemployee.2.2TheIRENCGE-DFModelModelOverviewTheItalianRegionalandEnvironmentalComputableGeneralEquilibriumofDepartmentofFinance(IRENCGE-DF)Modelisa(recursive)dynamicsinglecountrycomputablegeneralequilibrium(CGE)modelthatisdevelopedbytheItalianMinistryoftheEconomywithtechnicalassistancefromtheWorldBank.ItisbasedontheMANAGE-WBmodeloftheWorldBank(WorldBank,2023),whichisinturnbasedontheMANAGEmodelthatisdocumentedinvanderMensbrugghe(2021).IRENCGE-DFisdesignedtofocusonenergy,emissionsandclimatechange.InadditiontothestandardfeaturesofasinglecountryCGEmodel,theIRENCGE-DFmodelincludesadetailedenergyspecificationthatallowsforcapital/labor/energysubstitutioninproduction,intra-fuelenergysubstitutionacrossalldemandagents,andamulti-outputmulti-inputproductionstructure.Furthermore,themodelintroduceshouseholdheterogeneitytobetteranalyzetheimpactsofenvironmentalandenergypoliciesonwelfareandinequalityanddisaggregatestherepresentativehouseholdintotenhouseholdgroups.Thesourcesofincomeandconsumptionstructurereflectthe6informationcomingfromstatisticalhouseholds’surveys.Laborgrowthisexogenous.Capitalaccumulationderivesfromsavings/investmentdecisions.Themodelhasavintagestructureforcapitalthatallowsforputty/semi-puttyassumptionswithsluggishmobilityofinstalledcapital.Themodelallowsforawiderangeofproductivityassumptionsthatincludeautonomousimprovementsinenergyefficiencythatcandifferacrossagentsandenergycarriers.ThemodelcanbecalibratedtodifferentSAMsthatfollowastandardsetofconventionsinrepresentingtheeconomicstructure.ThemodelisimplementedintheGeneralAlgebraicModelingSystem(GAMS)softwareandanaggregationfacilityisusedasafront-endtothemodeltoallowforfullaggregationflexibility.ModelDescriptionTheIRENCGE-DFmodelisarecursivedynamiccomputablegeneralequilibrium(CGE)model.Eachyear,ascenarioissolvedasastaticequilibrium,withdynamicequationslinkingexogenousfactors(suchaspopulationgrowthandcapitalaccumulation)acrossyearswith,inaddition,updateequationsforproductivityfactors.Eachstaticequilibriumreliesonarelativelystandardsetofequationspecifications.Productionismodeledusingaseriesofnestedconstant-elasticity-of-substitution(CES)functionsdesignedtocapturethesubstitutionsandcomplementsacrossthedifferentinputs,notablycapitalandlabor,butalsowithafocusonenergyasenergypoliciesareoneofthekeyobjectivesoftheIRENCGE-DFmodel.Energyisassumedtobeanear-complementwithcapitalintheshort-run,butasubstituteinthelong-run.Thus,risingenergypricestendtoleadtorisingproductioncostsintheshort-runwhensubstitutionislow,butalong-runresponsewouldleadtoenergy-savingtechnologiesthatdampenthecost-pushfactor.Thisfeatureofthemodelisembodiedinavintagecapitalstructurethatcapturesthesemi-putty/puttyrelationsacrossinputswithmoreelasticlong-runbehaviorascomparedtotheshort-run.Themodelallowsforbothmulti-inputandmulti-outputproduction.Theformer,forexample,wouldallowforelectricitysupplytobeproducedbymultipleactivities—thermal,hydro,solarandotherrenewableformsofelectricityproduction.Thelatterallowsforasingleactivitytoproducemorethanoneproduct—forexample,oilseedcrushingproducesbothvegetableoilsandoilcakes(forfeed).Laborandcapitalincomearelargelyallocatedtohouseholdswithpass-throughaccountstoenterprises.Governmentrevenueisderivedfrombothdirectandindirecttaxes.Householdsaredisaggregatedintotenincomegroupsandtheirdemandismodeledusingtheconstant-differences-in-elasticity(CDE)demandfunctionthatisthestandardutilityfunctionusedintheGlobalTradeAnalysisProject(GTAP)model.Themodelallowsforadifferentspecificationof7demandedcommodities(indexedbyk)fromsuppliedcommodities(indexedbyi).AtransitionmatrixapproachisusedtoconvertconsumergoodstosuppliedgoodsthatalsoreliesonanestedCESapproach.Thetransitionmatrixislargelydiagonalinthecurrentversionwithconsumedcommoditiesdirectlymappedtosuppliedcommodities.EnergydemandisbundledintoasinglecommodityanddisaggregatedbyenergytypeusingaCESstructurethatallowsforinter-fuelsubstitution.Otherfinaldemandishandledsimilarly,thoughtheaggregateexpenditurefunctionisaCESfunctionratherthantheCDE.Goodsareevaluatedatbasicpriceswithtaxwedges.Themodelincorporatestradeandtransportmarginsthataddanadditionalwedgebetweenbasicpricesandend-userprices.Thetradeandtransportmarginsaredifferentiatedacrosstransportnodes-farm/factorygatetodomesticmarketsandtheborder(forexports),andfromporttoend-user(forimports).ImportdemandismodeledusingtheubiquitousArmingtonassumption,i.e.,goodswiththesamenomenclaturearedifferentiatedbyregionoforigin.Thisallowsforimperfectsubstitutionbetweendomesticallyproducedgoodsandimportedgoods.TheleveloftheCESelasticitydeterminesthedegreeofsubstitutabilityacrossregionsoforigin.Domesticproductionisanalogouslydifferentiatedbyregionofdestinationusingtheconstant-elasticity-of-transformation(CET)function.TheabilityofproducerstoswitchbetweendomesticandforeignmarketsisdeterminedbytheleveloftheCETelasticity.Themodelallowsforperfecttransformationinwhichcasethelaw-of-onepricemusthold.Marketequilibriumfordomesticallyproducedgoodssolddomesticallyisassumedthroughmarketclearingprices.Bydefault,thesmallcountryassumptionisassumedforexportandimportpricesandthustheyareexogenous,i.e.,exportlevelsdonotinfluencethepricereceivedbyexportersandimportdemanddoesnotinfluence(CIF)importprices.Themodeldoesallowforimplementationofanexportdemandscheduleandanimportsupplyscheduleinwhichcasetheterms-of-tradewouldbeendogenouslydetermined.Thecurrentversionofthemodelassumesmarketclearingwagesonthelabormarketswiththepossibilityofanupwardslopinglaborsupplyscheduleandsluggishmobilityoflaboracrosssectors.Introductionofmorelabormarketsegmentation(forexampleruralversusurban)andsomeformofwagerigiditycouldbereadilyimplemented.Indynamicsimulations,newcapital,i.e.thatgeneratedbyrecentinvestments,isallocatedacrosssectorssoastoequalizetherateofreturnacrosssectors.Oldcapitalremainsinstalledinitsoriginalsectorunlessthesectorisindecline.Asectorindeclineisoneinwhichpotentialsupply,asmeasuredbythecapital/outputratio,exceedsexpostdemand.Thiscanoccurfromavarietyofshocksthat8lowerdemandforaspecificcommodity.Ifasectorisindecline,itreleasesitsinstalledcapitalusinganupwardslopingsupplyscheduleanditsexpostreturnoncapitalislessthantheeconomy-wideaverage.Oldcapitalinexpandingsectorsearnsthesamerateofreturnasnewcapital.ThedynamicsofIRENCGE-DFiscomposedofthreeelements.Populationandlaborstockgrowthareexogenousandthelatterisoftenequatedtothegrowthoftheworkingagepopulation.Theaggregatecapitalstockgrowsaccordingtotheoveralllevelofsaving(enterprises,households,publicandforeign),butwillalsobeinfluencedbytheinvestmentpriceindexandtherateofdepreciation.ThethirdcomponentreliesonproductivityorTFP(TotalFactorProductivity)growthassumptions.Figure1.DF-RENVCGE,productionfunction3.PolicySimulationsandResultsCarbontaxesasexamplesofPigouviantaxesarepowerfulinstrumentstocorrectmarketfailuresandnegativeexternalitiesaddinginthepriceofproductstheenvironmentalcostofcarbon-intensive9activities.Inaddition,revenuesfromcarbonpricingcanbeusedtolowerexistingdistortionarytaxeswiththeaimofpromotingbothgreaterefficiencyandequityinthetaxsystem.Toevaluatetheeconomicappealofalternativereforms,westartfromareferencescenario(Baseline)thatrepresentsfuturedemographic,energyandemissionsevolutionundercurrentpolicylegislation.Thenasetofpolicyscenariosareevaluatedwhichimplementtheclimatemitigationmeasurestoachievethefitfor55emissionsreductions.Thepolicymeasuresarerepresentedthroughtheintroductionofcarbonpricesandarecomparedwithrespecttothebaselinescenariotoestimatethepolicyimpacts.Scenarioscoverthe2021-2030timeframe.ScenariosDescriptionBaselineContinuationofcurrentpolicies:40%reductioninGHGscomparedto1990Fit55Increasedclimateambitiontoachieve55%emissionsreductiontargetFit55–WageFitfor55withadditionalcarbonrevenuesrecyclingtoreduceLabourtaxes(i.e.SocialSecuritytaxContributionspaidbytheemployer,SSCer)–revenue-neutralreformFit55–CITFitfor55withadditionalcarbonrevenuesrecyclingtoreducecorporateincometaxes(IRAPandIRES)–revenue-neutralreformFit55–VATFitfor55withadditionalcarbonrevenuesrecyclingtoreduceVAT–revenue-neutralreformFit55–ExcisesFitfor55withadditionalcarbonrevenuesrecyclingtoreduceExcises–revenue-neutralreformFit55–IncomeFitfor55withadditionalcarbonrevenuesrecyclingtoreducehouseholds'incometaxes-revenue-taxneutralreformThebaselinescenarioreplicatestrendsoftheGrossDomesticProduct(GDP)fromtheInternationalMonetaryFund’s(IMF,2021).Tocapturetheexpectedenergyandemissiontrends,someassumptionsonenergy-relatedvariablesareassumed:costsofrenewableelectricitygenerationdeclineovertime,non-pricerelatedchangesinpreferencesinfavorofrenewables,increasesinelectricitysharesforthefinalandintermediateconsumers,improvementsinenergyefficiency.Inadditiontotheseassumptions,inthebaselinescenarioswealsointroducecarbonpricestoreplicatethecurrentclimatetargetsambition(seeFigure2).Undertheseassumptions,GHGsemissionsaredecliningconsiderablyinthebaselinescenariotoachieveareductionofatleast40%(from1990levels).Thefitfor55policyscenariosraisethe2030greenhousegasemissionreductiontarget,10includingemissionsandremovals,toatleast55%comparedto1990.ThedifferentlevelofclimateambitioninthescenarioscanbeobservedinFigure3.All“fitfor55”scenariosachievethesamelevelofGHGsemissionsconsistinginareductionof-33%withrespecttothebaselinescenario.Figure2:Climateambitioninbaselineandfitfor55scenariosTotackletheadversedistributionalimpactsthatcarbonpricingcanhave,differentrecyclingschemesareevaluated.Inthe“Fitfor55”scenario,carbonrevenuesarenotrecycledandareusedtoreducethegovernmentdeficit.Theotherscenariosareinsteadexamplesofrevenue-neutraltaxreformwhereadditionalcarbonrevenuesaccruinginthefitfor55scenarioareearmarkedforthespecificpurposeofreducingthelevelofotherexistingtaxeskeepingthetotalgovernmentrevenuesunaffected.Inthe“Fit55–Wagetax”scenario,carbonrevenuesareusedtodecreasethetaxwedgeonlaborthroughareductionoftheleveloftheSocialSecurityContributionspaidbytheemployer.Thethirdscenario(“Fit55–CIT”)assumesthatcarbonrevenuesareusedtoreducecorporatetaxes(IRESandIRAP)onoperatingsurplus.Inthefourthandfifthscenarios,revenuesraisedareusedtoreducetheincidenceofVATandexcisetaxesrespectively.Finally,the“Fit55–Incometax”scenarioanalyzesashiftofthetaxburdenfromhouseholds’incometocarbonemissions.LookingattheresultsinFigure3,whiletheevolutionofemissionsintheperiodisthesameacrossallpolicyscenarios(seeFigure3left),abatementcostsdiffer.Carbonpricereaches97€/tCO2einthe“Fit55”,staysapproximatelyatthislevelinallscenarioswiththeonlyexceptionbeingthe“Fit55–Excises”wherethecarbonpricegoesupto105€/tCO2e.11BaselineCarbonPriceinf552030,EUR/tCO2f55&wagetaxf55&CIT69f55&VAT97f55&EXCISES98f55&Incometax98Figure3:Emissionspathwaysandcarbonpricesindifferentscenarios9810598Inneoclassicalgeneralequilibriummodels,taxesaredistortionary,andthewelfarelosscausedbythetaxcanvarydependingontheelasticityofsupplyanddemandwithrespecttoprices.Ingeneral,theliteraturesuggeststhattaxesleviedonimmovablepropertyorconsumptionarelessdistortionaryandthus,lessharmfultoeconomicgrowththanthoseleviedoncorporateorlaborincome(Mankiwandothers,2009;Bayaretal.2021;Slemrod,1990).Thus,usingcarbonrevenuestoreducepre-existingtaxescanimproveoverallefficiencyandreducewelfarelosses.Indoingso,carbonpricesmightbehighercomparedtothescenariowithoutrecyclingschemeasthereductioninpre-existingcapitalandlabortaxesdecreaseproductioncosts,increaseoutputanddeterminehigherabatementcosts.ThecarbonpriceisimposedonallGHGsemissionsincludingtheso-callednon-CO2emissions(i.e.CH4,N2OandFgass)thusimprovingtheoverallefficiencyoftheclimatepolicy(OrecchiaandParrado,2014).Itisworthobservingthatthereductionofemissionstoachievefitfor55targetleadstoasmallGDPlossofaround-0.5%in2030(Table3).Recyclingschemes,whererevenuesareusedtoreducehighlydistortionarytaxes(asexcisetaxesandfactortaxesleviedoncapitalorwages)withanefficientcarbontaxonallsectors/commodities,alleviatethenegativeimpactsonemployment,investmentandconsumption.Twoscenariosturnouttobethemostcost-effectiveandaretheoneswherecarbonrevenuesareusedtoreduceexcisesandcorporateincometaxes,withGDPgoingfrom-0.5%to-0.3%.Thenextmostfavorablerecyclingmechanismiswhenrevenuesareusedtoreducelabortaxeswhichstimulatesconsumptionandlabordemand.Theresultthatexcises,mostlyenergytaxes,arefoundtobehighlydistortivemightdependonanumberofreasons.Thefirstreasonis“model-based”astheenergybundleiscombinedwiththecapital-skilledlaborbundleandthusitstaxationisasdistortionaryasthatonotherprimaryfactors,suchaslaborandcapital.Thesecondreliesonthecharacteristicsofexcisescomparedtoauniformcarbonprice.Infact,theburdenofexcisetaxesvariesalotacrossdifferentsectorsandevenacrossfuelsfordifferentusesineachsector(IMF2022)duetothepresenceofexemptionsandtaxexpenditures.Moreover,excisesarenotdirectlylinkedtothecarboncontentoftheproduct.These12twoaspectsdeepentheinefficiencyacrosssectorsassomeincurveryhighabatementcoststoreducecarbonemissionswhileothersdonotabateevenwhentheirabatementcostsaresignificantlylow.Onthecontrary,withauniformcarbonpriceendogenouslydeterminedbythemodel,allprofit-maximizingfirmswillreduceemissionsuptothepointwheremarginalabatementcostsareequaltothecarbontaxrateensuringthattherequiredlevelofemissionsreductionisachievedatleastcost.Finally,asshowninBohringeretal.2008and2016,overlappingregulationcandetermineefficiencylossesastheuseofmultiplepolicyinstrumentstocurbgreenhousegasemissionsasitisinthepresenceofacomprehensiveemissionpricingandenergytaxescancausewhatisdefinedas“excesscost”.Thus,thecutofenergytaxescouldreducethisadditionalcostduetotheoverlappingregulation.Table3:Macroeconomicresultsin2030(%changewrtBaseline)gov.publicGiniindex(AverageScenariosconsumptionExpend.investmentinvestmentexportimportgdp2022-2030)f55-0.9-0.50.4-0.5-1.0-1.3-0.50.009f55&wagetaxf55&CIT-0.6-0.40.1-0.4-0.9-1.2-0.40.004f55&VATf55&EXCISES-0.5-0.30.0-0.3-0.9-1.1-0.30.001f55&Incometax-0.5-0.4-0.6-0.4-1.0-1.3-0.4-0.006-0.3-0.3-0.5-0.3-0.8-1.0-0.3-0.004-0.7-0.5-0.1-0.5-1.0-1.3-0.5-0.006Intermsofincomedistribution,wecanlookattheGiniindex(average2022-2030).FromTable3,wecanobservethatthereareregressiveeffectsonincomedistributioninthe“f55”scenariotocomplytothestringentclimatepolicyconstraints.Thenegativeimpactsonincomedistributionarereducedinallrecyclingschemes.TheGiniindexslightlydeclinesinsomescenarioswiththelargestreductionsinthe“f55&Incometax”and“f55&VAT”recyclingschemeswherecarbonrevenuesareusedtoreducethepersonalincometaxandVATtax.InFigure4,welfareimpactsaredifferentiatedacrosshouseholddeciles.Weobservethatwelfareeffectsdiffersignificantlyacrosshouseholds,withpoorerhouseholdsbearingadisproportional13impactofclimateregulationmostlybecausepoorerhouseholdsspendonaveragealargershareoftheirincomeonpollutingactivities.Figure4–Welfareimpactsin2030Turningtotheimpactsoneconomicsectors(Figure5),fossilfuelandenergyintensiveindustriesobservethelargestreductionsintermsofoutput.Themagnitudeofthereductionsisgenerallylargerinthefitfor55scenario.Intheareaofrenewableenergy,sectorslikesolar,wind-powerandhydroelectric,registerpositiveproductionschangesrangingbetween5%and9%.Itisworthnoticingthatsomeother,lesscarbonintensivesectorsarealsogainingslightlyfromtheclimatepolicy:amongthese,textiles,productionofmachineryequipmentandelectricalequipmentareshowingthelargerincrease.14Figure5-Sectoraloutput(%changewrtBaseline)154.ConcludingRemarksInthispaper,weanalyzedtheeffectsontheItalianeconomyofanincreasingreductionovertimeofGHGemissionstomeetthetargetrequiredbytheFitfor55EUproposalby2030.WeadopttheIRENCGE-DFmodel,anew(recursive)dynamiccomputablegeneralequilibrium(CGE)modeldevelopedbytheItalianMinistryoftheEconomyandtheWorldBank.Themodelendogenouslycalculatesacarbonpricetocomplywiththedesiredlevelofemissionsabatementsimulatingthebehaviorofagentsbasedonoptimizingmicroeconomictheory.CarbonpricenegativelyimpactstheperformanceoftheItalianeconomy,reducingGDPby0.5%in2030comparedtoourreferencescenario.RegressiveeffectsonincomedistributionarealsoobservedinthisscenarioconsideringthechangeintheGiniindex.Totackletheadversesocialandeconomiceffects,wecompareddifferentrevenuerecyclingschemesshiftingthetaxburdenfrommajordirectandindirecttaxestocarbonemissions.ItturnsoutthatrecyclingcarbonrevenuescansignificantlyreducethenegativeimpactsonGDPandwelfare.Inparticular,themostcost-effectiverecyclingschemesarewithexcisesandcorporateincometaxes,withGDPdecreasingby-0.5%to-0.3%.Althoughdifferencesaresmallinsize,theuseofcarbonrevenuestoreduceVATandPersonalIncomeTaxarefoundtobethemostdesirablerecyclingoptionsintermsofequityandincomedistribution.16ReferencesBarron,A.R.,Fawcett,A.A.,Hafstead,M.A.,McFarland,J.R.,&Morris,A.C.(2018).PolicyinsightsfromtheEMF32studyonUScarbontaxscenarios.ClimateChangeEconomics,9(01),1840003.Bayar,A.,Bratta,B.,Carta,S.,DiCaro,P.,Manzo,M.,&Orecchia,C.(2021).AssessingtheeffectsofVATpolicieswithanintegratedCGE-microsimulationapproach:evidenceonItaly(No.wp2021-14).Böhringer,C.,Koschel,H.,&Moslener,U.(2008).EfficiencylossesfromoverlappingregulationofEUcarbonemissions.Journalofregulatoryeconomics,33,299-317.Böhringer,C.,&Müller,A.(2014).EnvironmentaltaxreformsinSwitzerlandacomputablegeneralequilibriumimpactanalysis.SwissJournalofEconomicsandStatistics,150,1-21.Böhringer,C.,Keller,A.,Bortolamedi,M.,&Seyffarth,A.R.(2016).Goodthingsdonotalwayscomeinthrees:OntheexcesscostofoverlappingregulationinEUclimatepolicy.EnergyPolicy,94,502-508.EuropeanCommission(2019)TheEuropeangreendeal,COM(2019)640final,11December2019.EuropeanCommission(2021a)‘Fitfor55’:deliveringtheEU’s2030climatetargetonthewaytoclimateneutralityCOM(2021)550final,14July2021.EuropeanCommission(2021b)ProposalforDirectiveoftheEuropeanParliamentandtheCouncilamendingDirective2003/87/ECestablishingasystemforgreenhousegasemissionallowancetradingwithintheUnion,Decision(EU)2015/1814concerningtheestablishmentandoperationofamarketstabilityreservefortheUniongreenhousegasemissiontradingschemeandRegulation(EU)2015/757,COM(2021)551final,14Ju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