ASEAN Sustainable Development Policy: Carbon Tax Implementation

Sustainable Development Policy: The Case of Carbon Tax in ASEAN Budy P. Resosudarmo Arndt-Corden Department of Economics Crawford School of Public Policy ANU College of Asia & the Pacific

Sustainable Development Historical background Basic concept Implementations: Planning approach Stylized model ASEAN Economic Community Case study of carbon tax

Initial situation: Economic growth Has been discussed for a long time: David Ricardo but also Adam Smith and Thomas Malthus Development policy is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another Focuses on production model and sources of production Using GNI or GDP as the indicator (Y) Formalized as the Solow-Swan growth model developed by Robert Solow in the US (1956) and at the same time by Trevor Swan in Australia (1956) Y = f ( A , K , L ) K : Capital L : Labor A : Productivity

Economic growth in several countries Angus Madison Data set

Human development After the World War II: Emphasis on human development Household income, individual education, health condition, drinking water etc. Development policy is related to increase the capacity of an economy to produce goods and services coupled with improvement in social and political welfare of the people (human development) Economic growth is essential but is not the goal in itself; instead, it is a means for achieving human development Development is to create an enabling environment for people to enjoy long, healthy, productive and creative lives (Ranis, Fei & Irwin, 1964) Using HDI as an indicator Literacy rate, life expectancy, poverty and income inequality

Environmental Issues Slow growing movements of grass root environmentalism (Silent Spring by Rachel Carson, 1962) 1972 UN Stockholm Conference on the Human Environment Sustainable development NGOs played a leading role Developing countries was suspicious 1980 Report on World Conservation Strategy Living Resource Conservation for Sustainable Development by IUCN, WWF, UNEP 1987 Our Common Future, The World Commission on Environment and Development, Oxford University Humanity has the ability to make development sustainable to ensure that it meets the needs of the present without compromising the ability of future generation to meet their own needs

Basic concept: Sustainability without compromising the ability of future generation to meet their own needs reduce the use of materials from the earth s crust reduce pollution reduce physical degradation of nature stimulate people s ability to meet their basic needs Capital concept: Strong and Weak sustainability strong: existing natural capital must be maintained and developed weak: human-made capital of equal value can take the place of natural capital Note on types of capital: natural capital, human-made capital, human capital & social capital

Triple Bottom Line Is an accounting framework taking into account 3 dimensions of performance: economic, social and environment (Elkington, 1994; Munasinghe, 1993 ) Economic growth: economic bottom line People: social equity bottom line The earth, environment bottom line Cannot easily be added up

Sustainable Development 1992 Rio de Janeiro: UN Conference on Environment and Development Agenda 21 to achieve Sustainable Development Socio-economy, conservation, interest groups, science & tech. 2002 Johannesburg: UN World Summit on Sustainable Development Johannesburg Declaration and Final Report 2012 Rio de Janeiro: UN Conference on Sustainable Development Commitment to produce Sustainable Development Goals 2015 UN Sustainable Development Submit Produce the 17 Sustainable Development Goals and the associated 169 targets Can be seen as the extension of the Millennium Development Goals

Millennium & Sustainable Development Goals MDGs (2000-2015) SDGs (2015-2030) Eradicate extreme poverty & hunger No poverty Zero hunger Reduced inequality Achieve universal primary education Good health and well-being for poeple Sustainable cities & communities Promote gender equality and empower women Quality education Responsible consumption and production Reduce child mortality rates Gender equality Climate change Improve maternal health Clean water & sanitation Life below water Combat HIV/AIDS, malaria, and other diseases Affordable & clean energy Live on land Ensure environmental sustainability Decent work & economic growth Peace, justice & strong institution Develop a global partnership for development Industry, innovation & infrastructure Partnership of the goals

Planning approach Once the targets are identified and ranked, the primary concern is to identify policies relevant to achieving the targets. A single policy can affect several targets For each target, there can be several policies Hence, develop: A sustainable development indicator A single math/econ model with multiple outcomes (social economic environmental indicators) Multiple-integrated math/econ models with multiple outcomes

Sustainable development indicator Among others are: Green GDP: traditional GDP - cost of resource depletion - cost of environmental (SEEA, 1993) Genuine Saving: standard saving deducted by the value of depletion of resource asset and pollution damages (Hamilton, 2000) Comprehensive Wealth: total value of all assets: not only reproducible and human capital, but also natural capital, health improvements and technological change (Arrow et al., 2012) Easy and straight forward interpretation of sustainability Calculations for cost/value of resource depletion, environmental degradation in monetary unit are still debatable Relative no flexibility (many times is needed given so much uncertainty)

A single model with multiple outcomes Mostly are general equilibrium models. Among others are: Environmental Input-Output Analysis Social and Environmental Accounting Matrix Analysis Environmental Computable General Equilibrium Analysis Flexible in evaluating outcomes (social economic environmental indicators) Data intensive while availability of good reliable data is an issue Economy Society/Eco- system Social Program/Policy Environment

A stylized Input-Output analysis Intermediate Purchasers Intermediate Final Purcha- sers Total Agriculture Manufacturing Services Suppliers Output Agriculture 60 20 20 20 20 15 20 10 15 125 100 50 $225 $150 $100 Manufacturing Services Primary Suppliers Low Skill Labor 50 45 30 15 35 45 5 High Skill Labor 25 25 Capital Total Input $225 5gr $150 40gr $100 6gr Pollutant

Matrix A & labor intensity Matrix A Agriculture 0.27 0.13 0.20 Manufacturing 0.09 0.13 0.10 Services 0.09 0.10 0.15 Low Sk Labour 0.22 0.10 0.05 High Sk Labour 0.20 0.23 0.25 Kapital 0.13 0.30 0.25 Emission 0.02 0.27 0.06

Matrix multiplier Intermediate Purchasers in US$ million Intermediate Final Purcha- sers Total Agriculture Manufacturing Services Suppliers Output Agriculture 0.27*225 0.13*150 0.20*100 125 225 Manufacturing 0.09*225 0.13*150 0.10*100 100 150 Services 0.09*225 0.10*150 0.15*100 50 100 a a x d x 11 1 1 1 1 n + = a a x d x 1 n nn n n n orA.x + d = x x=(I-A)-1d

Impacts on outputs Suppose that: d1 = 0 d2 = 10 d3 = 0 Matrix Multiplier Agriculture 1.44 0.26 0.37 Manufacturing 0.17 1.20 0.18 Services 0.17 0.17 1.24 Resulting: X1 = 2.64 X2 = 12.00 X3 = 1.60 Low Sk Labour 0.22 0.10 0.05 High Sk Labour 0.20 0.23 0.25 Kapital 0.13 0.30 0.25 Emission 0.02 0.27 0.06

Triple Bottom Lines For: d1 = 0 d2 = 10 d3 = 0 x LSL HSL K P Agriculture 2.64 0.59 0.53 0.35 0.06 Manufacturing 12.00 1.20 2.80 3.60 3.20 Services 1.69 0.08 0.42 0.42 0.10 SUM 16.34 1.87 3.75 4.38 3.36

Technological Changes Suppose an agricultural mechanization program is implemented in the agricultural sector in such that: The cost of intermediate inputs from agricultural sector is reduced by 25% The extra profit due this reduction of agricultural input, 50% goes to high skill labor and the rest to capital Suppose due to mechanization, the quality of agricultural product improves and so the demand increase by 10% What are the impacts of this mechanization program on the economy, social condition and the environment

Technological Changes Matrix A Agriculture 0.27*(1-0.25) 0.13 0.20 Manufacturing 0.09 0.13 0.10 Services 0.09 0.10 0.15 Low Sk Labour 0.22 0.10 0.05 High Sk Labour 0.20 0.23 0.25 Kapital 0.13 0.30 0.25 Emission 0.02 0.27 0.06

Distribution of extra profit Matrix A Agriculture 0.27*(1-0.25) 0.13 0.20 Manufacturing 0.09 0.13 0.10 Services 0.09 0.10 0.15 Low Sk Labour 0.22 0.10 0.05 High Sk Labour 0.20+[0.27*(0.25)]*0.5 0.23 0.25 Kapital 0.13+[0.27*(0.25)]*0.5 0.30 0.25 Emission 0.02 0.27 0.06

Impacts on outputs Suppose that: d1 = 0.1*225=22.5 d2 = 0 d3 = 0 New Matrix Multiplier Agriculture 1.31 0.24 0.34 Manufacturing 0.15 1.20 0.18 Services 0.16 0.17 1.23 Resulting: X1 = 29.57 X2 = 3.44 X3 = 3.50 Low Sk Labour 0.22 0.10 0.05 High Sk Labour 0.20 0.23 0.25 Kapital 0.13 0.30 0.25 Emission 0.02 0.27 0.06

Triple Bottom Lines The impact of agricultural mechanization x LSL HSL K P Agriculture 29.57 6.57 6.90 4.93 0.66 Manufacturing 3.44 0.34 0.80 1.03 0.92 Services 3.50 0.17 0.87 0.87 0.21 SUM 36.51 7.09 8.58 6.83 1.78

Computable general equilibrium model Inserting math models representing agent s behaviour in an I-O or SAM table Production block: results from producers maximizing profit behaviour Consumer block: results from consumers maximizing utility behaviour Export-import block: results from exporters and importers maximizing profit behaviour Investment block: investment decisions as well as the demand for goods and services used in the construction of the new capital Market clearing block: clearing conditions for labour, goods and services, and foreign exchange

The Case of Carbon Tax in ASEAN Budy P. Resosudarmo Arndt-Corden Department of Economics Crawford School of Public Policy ANU College of Asia & the Pacific

1050 Southeast Asia GDP in billion USD 900 750 600 450 12 GDP in trillion USD 300 10 150 8 0 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 6 Indonesia Thailand Other SEA Philippines Singapore Malaysia 4 2 0 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012 China Southeast Asia Other East Asia

2016 Southeast Asia in the World Southeast Asia 640 million people or 8.6% of world population 3% of total land area in the world $2.5 trillion or 3% of the world s GDP Economic reforms in 1970s & 1980s (Indonesia: the Berkeley Mafia) Ave. annual growth of 5.5% since 1980 GDP/cap: $ 4,000 Latin America 640 million people or 8.6% of world population 4% of total land area in the world $5.2 trillion or 7% of the world s GDP Economic reforms in 1970s & 1980s (Chile: the Chicago Boys) Ave. annual growth of 3.5% since 1980 GDP/cap: $ 8,200 WDI

East Asian Integration By end of 2010s

ASEAN Community Bali Concord II in 2003: ASEAN Community by 2020. Accelerated to 2015 in 2007. 3 Pillars: Political (ASC), Economic (AEC), and Socio-Cultural (ASCC). ASEAN Economic Community: Brunei Darussalam and Singapore in 2010. Indonesia, Malaysia, Philippines, and Thailand in 2015. Cambodia, Lao PDR, Myanmar, and Vietnam in 2020. A Single Market Idea including ASEAN Free Trade Area

Energy and environmental challenges National challenges: Price distortion: Large subsidies in Indonesia, Malaysia, and Brunei Energy source preference: Great reliance on fossil fuel, e.g. coal Environment: significant world emitter of carbon Regional challenges: Development gap: Technological differences to produce/convert energy Resource gap: Varying patterns of energy consumption among ASEAN countries Geographical distinction and demographical disparities Global challenges: Global recession Rise of China and India Energy price fluctuation and Climate change concern ASEAN has to response as well

Top CO2 Emitters Energy combustion only (not include deforestation) 35% 30% 25% 20% 15% 10% 5% 0% 2015

Objectives To understand the impact of (possible) carbon tax on the economies of ASEAN countries Double the pleasure, double the fun: Double-Dividend hypothesis. No-Regret option: economic gain, maybe; environmental improvement, yes. Recycling mechanisms: industries, households, and government. The limitations: regress. Regress: regressive in developed countries and progressive in developing countries. Nurdianto, D.A. and B.P. Resosudarmo (2016), The Economy-wide Impact of a Uniform Carbon Tax in ASEAN , Journal of Southeast Asian Economies, 33(1): 1-21.

The IRSA-ASEAN Model Inter-regional system of analysis for ASEAN First fully integrated, SAM- based, multi-country model of ASEAN. not GTAP, not Globe. Highlights, among others: Disaggregated household groups for distributional effect. Financial transfers recorded, e.g. remittance. Endogenized revenue recycling mechanism.

Classifications of the Model 6 countries: Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam For each country: Sectoral Classification (26) Labor Classification (2): Skilled and Unskilled Non-Labor Classification (3) : Land, Natural Resources, and Capital Households (4) : Rural-Low, Rural-High, Urban-Low, and Urban-High Other Institutions (2): Government and Corporate Other Accounts (3): Indirect Tax, Import Tariff, and Saving-Investment Rest of the World account: Capital Account (Import Tariff and Saving-Investment) Import and Export Account (26)

Production Sectors Agriculture Mineral products nec Farming Metal products Forestry Other manufacturing Fishing Electricity Coal Gas distribution Oil Water Natural gas Construction Minerals nec Trade Food and beverages Transportation Textiles and leather products Communication Wood and paper products Financial services Petroleum and coal products Public administration Chemical, rubber, and plastic products Other services

Policy Simulations 1 carbon price at USD 10 per ton of CO2 emission (MoF, 2009). Uses of fossil fuel (read: coal, petroleum products, and manufactured gas) by households and industries are taxed (read: sales tax). 3 policy variations (recycling mechanisms): a. Government expends all carbon tax revenue to increase its consumption; b. Government expends 50 percent of the revenue and redistributes 50 percent back to low-income households in both rural and urban areas in the form of cash transfers; and c. Government expends 50 percent of the revenue and redistributes 50 percent back to the industries in the form industrial tax reduction.

Price Impact Simulation: - USD 10 price per ton of CO2 emission; - Recycled through government expenditure; and A carbon tax increases price to consumers and industries. Prices of coal, petroleum products, and manufactured gas increase as a sales tax is imposed on each of them. Subsequently, the electricity and transportation sectors are affected the most. Indonesia Malaysia Philippines 1.24 1.11 1.02 1.03 1.02 Singapore Thailand 1.24 1.08 1.02 1.02 1.01 Vietnam 1.22 1.15 1.01 1.01 1.06 1.29 1.10 1.01 1.03 1.02 1.25 1.13 1.01 1.03 1.01 1.30 1.07 1.03 1.02 1.00 Coal Petroleum Products Manufactured Gas Electricity Transportation

Carbon Tax at USD 10 per ton of CO2 Emission Macro Impact CO2Real GDP % Real Sectoral Change (%) Agri. Manuf. % Serv. Government Indonesia Malaysia Philippines Singapore Thailand Vietnam Household Indonesia Malaysia Philippines Singapore Thailand Vietnam Industry Indonesia Malaysia Philippines Singapore Thailand Vietnam -3.7 -4.06 -2.99 -0.95 -2.38 -6.29 0.25 0.04 -0.04 -0.01 -0.14 -0.33 -0.14 0.01 -0.08 0.02 -0.18 -0.06 -0.32 -0.18 -0.43 -0.35 -0.74 -1.12 0.75 0.46 0.25 0.12 0.32 0.87 -3.4 -3.74 -2.82 -0.88 -2.08 -5.77 0.27 0.06 -0.03 -0.01 -0.08 -0.22 0.01 0.17 0.05 0.04 0.01 0.14 0.07 0.07 -0.18 -0.26 -0.38 -0.65 0.47 0.02 0.07 0.09 0.14 0.32 -3.34 -4.03 -3.35 -0.94 -2.49 -3.67 0.26 0.04 -0.05 -0.01 -0.14 -0.22 -0.02 0.55 0.24 -0.28 -0.1 -0.38 0.24 0.12 -0.33 0.12 0.02 0.04 -1.19 * -0.09 0.05 -0.12 0.24

Carbon Tax at USD 10 per ton of CO2 Emission Household Impact Real Household Expenditure Change (%) Rural-Low Urban-Low Rural-High Urban-High Government Indonesia Malaysia Philippines Singapore Thailand Vietnam -1.1 -1.36 -0.77 -1.27 -1.54 -0.71 -0.32 -0.64 -1.83 -1.2 -1.13 -0.77 -0.18 -1.35 -0.73 -0.34 -1.06 -1.55 -0.91 -1.84 -1.14 -1.77 Household Indonesia Malaysia Philippines Singapore Thailand Vietnam 2.18 7.16 5.85 0.12 -0.76 0.43 0.45 0.39 0.26 -1.32 -1.36 -0.88 -0.9 -1.56 -0.9 -0.37 -1.53 -1.81 3.69 2.44 -1.32 -1.81 Industry Indonesia Malaysia Philippines Singapore Thailand Vietnam -1.61 -2.76 -1.66 -2.61 -0.63 -0.51 -1.35 -2.62 -1.35 -0.78 -1.02 -0.32 -0.99 -0.6 -0.22 -0.77 -2.65 -1 -2.59 -1.9 -2.25 -1.85

Household Expenditure Change* * - USD 10 per ton of CO2 emission.

Conclusions Carbon tax is an effective mechanism to reduce CO2 emission: Practical for developing countries. Opportunity to generate recycling mechanism Recycling to obtain double dividend hypothesis: Not always the case in obtaining double dividend. Only evident in Indonesia and Malaysia due to existing fuels subsidy. Is choosing which recycling mechanism to use important? Macro-economically and environmentally, no. Politically, yes: compensate households or industries Cases for winner or loser : Indonesia and Malaysia could potentially be the winners . Vietnam could potentially be the loser . Not so clear for Philippines, Singapore, and Thailand.

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