Analysis of Environmental Taxation and Migration
Attributes
Medium: Animals, Plants and/or Others
Country: China
Analytical Framework(s): Other
Study Date: 2006
Publication Date: 2006
Major Result(s)
Study Note: In this report, a recursive dynamic Computable General Equilibrium (CGE) model with two representative households (rural vs. urban) was formulated to examine the relationship between the proposed environmental tax policy and the spatial rural-urban migration distortions. Two environmental tax policies are selected for the analysis. One is fuel tax policy, a tax on primary fuels where the tax rate will be set as proportional to the average damage per unit of fuel use. The other one is output tax, a tax on sector output, where the tax rate is proportional to the marginal health damages of each sector. The goal of this study is to answer the following research questions: How would the "rural-urban" migration process be affected by the proposed environmental tax policy? Would the environmental tax policy exacerbate or relieve this type of labor market distortion? Which environmental tax policy is more efficient in terms of pollution reduction and impacts on the labor market?
Study Details
Summary: For the past twenty years, the Chinese economy has achieved a growth rate averaging nearly 10% each year. However, this strong economic performance has been accompanied by severe environmental deterioration. To curb the rapid growth of air pollution, many environmental scholars are advocating an environmental tax policy, which has been extensively proved as an effective and efficient economic incentive instrument on pollution abatement by many OECD countries. However, a lot of literature on optimal environmental taxation in the "second-best setting" suggests that if labor market distortions are considered, an environmental tax policy will actually exacerbate pre-existing tax distortions in the economic system due to the negative "tax interaction effect", thus driving up welfare costs associated with environmental tax reform. In previous literature on China's environmental tax policy, inelastic labor market assumptions were typically assumed due to the large labor force in China, giving rise to a strong form "double dividend" result (This suggests that environmental taxes can be used to discourage environmental damage activities and reduce the efficiency costs of pre-existing tax distortions simultaneously.) This result was obtained only when positive welfare gains from the "revenue recycling effects" were accounted for, while "tax interaction effects" in the labor market were zero due to the inelastic labor supply assumption. However, previous literature ignored the fact that in a transitional economy like China, because of the old household registration "hukou" system and other government constraints on migrations, peasants' rural-urban migration behaviors are distorted and resulted in tremendous economic inefficiency in the allocation of labor resources spatially. Thus, there might be another type of "tax interaction effect" associated with the environmental tax in the second-best setting, which stems from the spatial allocation of urban and rural labor, i.e. migration, rather than from the entering or exiting behaviors in the labor market of western countries. This study examines how environmental tax policies affect "rural-urban" migration flow and associated labor market distortions in China, using a recursive dynamic Computable General Equilibrium (CGE) model with tworepresentative households (rural vs. urban). This study analyzes the impact of two sets of environmental taxes: fuel tax and output tax and finds that both of these discourage rural-urban migration flow and exacerbate the current spatial labor distortions in China. By comparing the two tax policy regimes, the CGE model simulations suggest that fuel tax is more economically efficient than output tax in terms of reducing more pollution emissions and associated environmental health damages, and bringing about lower distortions in the rural-urban migration process.
Site Characteristics: The Chinese Household Income Project (CHIP 1995) data set from the Inter-University Consortium for Political and Social Research was used in the empirical analysis. The CHIP 1995 data set was collected by Carl Riskin, Zhao Renwei and Li Shi (2000); it was a joint research effort sponsored by the Institute of Economics, Chinese Academy of Social Sciences, the Asian Development Bank, and the Ford Foundation, with additional support provided by the East Asian Institute, Columbia University. This survey was selected from significantly larger samples (approximately 65,000 rural households and 35,000 urban households) drawn by the State Statistical Bureau. The CHIP 1995 household survey data set is useful because it provides relevant information on rural peasants' migration behavior, personal income and hours worked in different occupations as well as a wide range of individual and household characteristics in both rural and urban areas of China. In addition to the responses of migrants, we also learnt their work distribution in urban manufacturing sectors. For our estimations, we dropped individuals who did not answer the migration question on whether he/she would leave the household to work in other areas, so our sub-sample covered 7,500 households containing 21,127 working-age adults.
Comments: In this study, the migration process is modeled explicitly in the CGE model. To provide crucial parameters for this migration module, it was necessary to conduct empirical studies before the CGE modeling exercises. First, one needs to understand the theoretical aspect on rural-urban migration behavior and how it is related to the ruralurban wage differential. Then based on micro level survey data, an empirical analysis was conducted to estimate the key parameters in the urban-rural migration equations.