Distributional impacts of carbon taxing in the Netherlands: a 'flexible' input-output analysis

Abstract

This thesis aimed to explore how the Leontief price model could be best used in carbon taxing research through a case study about carbon taxing impacts on the purchasing power of the elderly in the Netherlands. Previous studies highlighted the importance of preventing distributional impacts on the elderly to gain public support for carbon taxing. Previous research also suggested that the Leontief Price Model has the tendency to overestimate price impacts due to its inability to capture input substitutions in response to taxes. This thesis used two different input-output models: a conventional Leontief Price Model and a ’flexible’ cost-push model developed by the Dutch National Bank that can incorporate additional price impacts of input-substitution. The Consumer Price Index was calculated to estimate the tax impacts on the purchasing power of elderly in the Netherlands.

It was discovered that the overall effects on the purchasing power of Dutch elderly remained marginal in the case of both an economy-wide Dutch carbon tax and a tax on the Dutch electricity sector. The inflation rates for the elderly ranged from 0.9% to 4.5% for the Dutch tax and 0.4% and 2% in the case of the electricity tax. Yet, compared to other age groups in the Netherlands, carbon taxes could still pose a risk to the purchasing power of the elderly, particularly to their ability to afford essential expenses such as electricity. All scenarios resulted in striking increases in electricity prices. The most ambitious scenarios, a Dutch carbon tax of €250 per tCO2, could result in a 25% increase in electricity prices. Given the limited disposable income and already weak purchasing power of Dutch elderly, carbon taxing could, thus, potentially worsen energy poverty among this group. Due to difference in consumption patterns and total income between age groups of main earners, elderly above 75 are more vulnerable to the tax compared to other age groups, including the elderly between 65 and 75. In addition, the case study highlighted the limitations of domestic forms of carbon taxing for a trade-oriented economy such as the Netherlands, since the displacement of emissions is disregarded here. Furthermore, this thesis confirms the conventional Leontief price model’s tendency to overestimate price impacts, as the flexible cost-push showed systematically lower outcomes. Although the flexible cost-push model improves on the conventional model through the inclusion of input-substitution, the results also showed that the flexible model is still somewhat limited in its ability to capture input-substitution. This thesis, therefore, also identified several opportunities for refining the flexible cost-push model to enhance its value in future research.

This thesis is an important contribution to the limited recent research on flexible input-output models by suggesting improvements to the flexible input-output model developed by the Dutch National Bank, which to the best of our knowledge had not been empirically tested since its development. This thesis also builds on existing literature by showing that the consumption pattern is not only vital in determining vulnerability to carbon taxing between income groups and countries, but also between different age groups of main earners. All in all, the findings once again emphasize the importance of explicitly considering both environmental effectiveness as well as social sustainability in carbon taxing design to not further exacerbate existing inequalities.