2
.
3
. Combining the material flow model
‘
Flux
’
with the AGE model
‘
Taxinc
’
The data on the material flows in the material flow model Flux are used to implement material
policies in the economic model Taxinc. The phys- ical data on the material flows between economic
sectors including extraction are connected to the data in monetary units in the Taxinc-model. A
levy on an economic sector is determined by its use of materials in kg and its output in guilders.
After the levy is imposed, the Taxinc-model calcu- lates a new equilibrium. The results of the Taxinc-
model are imported into Flux to assess the effects on the material flows. Thus, the combination of
Flux and the Taxinc-model allows for the con- struction of various fiscal policy scenarios to ex-
amine the economic and physical environmental effects of these policies.
The height of the material levy imposed on a production sector depends on the material inten-
sity of the sector. In this study, two different types of material intensities are distinguished. First, the
direct material intensity of a production sector is defined as the material inflow in kg in the sector,
coming from outside the domestic economy i.e. coming from imports or from the environmental
sector per guilder of production output. The second material intensity that is identified is the
so-called compounded material intensity that measures the total embodied material content of
the product produced in the sector. This com- pounded material intensity consists of the direct
inflow of material in the sector from imports or the environment, but also encompasses the mate-
rials that entered the economic system in earlier production stages.
3
In this way, the compounded material intensity depends also on the throughput
of the materials through the economic system. The material flow model makes the calculation of
these compounded material intensities possible, and it is these compounded intensities that are
relevant for material policies.
For practical reasons, it is assumed that the direct material intensity does not change when a
levy is imposed. Changes in the output levels can then be translated into changes in material use.
Clearly, this effect on materials will differ from the ‘true’ effects, primarily because changes in the
material contents of inputs cannot be accounted for, and because substitution within a sector is not
taken into account. However, substitution of one material by another is considered if the supplying
production sector is different for both materials. Consequently, the compounded material intensi-
ties are non-constant. The assumption of constant direct material intensities limits the interpretation
of the results, but cannot be voided in the current framework see concluding section below for a
discussion on how to improve the methodology in this respect.
3. Material and product policies
A material policy may be imposed to reduce the use of specific materials and products. The poli-
cies used in this study are regulatory policies, where the revenues are redistributed to the tax-
payers. Therefore, a scenario for a policy imple- mentation consists of two parts: 1 the material
or product policy; and 2 the destination of the revenues generated by the policy. In practice,
policy makers need to make choices about both of these issues. The scenario analyses are not per-
formed for forecasting, but for illustrating the mechanisms in the combined empirical model.
For the material policies, the relative tax weight of the material levy depends on the material inten-
sity of the production sector. Different policy alternatives are formulated to show the differ-
ences between using the direct or compounded material intensities see Section 2. The overall tax
rate of the levy, which essentially serves as a scaling parameter, is chosen such that the total
tax revenue will be 0.1 of national income. The total ex post tax payments by a production sector
or household group also depend on the indirect economic effects of the policy. These indirect ef-
fects are governed by all the price, tax and income elasticities.
The revenues are redistributed by reducing the labour taxes paid by the production sectors,
3
Note that for each stage of production, a new com- pounded material intensity can be calculated.
which may be interpreted as a reduction in the employers’ contributions to social security. How-
ever, as the labour supply is rather inelastic, the labour effects of the policies are expected to be
limited in the general equilibrium context.
The material levy and the reduction of the labour tax result in a shift in the tax burden from
labour to material use. The current tax system discourages work and investment, and it encour-
ages pollution and material use. Therefore, a tax shift from labour to material use is attractive
because it taxes more what we want less of, i.e. material use, and less what we want more of, i.e.
labour Hamond et al., 1997.
4
This regulatory levy can be seen as a ‘green tax reform’ or ‘eco-
tax’. Though the explicit objective is to reduce the use of specific materials, stimulating employment
may be an implicit goal.
Exports are exempt from levies, as the competi- tive position of the exporting sector would be too
severely affected. Implicitly, the material content of the imported products is assumed to be equal
to those of domestic substitutes.
5
This results in a single tax rate for both types of inflows of materi-
als extraction and imports. The regulatory levy will not only affect the
sectors that are subjected to the levy, but indi- rectly also other production sectors and house-
hold groups. The levied sectors will react to the changes in relative prices, which triggers a reac-
tion of other agents. In total, all relative prices will change, and consequently all production sec-
tors and household groups are affected by the levy. As a result, part of the tax burden is shifted
from the taxed sectors to the rest of the economy. The magnitude of this burden-shift depends on
the price and income elasticities.
3
.
1
. A regulatory le6y on primary material input
:
the
‘
inflow le6y
’
A regulatory levy on primary material input is imposed on the inflow of materials into the Dutch
economy, either through imports from foreign economic sectors or through extraction from the
environment see arrows labelled 1 in Fig. 2. This means that the production sectors are levied ac-
cording to the direct material intensity of the sector i.e. the materials added during the produc-
tion stage and not the material contents of in- puts. To avoid double counting, the intermediate
flows of materials between sectors are not levied.
3
.
2
. A regulatory le6y on material throughput
:
the
‘
throughput le6y
’
With a regulatory levy on primary material input the first stage production sectors will be
severely affected. Therefore, an alternative mate- rial policy may be imposed on the throughput of
materials in the economy. This is simulated by levying the inflow of materials into all sectors,
except for first stage production sectors see ar- rows labelled 2 in Fig. 2 plus the material flows
from the first stage production sectors to their respective clients. The throughput levy thus de-
pends on the compounded material intensity. The total material flow on which the policy is imposed
is smaller than in the base scenario as the outflow from the first stage production sectors are not
taxed. This is compensated by a higher overall tax rate.
A firm in the first stage production sector is taxed to the extent that it is a buyer of goods
made by another firm in this sector the buying firm then acts as a second stage production sec-
tor. This can be interpreted as intra-industry trade between two firms in the first stage produc-
tion sector. For instance, the basic zinc industry will provide some zinc products to the other basic
metal industries.
3
.
3
. A regulatory le6y on products
:
the
‘
product le6y
’
The product policy is directed at products that
4
Other possibilities to redistribute the revenues to the tax- payers include a subsidy on the use of an environmentally
less-damaging input, introduce a subsidy on RD, or a lump- sum transfer to the production sectors or households.
5
As imports in the material flow model are not distin- guished by origin, these imports cannot be linked to the
imports in the AGE model. Therefore, it is necessary to make the assumption that the material intensity of foreign produc-
tion is equal to that of domestic production.
contain certain materials. The consumers of these products, which may be either production sectors
or household groups, are subjected to the levy see arrows labelled 3 in Fig. 2. The goal of this
policy is to encourage consumers to switch to other products with a lower metal content. The
main difference with the regulatory material levies is that the products themselves are levied, not
their material content. In this scenario the relative tax weights are equal across all sectors. The total
tax paid by a sector depends on the value of the products bought from the first stage production
sectors.
3
.
4
. Application to hea6y metals In the scenario analysis the material policies
will be simulated for two specific heavy metals: zinc and lead. Table 1 presents the direct and
compounded zinc and lead intensities for selected production sectors. The compounded material in-
tensity is calculated for a ‘first-stage compound’, i.e. the first-stage production sectors are excluded
and the implicit material content of the products from these first stage production sectors are taken
into account in the material intensities of the other sectors. For illustrative purposes, the share
in the total inflow of a particular metal is pre- sented measured as a percentage of the use in
kilograms.
Table 1 shows that the share of the basic metal industry in the total inflow of zinc is more than
80 of the total zinc use. Other large users of zinc are the basic chemical industry, metal products
manufacturing and wholesale and retail trade through imports. The lead use of the basic metal
industry is 46 of total lead use. Among the sectors with high lead intensity is the
construction sector. At first glance, the large zinc and lead intensity of the other services sector may
seem surprising. However, this sector encom- passes the waste-handling firms that account
for a large use of metals Boelens and Olsthoorn, 1998.
A high low direct metal input of a production sector does not necessarily imply a high low
compounded metal intensity of the goods and services produced in the sector. The reported di-
rect intensities are based on where the metals enter the economic process. For example, a final
stage production sector may produce goods and services with a high compounded metal content,
but add a little more metal in the production process itself. The materials included in the eco-
nomic inputs are already accounted for in other production stages. The differences between the
compounded and direct material intensities indi- cate where most of the materials from the basic
metal industry goes the throughput from this sector.
4. Results of the scenario analysis
