Fossil Fuel Prices and Taxes, and Their Effects on Economic Development and Income Distribution in Viet Nam
The project aimed to explore the short and long run impacts of imposing additional fossil fuel taxes and removing respective existing subsidies on the Vietnamese economy. The objectives were to provide dynamic projections of the potential effects on the development of different industrial subsectors, the effects on income distribution and welfare of different social groups, the impacts of fuel-tax-induced energy efficiency gains arising from the adoption of low carbon-intensive technologies and the incentives for R&D activities directed at low carbon technology innovation, and the effects on Viet Nam’s external trade.
By considering differentiated fuel tax schedules and alternative uses of the additional government revenue, the analysis was designed to lead to tentative recommendations for fossil fuel tax policy design and other parallel government measures that are suitable to facilitate the transition of the Vietnamese economy towards a sustainable low-carbon development path, while maintaining high growth rates and mitigating potentially adverse side effects on vulnerable groups.
The analysis is based on a purpose-built dynamic multi-sectoral computable general equilibrium model of the Vietnamese economy with a stylised representation of fossil fuel tax / subsidy instruments, a careful representation of technical substitution possibilities among different energy sources and a disaggregated treatment of the household sector. The model has been calibrated to a modified version of the most recent social accounting matrix for the country which reflects the observed current input-output structure of production, the commodity composition of demand and the pattern of income distribution in Viet Nam at a disaggregated level. The model is first employed to generate a dynamic business-as-usual scenario in the absence of changes in fuel taxes and subsidies up to 2020, which then serves as the baseline for comparison with the CGE simulations of variations in fossil fuel taxation.