Water Right Fee and Green Tax Reform - A Computable General Equilibrium Analysis

This study uses a single-country water resources CGE model, WATERGEM, to investigate the double dividend effect of imposing water right fees. WATERGEM is developed based on ORANI model with a SAM data structure. The water resources considered in the model are tap water, surface water, and ground water. Water company is treated as a sector, surface water and ground water are treated as two primary inputs. The substitution among three water resources is also formulated. The green tax reform is getting its popularity in the advanced countries. Due to the environmental concerns, more and more environmental taxes have been levied. The collected environmental tax revenue could be used to reduce the distorted taxes. This generates two effects, improvement in environmental quality and reduction in distortion, known as double dividends. The water right fee is usually collected under the user pays principle to increase the efficiency of water use. We consider it as an environmentally-based tax. For policy simulation, we assume that the water right fee revenues could be earmarked, or used to deduce household income tax, corporate profit tax. The results of simulation show that the double dividend effect does exist, and the double dividend effect of deduction in corporate profit tax is higher than the others. In the meanwhile, the simulation results also show that water demand reduces when water right fee is imposed.