Fiscal policies such as commodity taxes, subsidies, and price reforms can complement direct pollution abatement instruments and encourage fuel consumption
To anyone who has visited Mexico City, Santiago, Beijing, or Bangkok, theproblem of industrial pollution is obvious. But despite increasing concern, effective strategies for emissions control have yet to be designed and implemented. Here are some of the barriers to efficient abatement policies:
Given these problems with specific controls, researchers have recently focused increased attention on indirect fiscal policies. The advantage of such policies is that they can generate revenue, they are less subject to political manipulation, and they are relatively easy to administer. Because energy intensity and fuel choice are important determinants of air pollution, selective fuel taxes would be candidates for such---rather blunt---indirect instruments.
To learn more about this perspective, Bank consultants Diana Moss and James Tybout used plant-level data from manufacturing industries in Chile and Colombia to address two sets of issues.[1]
To gain a general sense of the levels of, and variability in, fuel intensities, the researchers present time trajectories of the share of energy spending in total variable costs and in gross output. Real fuel use as a percentage of real variable costs varies from a high of 5.7 to a low of 4.5 in Chile and from a high of 3.8 to a low of 3.3 in Colombia. One immediate implication of these relatively small shares is that, overall, manufacturing subsectors could absorb substantial fluctuations in fuel prices without large changes in operating profits. But a handful of subsectors (copper, cement, paper, petroleum, industrial chemicals, and iron and steel) are much more dependent on energy than the average numbers suggest.
Overall, 16 of the 28 Chilean industries (in 1979--85) and 16 of the 26 Colombian industries (in 1977--88) showed at least some reduction over the sample period in energy use per unit of output. These changes are caused in part by capacity utilization effects, but it may be that longer-term shifts in the fuel mix occurred during the sample period. Moreover, that adjustment patterns are very country-specific for some industries (paper, rubber, and ceramics) suggests that local economic conditions can play a potentially large role in determining energy efficiency.
Changes in the composition of energy sources are also substantial within some industries. This is true for apparel in Chile, wood products in Colombia, and for nonmetallic mineral production in both countries. In all these examples a shift is made toward less energy-intensive, or cleaner, production.
A look at energy intensities by subsector over time reveals that energy savings have been accomplished in both countries without scaling back the energy-intensive industries. Such industries as industrial chemicals and glass have apparently gained market share while there has been a secular trend toward increasing energy efficiency within industries. Energy-intensive subsectors have saved the most, possibly because they reap a relatively high return from doing so.
According to the researchers, changes in industrial energy use can be thought of as coming from one of three sources: changes in the interindustry mix of goods produced, changes in the intraindustry output shares of the producers, or changes in the energy intensity of individual producers. Decomposing adjustment in the energy-intensive sectors, they found substantial energy savings in many instances, most of it coming from within-plantadjustments (see the table).
Overall, the high level of adjustment within plants suggests ample scope for fuel substitution without hampering competitiveness.
In Chile there is evidence that new capital equipment has embodied technologies that use electricity. First, much of the new demand for electricity was met through a secular trend toward self-generation; self-generation is not easily accomplished without new equipment. Second, new plants differed systematically in their energy use from others of comparable size in the same industries. In both Chile and Colombia new firms tended to rely more on electricity and much less on petroleum than incumbents did. This suggests that new technologies were becoming embodied in the manufacturing capital stock through new investment.
Looking at temporal trends in prices, several general observations can be made. First, in Chile the cost of energy rose almost 30% more than output prices for manufacturers during 1979--85. Similarly, in Colombia the cost of energy rose 36% in relation to the wholesale price index during 1977--88. These relative price changes may largely explain the observed overall reductions in energy intensity within plants.
Second, although in Chile the cost of electricity rose less than the aggregate energy price index, in Colombia the cost of electricity rose substantially more than the aggregate energy price index. Thus, the intraplant adjustment away from electricity in Colombian manufacturing was probably caused in part by a rapid increase in the price of electricity; the adjustment toward electricity in Chile was probably due in part to a fall in the price of electricity in relation to fossil fuel prices. Relative price changes for other fuels also matched changes in fuel intensities with little lag.
At the aggregate level, Chilean manufacturers managed to mildly reduce the energy intensity of their production during 1979--85. Colombian manufacturing was less energy-intensive on the whole, and its energy intensity decreased as well, though by a smaller amount than in Chile, during 1977--88.
Chilean manufacturers shifted away from fossil fuels and toward electricity. These adjustments were primarily within plants rather than due to changes in the mix of manufacturing goods produced. A different pattern emerges in Colombia, where individual plants tended to become less electricity-intensive, but where changes in the output mix offset this tendency to economize on electricity. Generally, intraindustry and intraplant reductions in the use of fossil fuels and energy tended to dominate changes in the manufacturing output mix. Thus, substantial energy savings seem possible without forcing widespread shutdowns among energy-intensive producers.