William & Mary

Economic Policy in Action

Thomas Arthur Vaughn Professor of Economics Alfredo Pereira and Dr. Rui Pereira were instrumental in the design and implementation of green fiscal reform in Portugal. Based on their recommendations, a new tax on carbon dioxide, indexed to the price of carbon dioxide emissions in the European Union Emissions trading system was approved by Parliament, and enacted on January 1st, 2015 through Decree-Law n.o 82-D/2014. The process and outcome demonstrated the importance of careful analysis in informing policy making as well as the sacrifices made to make the policy politically feasible.

Dr. Alfredo PereiraFor the period between April and December of 2014, Alfredo Pereira was the coordinator for technical support team reporting to the Commission for Green Fiscal Reform in Portugal. The Commission for Green Fiscal Reform was appointed by the Portuguese Ministry of the Environment, Land use Planning and Energy as well as the Secretary of State for Budgetary Affairs. Alfredo Pereira supported the Commission as it attempted to resolve practical issues, create consensus and create transparency in policy making. The technical report on the environmental and economic effects of a new tax on carbon dioxide in Portugal supported the development of the legislation and was open for public comment prior to the passage of the legislation. The public consultation documentation is available here (Principal documentation in Portuguese, three technical summaries in English) from the Portuguese Ministry for the Environment, and Energy. 

The policy recommendations put forward by the Commission for Green Fiscal reform, following directly from the technical report, were successful because they were able to accommodate the legitimate needs of different stakeholders: interest groups that advance environmental goals, households focused distributional issues, and businesses concerned with international competitiveness. The analysis demonstrated that a carbon tax with revenues used to finance a reduction in personal income taxes, employer social security contributions and used to finance investment tax credits for investments directed at improving energy efficiency can produce three dividends over the long run. This policy design reduces harmful greenhouse gas emissions while encouraging economic growth and advancing badly needed budgetary consolidation efforts that are particularly pronounced in light of the recent sovereign debt crises in Europe. A summary of the main recommendations are also presented in two William and Mary Economics Department working papers by Alfredo Pereira and Rui Pereira [Working Paper 154, Working Paper 155].

Alfredo PereiraPolicies implemented in many cases differ from the ideal that analysts and economists examine due to the need to reconcile political feasibility with the sometimes uneven effects of policies felt across different groups. A key feature of this proposal was a judicious set of mixed strategies to recycle all carbon-tax revenues back into the economy. Pereira and Pereira show that the carbon tax that the Portuguese Parliament eventually approved deviated from such guidelines, and ultimately failed to achieve the triple dividend. A summary of the main conclusions are also presented in a working paper by Alfredo Pereira, Rui Pereira, and Pedro Rodrigues [Working Paper 161]. The resulting legislation, however, serves as an important step towards sustainability and an important contribution towards the use of economic and fiscal instruments in environmental policy. The Decree-Law introduced a new tax on carbon dioxide in Portugal whose price is determined by the EU-ETS together with a one-time reduction in the person income tax, incentives for investment in renewable energy and a tax on plastic bags.

In the context of this public policy effort, from April 2014 to May 2015 that is during both the period of the Commission for Green Fiscal Reform in Portugal and in the immediate aftermath of the legislation being approved, Alfredo Pereira participated in over forty conferences, ministerial meetings and town hall meetings discussing the policy proposal and addressing the issues raised by interested parties. Similarly appeared his views appeared in a large number of media features, articles, and interviews, in major Portuguese media including SIC, TVI, Journal de Negocios, Publico and Diario Economico.

The work of Professor Alfredo Pereira and Rui Pereira was instrumental in the design, promotion and public understanding of the tax reform package submitted to Parliament. These efforts put William and Mary in the international news. The experience demonstrated the importance of applied economics in policy making and the need for compromise to ensure positive outcomes, here a significant step towards controlling greenhouse gas emission in Portugal through the introduction of a tax on carbon dioxide emissions.