Study: Land taxation can protect forests

Due to climate change, population growth and economic growth, land will become an increasingly scarce factor within the 21st century which will put pressure on forest and biodiversity conservation. A new study by MCC researchers Matthias Kalkuhl and Ottmar Edenhofer provides a new perspective on the role of land taxes for forest conservation and economic development. The research results were published in the economic journal International Tax and Public Finance.

Taxes on land without standing forests could become an innovative policy tool to reduce deforestation as they reduce the incentive to clear forest land for agricultural production. Using a two-sector growth model, the authors demonstrate that land taxes in an open economy can additionally induce a structural change in the economy where the workforce shifts from the agricultural to the manufacturing or industrial sector. As labor productivity is higher in the manufacturing sector, the structural change increases economic wealth in the long run, pointing at a large double dividend from land taxation.

Besides land taxes, the authors also study the implications of technological change leading to higher agricultural yields and higher productivity in the industrial sector. In open economies that are well integrated into global trade, improved agricultural productivity increases deforestation as the country specializes more on agriculture. For closed economies (i.e. largely isolated from global markets due to high transportation costs or prohibitive trade costs), increased agricultural productivity reduces pressure on forests as food demand can be met with less area. Hence, while technological change can have ambiguous effects on forest conservation, land taxes turn out to be always effective. Furthermore, land taxes are able to raise public revenues in countries where government budgets are often low and therefore public infrastructure spending lacks sufficient resources.

The full article is available online at: link.springer.com/article/10.1007/s10797-016-9403-6