Fiscal balance: environmental taxes and investments

In this paper we develop a simple framework in macroeconomics for evaluating environmental investments that bear national significance. The framework rests on the concept of fiscal balance and the premise that environmental taxes must be returned towards restoring and/or enhancing environmental capital investments. We further illustrate that traditional frameworks in macroeconomics are not capable of evaluating the social desirability of environmental investments owing to the absence of environmental variables in these frameworks. The framework developed here shows that the recognition of environmental capital depreciation in macroeconomics permits the differentiation between various environmental investments in terms of their environmental impacts. These impacts are measured in terms of the costs of abating pollutants associated with climate change. The framework and its application are illustrated with reference to environmental investments in Vietnam.