Green Tax and Budget Reform as a Public Policy Promoting Green Growth – European Experiences Second Policy Forum of the Seoul Initiative Network on Green Growth “Application of Economic Instruments for Green Growth” Stefan Speck UNCC, Bangkok, Thailand September 5-7, 2007

Structure What is understood under ETR/EFR – the European perspective ETRs implemented in Europe – similarities and differences Environmental effectiveness Results of a study analysing the macroeconomic effects of ETRs ETR and employment Results and Lessons Learned

What is understood under ETR/EFR – the European perspective? Environmental tax reform (ETR) is basically a reform of the national tax system where there is a shift of the burden of taxes from conventional taxes, such as labour, to environmentally damaging activities, such as resource use or pollution. Environmental fiscal reform (EFR) is a broader principle, which focuses not only on shifting taxes and tax burdens, but also focuses on reforming subsidies. (European Environment Agency, 2005)

What is understood under ETR/EFR – the European perspective? The first ETR in the Nordic countries – Sweden (1991) and Denmark (1993) – Netherlands, Finland, Germany, UK plus Switzerland and Italy Delors' White Paper on Growth, Competitiveness and Employment – European Commission 1993: If the double challenge of unemployment and pollution is to be addressed, a swap can be envisaged between reducing labour costs through increased pollution charges. ‘Double Dividend Hypothesis’ – a host of academic literature on this subject ( ‘revenue-recycling dividend’)

ETR in EU member states National approaches of ETRs in EU member states differ widely in terms of: Environmental taxes: mainly energy taxes but different energy products and economic sectors are targeted Reduction in other taxes (recycling of revenues generated) :  taxes/charges levied on labour: income taxes, social security contributions, etc;  capital taxes;  granting of subsidies for energy efficiency improvement; Large differences in the approaches adopted mainly in recycling measures between countries!

ETR in EU member states Revenue neutrality – guiding principle in textbooks but not in reality Scope of ETR in terms of revenues shifted; ETRs can also be part of a major tax shifting programme  Sweden 1991 – major fiscal reform process and ETR was part of this reform process: total loss in revenues 71 bill SEK – environmental taxes generate around 18 bill SEK, i.e. partly offsetting the losses in the national budget  Sweden 2001 – 10-year programme of tax shifting programme of around 1.4% of GDP but was abolished after change in government  Germany – about 0.9% of GDP  UK – about 0.13% of GDP

ETR in EU member states Economic sectors affected: industry (large vs. small and medium sized enterprise), transport, households Special tax provisions (tax exemptions/ reductions, tax ceilings) for industry can be found in all countries – fear of possible losses of competitiveness of domestic industries Special earmarking of environmental revenues for specific investment subsidies (for example, Italy) Design of ETRs: rather different between countries reflecting the individual national policy objectives! ONE SIZE WON’T FIT ALL!

The German ETR – tax shift programme ETR – to be implemented during the period First objective: Environmental protection, in particular the reduction of greenhouse gas emissions as a means of climate change mitigation. Second objective: reduction of labour costs as a means to increase employment. Instruments to be implemented: energy taxes (increase in existing ones plus new tax on electricity); and reduction of employers’ and employees’ statutory pension contributions  ‘double dividend’ hypothesis!

ETR/EFR – double dividend hypothesis ‘Double dividend’ hypothesis as summarised in a recent OECD publication: ‘… that the results of many models converge, to indicate that a carbon-energy tax combined with cuts in labour taxation, would yield some double employment-environment dividend. However, the employment effect is limited’ (OECD, 2001). ‘ …that an employment dividend is possible when the revenues raised when implementing economic instruments - such as taxes or auctioned tradable permits – are recycled in the form of a reduction in labour costs. The employment increase is likely to be greater when payroll tax reductions are concentrated on unskilled workers’ (OECD, 2004).

Environmental effectiveness of environmental / energy taxes  Germany – reduction in energy consumption ( ): petrol by 14%, slight increase in diesel 2%, and reduction in LFO 23%!  Sweden - CO2 emissions would have been 20% higher if energy/carbon taxes would have remained at 1990 level!  Denmark - landfill tax led to a reduction in the total amount of waste and an increase in the reuse of building and construction materials!  Netherlands – energy consumption 3.5% lower than it would have been had the tax on natural gas and electricity not existed!  Ireland – plastic bag levy: a reduction of around 90 per cent of the consumption of carrier bags after the levy was introduced!  UK – transport: congestion charge in London – reduction in traffic!

The COMETR project – some results Main findings of an EU funded project analysing ETRs in six EU member states (Denmark, Finland, Germany, Netherlands, Sweden and the UK): Results are based on a modelling framework (1990 – 2012)  ETRs lead to a reduction in fuel demand (around 4 percent)  Reduction in CO2 emissions – largest reduction in countries with highest energy/CO2 tax rates  Revenue recycling reduced the costs of ETR and it can be expected to result in an increase in GDP – macroeconomic impacts depend on how revenues are recycled  ETR caused employment to increase by as much as 0.5 percent

COMETR results – effects of ETR on GDP

COMETR result – effects of ETR on employment

ETR and employment A word of caution with regard to the employment effect! Germany: It is estimated that the effective impact of the ETR has been to reduce the pension contribution costs 8% - equivalent to a reduction in average labour costs of around 1.1%. UK: The full-year revenue from the climate change levy (part of the UK ETR) was expected to be around £1,000 million and this was used to fund a 0.3% point reduction in the employers’ national insurance contribution rate (from 12.2% to 11.9%). This represented a reduction in the average cost of labour of around 0.03%.

Summary and Lessons Learned Significance of the design of an ETR  Identification of national policy goals to be achieved with the introduction of an ETR – environmental objective and economic objective!  Which part of the society will be targeted (household/ industry)?  Which environmental taxes to be used?  Which recycling mechanism is used (reduction of other taxes) plus other recycling measures – taking into account the revenue neutrality principle !

Summary and Lessons Learned A further important aspect in the successful implementation of ETR is the role of public information by addressing the potential winners and outcomes of such programmes. Findings of PETRAS - an EU DG Research funded – project: significant impediment to ETR concept is the lack of plausibility in the eyes of general public. to establish trust that the government will honour its promises in terms of using the revenue to reduce labour taxes rather than revenues just disappearing into a black hole.

Summary and Lessons Learned Extensive use of environmental taxes has not shown itself to be detrimental to economies. Public information campaign to generate public support for the shift in taxation from ‘goods’ (labour) to environmental ‘bads’ (environmental pollution). ETRs are primarily focusing on energy taxes – but also other environmental taxes. Revenue generating potential of the latter is rather limited. Broadening the tax base – link to a more general fiscal reform; type of a more consumption-based taxing system.

Conclusion - Perspective/prospect of ETR in Europe More general tax reforms in which an ETR is a component can be found in Europe. The criteria of these reforms are to change the overall tax structure but not explicitly referring to ETR (Austria, Russia). Efforts to reduce subsidies that do not have defendable social, economic or environmental aspects, are expected to continue, and where successful result in budget savings and contribute to reduce the economic tax burden. ETR must address country-specific issues, i.e. the nature and extent of the ETR is relevant to the particular country economic, social and political circumstances.