Environmentally Counterproductive Support Measures in Austria – Empirical Analysis for Energy and Transport Daniela Kletzan-Slamanig Angela Köppl FairTax special session “Fair and Sustainable Taxation”  March 9-10, 2017

Why reform environmentally counterproductive support measures? (1) Meeting the long-term climate policy targets requires a fundamental change in energy systems and avoiding fossil lock-ins This requires a comprehensive consideration of climate policy issues in all areas of fiscal policy (taxes, subsidies, …) Fiscal instruments like environmental taxes are a key instrument for changing behaviour But: subsidies for fossil fuels and energy intensive activities thwart the efforts aimed at structural change and sustainability

Why reform environmentally counterproductive support measures? (2) „All kinds of financial supports and regulations that (…) together with the prevailing taxation regime, (unintentionally) discriminate sound environmental practices.“ (OECD, 1998) Policies ought to remove these distortions and provide consistent signals to all market participants International institutions (OECD/IEA, EU, IMF,…) have demanded the reform of subsidies that generate unintended negative effects on the environment A subsidy reform can contribute to various goals: Reaching environmental and climate policy targets Relieving public budgets Improving resource allocation and supporting eco-innovation

Environmentally counterproductive support measures in Austria Stock taking of support measures with potentially negative impacts on the environment Focus on energy supply and use, transport, housing Focus on direct subsidies and preferential tax treatments on the level of the federal state (exception: housing) Period covered: 2010 – 2013 16 support measures identified and quantified

Environmentally counterproductive support measures in Austria - overview Energy supply and use Energy tax refund for energy intensive industries Manufacturer privilege Energy tax exemption for non-energetic use of fossil fuels Public energy research expenditures for fossil fuel technologies Grandfathering of allowances in the EU ETS Transport Reduced mineral oil tax rate for diesel Mineral oil tax exemptions for: - air traffic - shipping VAT exemption for international flights Commuter subsidies Taxation of company cars 1) Tax exemptions within the scope of registration and vehicle taxes Real estate tax exemption for traffic areas 2) Housing Direct subsidies for new single-family houses Income tax allowance for new residential buildings 1) Implicit subsidy within the scope of building regulation (parking space obligation) 1) These measures were part of the tax reform 2016.- 2) Not quantified.

Environmentally counterproductive support measures in Austria– volume & distribution Total volume of subsidies analysed: 3,8 – 4,7 bn. € (Ø 2010 -2013) About two thirds can be reformed on the national level.

Environmentally counterproductive support measures in Austria– volume & distribution Households: 40% Enterprises: 60% Housing Transport Transport: ~50% Energy: ~ 33% Energy Q: own illustration.

Example 1: Energy tax refund (1) Energy intensive companies get a refund on energy taxes paid that exceed the value of 0,5% of their gross value added. Since 2011 the refund has been limited to manufacturing, not corresponding to EU law. Service companies can demand the refund retroactively. Given the energy tax refund and the low CO2 price in the EU ETS there is no significant price signals for companies to improve energy efficiency or engage in technological innovation. Energy intensity of Austrian manufacturing showed lower improvement in the past 10 years than the EU trend.

Example 1: Energy tax refund (2) The subsidy amounts to 400 – 450 mill. € per year for manufacturing. Service companies received additional 100 mill. € annually. Until 2010 service companies constituted ~75% of applications but only ~20% of refunds. Average refund per company ranged from 20.000 € (services) to 200.000 € (manufacturing). Two thirds of refunds for manufacturing accrue to five sectors (paper, basic metals, mineral products, chemicals, food products)

Example 2: reduced tax rate for diesel The tax rate for diesel is lower than that for petrol (0,425 € vs. 0,515 € je litre). Initially intended as a support measure for commercial transport the differentiation also benefits private transport. The measure exerts a strong influence on the purchase of diesel-powered vehicles. The share of diesel cars increased from 37% (2000) to 57% (2014). The average emission intensity of diesel cars increases in contrast to petrol powered cars. This translates into strongly increasing CO2 emissions from diesel-powered passenger transport. In addition, diesel contributes to other air emissions (e.g. particulate matter)

Example 2: reduced tax rate for diesel Foregone revenues in m € Total Transport Q: Statistik Austria, own calculations. The loss in revenues from the mineral oil tax due to the lower tax rates for diesel amounts to 640 m € p.a. (Ø 2010 – 2013)

Example 3: Commuter subsidies The main commuter subsidy in Austria (Pendlerpauschale) is an income tax allowance It is not based on actual distances travelled or costs incurred but is granted as flat-rates The system of commuter subsidies in Austria is complex and generates high administrative costs: It is differentiated in small and large rates (based on the availability and reasonability of public transport) It distinguishes between different distance classes (in 20km steps) Other instruments for commuter support are in place (other tax measures as well as direct subsidies on province-level) As an income tax allowance it benefits mainly higher incomes Its design elements (flat rate, rules regarding reasonability of public transport) generate incentives for car use

Example 3: Commuter subsidies Distribution by distance Q: BMF, Statistik Austria, WIFO calculation. and income small rate large rate Total volume of tax allowance ~500 m € Underestimation because additional measures cannot be quantified ("Pendler Euro", subsidies on provincial level) Subsidy benefits higher income classes and is mainly granted for short to medium distances

Conclusions The use of fossil fuels is still subsidised with a range of measures in Austria In order to contribute to climate policy goals a subsidy reform should be implemented in steps resulting in consistent price signals for households and companies Ideally the subsidy reform should be part of a comprehensive fiscal reform To ease the transition additional revenues can be recycled for R&D or infrastructure investments The first step towards a reform is a comprehensive subsidy controlling, i.e. transparent information about the volume, effects and distribution of subsidies and the identification of necessary changes.

Thank you for your attention! Daniela.Kletzan-Slamanig@wifo.ac.at Angela.Koeppl@wifo.ac.at