1 Overview of carbon related taxation in OECD countries Presentation at the AFDC 2010 Biennial Forum on Fiscal and Financial Policies for Low-carbon Economic Development Shanghai, P.R. China 26 November 2010 Nils Axel Braathen OECD, Environment Directorate

2 Introduction In October 2010, OECD published the book Taxation, Innovation and the Environment … …. to a large extent built on a number of ex post studies of the innovation impacts of selected environmental policies … … but also includes an updated overview of the use of environmentally related taxes in OECD countries... … and a ‘user’s guide’ for policy makers on how to implement such taxes. This presentation will focus on the information regarding carbon-related taxes in this book and related OECD work.

3 Revenues from environmentally related taxes in per cent of GDP, by tax-base (2008)

4 Revenues from environmentally related taxes in per cent of GDP, by tax-base

5 Why have revenues decreased in per cent of GDP in recent years? This is closely linked to the increase in world crude oil prices since year This price increase has contributed to people substituting away from motor fuel use, towards other goods and services. In short: Price signals work! As motor fuels often are (much) more taxed than other goods and services, revenues from environmentally related taxes decrease in per cent of GDP. The high motor fuel prices may also have made it politically difficult for countries to increase nominal tax rates in line with inflation. Hence, for example, the real tax rate on petrol decreased 8% between 2000 and 2010.

6 Tax rates on petrol and diesel

7 By far the highest rate of tax on petrol in the OECD, and the second highest rate on diesel, are levied in Turkey, one of the OECD countries with the lowest income per capita. If the motor fuel taxes had been levied only to address greenhouse gas emissions, a tax rate of 0.6€ per litre petrol would correspond to a “carbon tax” of 256€ per tonne CO 2 emitted. However, in practice, the taxes on petrol and diesel are of course levied for a number of other reasons, and one should not count all of them as “carbon taxes”. Nevertheless, it is the full rate of tax that will influence the extent to which CO 2 will be emitted. Tax rates on petrol and diesel (I)

8 Petrol taxes vs. diesel taxes (II) Because diesel-motors are more fuel efficient than petrol-driven motors, diesel-driven vehicles emit less CO 2 per km driven than what petrol-driven vehicles does. However, this is not a valid argument for setting tax rates on diesel lower than tax rates on petrol – because the drivers benefit directly from this fuel efficiency advantage (the benefits are fully internalised). One litre diesel causes more CO 2 emissions than one litre petrol. And diesel-driven vehicles cause more harmful emissions of NO x, particle matter (PM 10, PM 2.5 ) and noise than petrol-driven ones. Petrol-driven vehicles cause larger VOC emissions. None of these impacts are internalised – the drivers do not take these impacts into account in their decisions. All in all, from an environmental perspective, tax rates per litre diesel ought to be higher than tax rates per litre petrol – not lower.

9 Impacts of prices and taxes on transport sector energy use per unit GDP I

10 Impacts of prices and taxes on transport sector energy use per unit GDP II

11 “Carbon taxes” and total taxes levied on selected energy products in OECD countries

12 Tax rates per tonne CO 2 emitted implicit in the excise tax rates on selected fossil fuels

13 CO 2 -related tax rate differentiation in motor vehicle taxes A number of countries have introduced CO 2 -related tax rate differentiation in taxes on motor vehicles: –Based directly on estimated CO 2 emissions or on fuel efficiency. –In one-off and/or in recurrent taxes. One-off: taxes per vehicle at purchase Recurrent: taxes e.g. per year, to be allowed to use a vehicle –Some countries apply different rates for petrol- and diesel-driven cars. –In some countries, the differentiation depend on the vehicle price. –France has special rates for company-owned cars. The following slides will show how tax rates per tonne CO 2 emitted over the lifetime of a vehicle can be calculated.

14 One-off tax per vehicle as a function of CO 2 emissions per km driven Petrol-driven vehicles,

15 Tax per year as a function of the vehicles’ CO 2 emissions per km driven Petrol-driven vehicles,

16 Calculating tax per tonne CO 2 emitted over a vehicle’s lifetime Assume that a vehicle is driven 200,000 km over its lifetime. For the recurrent taxes, assume that the lifetime is 15 years. Calculating lifetime emissions: –Gram CO 2 per km * 0.2 = tonne CO 2 emitted over the lifetime –180 g CO 2 per km * 0.2 = 36 tonnes CO 2 emitted over the lifetime One-off taxes for a vehicle emitting 180 g CO 2 per km: –If the tax is 7200€ per vehicle => (7200 / 36) = 200 € per tonne CO 2 Recurrent taxes for a vehicle emitting 180 g CO 2 per km: –If the tax is 540€ per year => (540 / 36) * 15 = 225 € per tonne CO 2 –(The amount would be lower, if discounting of future tax payments was taken into account.)

17 CO 2 -related tax rate differentiation in one- off motor vehicle taxes € per tonne CO 2 emitted over the vehicle lifetime, petrol-driven vehicles

18 CO 2 -related tax rate differentiation in recurrent motor vehicle taxes € per tonne CO 2 emitted over the vehicle lifetime, petrol-driven vehicles

19 Tax per tonne CO 2 emitted over a vehicle’s lifetime, selected emission levels per km Petrol-driven vehicles,

20 The case for CO 2 -related differentiation of motor vehicle taxes I In a “perfect world”, one can question the need for CO 2 - related differentiation of motor vehicle taxes. As there is a direct link between the carbon content in the motor fuels used and the CO 2 emissions of a given vehicle, it could be more efficient to just apply a tax reflecting the carbon content of different fuels. Differentiation of a tax on vehicle purchases only affect (directly) the decisions of those that buy a new vehicle – and it has no (or little) impact on how much the vehicles are used. Differentiation of recurrent vehicle taxes can affect the decision to continue to own both new and old vehicles – but will also have no (or little) impact on how much the vehicles are used.

21 However, the world is not quite perfect. It is e.g. possible that consumers are “myopic” – i.e. that they don’t take future fuel consumption much into account when buying a new car. It can also be “politically easier” to introduce a (possibly revenue-neutral) CO 2 -differentiation in vehicle taxes than to introduce (only) “sufficiently high” motor fuels taxes. However, the degree of differentiation of vehicle taxes applied in some countries can seem out of proportion to the CO 2 abatement incentives provided elsewhere in the economies. The case for CO 2 -related differentiation of motor vehicle taxes II

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