OECD IMPLEMENTING ENVIRONMENTALLY RELATED TAXES Outstanding issues Jean-Philippe Barde and Nils Axel Braathen OECD, Environment Directorate

OECD Setting the scene (Reminder) An increasing use of environmentally related taxes in all OECD countries. Comprehensive green tax reforms in a number of EU countries. Revenue of environmentally related taxes: –2 - 3 % of GDP –7 % of total tax revenue –90 % of revenue comes from transport-related taxes (fuels and vehicles).

OECD Tax revenue raised on different environmentally related tax-bases

OECD GREENING TAX SYSTEMS: policy options Remove and/or restructure existing environmentally harmful tax provisions Restructure existing taxes (e.g. energy taxes) Introduce new taxes Piecemeal vs. comprehensive tax reform

OECD Two outstanding implementation issues: Distributional impacts Impacts on sectoral competitiveness

OECD Distributional impacts Direct: related to the structure of household expenditure (in particular, expenditures on energy and transport) Indirect: due to taxation of production inputs (price effect on consumers goods) Final incidence: impacts on the remuneration of production factors (lower wages or lower return on capital).

OECD Little available evidence: Probable regressivity of energy-related taxes (simulations in Sweden, UK), water (Denmark). Higher taxes (e.g. at the level required to achieve Kyoto targets) could induce more significant regressivity.

OECD Policy options MITIGATION: tax breaks for specific segments of the population (e.g. heating fuels). Will defeat the purpose of the tax. Administrative complexities. COMPENSATION: e.g. lump sum payments to households. Examples: energy saving subsidies to households, tax refund (Switzerland).

OECD Policy options (cont) TAX SHIFT: reduction in other taxes like income taxes (but may be regressive as poorest households pay the least taxes).  More analysis is needed: current OECD work

OECD Competitiveness: issues Applies to: company, sector, country. Environmental taxes are more “visible” In case of emission taxes: payment on residual emissions (hence additional cost). But, at country level, taxes are a transfer. Economically efficient taxes should minimise overall cost, thus increase competitiveness. Threat of relocation of industries.

OECD Competitiveness: issues (cont) Competitiveness impact depend on market structure (e.g. whether taxes affect prices or profits) Do taxes replace or supplement existing regulations (usually a supplement)? Is the tax reform revenue neutral? What tax shift (labour or capital)? Who benefits from environmental improvements?

OECD Competitiveness: evidence and practice Literature reviews indicate NO evidence of significant impact. BUT, this is largely due to numerous mitigation measures, such as: –Reduced tax rates for products, sectors, inputs –Tax exemptions for specific activities: More than 1000 recorded in OECD tax database (but not all exemptions are for competitiveness purpose) –Tax refunds / recycling

OECD Competitiveness: policy options (cont) A prisoner's dilemma situation? The recent OECD report concludes that : “Countries…could consider possible concerted policy options and changes, decided and implemented at the national level, but within a framework which provides a multilateral dialogue.”  One priority area would be a concerted reduction of existing tax exemptions.

OECD Current OECD work  Analyse “second best” unilateral options to alleviate the competitiveness impact such as: Better integration of environmental taxes in comprehensive tax reforms (providing efficiency gains). Early warning and progressive tax increase

OECD Gradual phasing out of exemptions. Replace full exemptions by several- tier tax rates to maintain incentives to reduce emissions. Channel back revenue to the taxed sectors, while maintaining incentives at the margin.

OECD  Analyse Competitiveness impact of energy taxation on presently exempted sectors (steel industry).  Promote a multilateral dialogue.