1. OECD OECD Experience with Environmental Taxes and Charges Presentation at the Seminar on Tax Reform Trends Institute for Fiscal Studies Madrid – 16 May 2005 by Nils Axel Braathen OECD, Environment Directorate

2. OECD Use of environmentally related taxes  A detailed description of current use of  environmentally related taxes, fees and charges,  tradable permits,  deposit-refund systems,  environmentally motivated subsidies, and  voluntary approaches …  … is available to everybody in the OECD/EEA database on instruments used for environmental policy at –www.oecd.org/env/policies/database

3. OECD Revenues from environmentally related taxes in per cent of GDP AUS AUT BEL CAN NOR POL POR SVK ESP SWE SWI TUR UK US HUN ISL IRL ITA JAP KOR LUX MEX NET NZE CZE DEN FIN FRA GER GRE

4. OECD Tax revenue raised on different environmentally related tax-bases

5. OECD Environmentally Related Taxes and Green Tax Reform All countries apply one or more “environmentally related taxes”. –Fuel taxes –Motor vehicle taxes –Packaging and/or Waste taxes A few countries have also engaged in (revenue neutral) Green Tax Reforms or Environmental Fiscal Reforms –Denmark, Finland, Sweden, Norway, Netherlands, United Kingdom, Germany

6. OECD Green Tax Reform options  Remove environmentally harmful subsidies and tax provisions.  Restructure existing environmentally related taxes according to environmental criteria.  Introduce new environmentally related taxes.  Several options for the use of increased revenues: ØReduce budget deficits/increase budget surpluses ØIncrease public spending – generally or selectively ØReduce distortionary taxes – a “Double dividend”?

7. OECD The double dividend issue There is no indication that Environmental Fiscal Reforms have significant negative impacts on employment in general. Is there also a “double dividend”? –Recent economic theory make it not seem very likely. –Most reforms seek to reduce unemployment. –Very difficult to tell from – mostly lacking – ex post empirical evaluations whether this was achieved. Disentangling problems – other factors also impact on employment. What would otherwise have happened? Some available studies are too partial in their approach.

8. OECD Some commonly used tax-bases

9. OECD Taxes on motor vehicle fuels  Exist in all OECD countries – and many other.  Came into use at an early stage – primarily for fiscal reasons.  In some countries several different taxes are levied on petrol and diesel.  In most OECD countries, the tax rate on petrol is higher than on diesel – which makes no sense from an environmental point of view.  There is sometimes differentiation according to environmental criteria (lead and sulphur content).  Often special rates for commercial uses and/or public transport.

10. OECD Tax rates on unleaded petrol and diesel 1.1.2002 ? Based on exchange rates as of 1.1.2002.

11. OECD Motor vehicle taxes  Three main categories  Taxes on first-time purchase of the vehicles  Annual taxes levied on the right to use the vehicle  Charges more directly linked to the road use  Often introduced primarily for fiscal reasons  All categories have environmental impacts – and can be environmentally “modulated”, e.g. related to  Engine size or power  Vehicle weight  CO 2 emissions, according to vehicle type certification  Interesting new road-charging schemes in UK (London), Switzerland, Austria, Germany,…

12. OECD Waste management levies  User charges on waste collection and treatment  Flat charges  Variable charges (Frequency, volume, weight, bags, …)  Taxes on the final treatment/landfilling of waste (Australia [NSW], Austria, Czech republic, Denmark, Finland, France, Hungary, Netherlands, Norway, Poland, Sweden, Switzerland, UK, …)  Tax on measured emissions from incinerator in Norway.  Waste-motivated taxes on individual products Batteries, Packaging, Disposable products, ODS- containing products, Lubricants, etc. (Same + Belgium, Canada, Italy, Japan, Slovak Republic, US.)  Sometimes links with deposit-refund systems and “Extended Producer Responsibility” schemes

13. OECD A special case: The Load-based Licensing scheme in New South Wales

14. OECD New South Wales, Australia: Load-based Licensing Scheme Each polluter needs a licence to be allowed to pollute. Everyone has to pay an administrative fee to obtain a licence. Above a certain pollution level, the price for the licence varies with the size of the pollution allowed. Above another, higher level, the price per unit doubles – up to a specified annual load limit. Polluters can commit to reduce their emission within a 3 year period – and will in this case pay a fee as if they had already reduced the pollution. Repayment of the tax reductions – with interests – if the commitments are not kept.

15. OECD Load-based Licensing Scheme New South Wales, Australia www.environment.nsw.gov.au/licensing/lbl/index.htm

16. OECD Load-based Licensing Scheme In summary:  The scheme takes into account: –differences in the danger of different pollutants; –different characteristics of recipients located at different places; –different emission characteristics of different sectors. (This is not necessarily a good idea!)  The scheme is relatively complicated  but implementation is facilitated by the use of IT.  The scheme combines an economic instrument and negotiated agreements  through fee reductions (subsidies).

17. OECD Another case: Aviation charges

18. OECD Emission and noise charges Zurich and Geneva airports  Taxation of international commercial air traffic is complicated, i.a. due to the Chicago Convention and some thousand bilateral agreements.  A few countries do, however, tax domestic commercial aviation.  Also, authorities at the airports in Zurich and Geneva have introduced an elaborate system of landing charges, depending on –Emission characteristics of the aircraft –Noise characteristics of the aircraft –The actual hour of landings and departures www.uniqueairport.com

19. OECD Emission and noise charges The emissions part  Jet aircraft and shaft-engine powered aircraft are each grouped into 5 emission classes.  The emission classes are calculated based on the nitrogen oxide and hydrocarbon load over the landing and take-off cycle and the engine trust or power: g Emissions / kN Engine trust

20. OECD Emission and noise charges The noise part  One sub-part depending on aircraft noise class, calculated by comparing the mean value for the aircraft of the energetic noise level at measuring points around the airport to the overall mean value of such measurements.  One sub-part depending on the hour (minute!) of take-off and landing.

21. OECD The tax on ozone-depleting chemicals in the US

22. OECD Tax on ozone depleting chemicals USA  Taxes sales of ozone depleting substances according to their estimated harm  Taxes the holding of stocks of such chemicals  Finally, it taxes imported finished products based on assumed ODS-usage in their production, i.e. it involves Border Tax Adjustments. http://www.irs.gov/pub/irs-pdf/p510.pdf http://www.irs.gov/pub/irs-pdf/f6627.pdf

23. OECD Tax on ozone depleting chemicals More on the Border Tax Adjustments  ODS usage in the production of numerous “final”products is estimated, based on the “predominant production method” in the US.  By default, taxation is based on these values.  If importers can document a lower usage of ODS, taxation will be based on this lower weight.  If the ODS weight is unknown, the tax is 1% of the entry value of the product.  A similar system has been accepted by WTO.

24. OECD Environmental effectiveness

25. OECD Determining factors  Impacts of the levies on the marginal prices / costs facing the economic decision-makers.  Fixed rates per capita, etc., provide no incentives!  Price elasticities of the tax-bases, which i.a. depend on  Substitution possibilities.  Short term => Technologies are given  Longer term => Impacts on technological change  The link between the tax-base used and the environmental problem at stake.

26. OECD Estimated price elasticities of gasoline

27. OECD Fuel Efficiency of new cars and real gasoline price in USA

28. OECD Estimated price elasticities of residential electricity For additional references, see: Runa Nesbakken: “Price Sensitivity in Residential Energy Consumption in Norway”. Discussion Papers No. 232, September 1998, Statistics Norway. http://www.ssb.no/cgi-bin/publsoek?job=forside&id=dp-232&kode=dp&lang=en

29. OECD Electricity prices and electricity intensity Source: Birol & Keppler, Energy Policy 28 (2000). Observations from 27 OECD and 22 non-OECD countries, 1996.

30. OECD Obstacle to overcome: Fear of loss of sectoral competitiveness

31. OECD Sectoral Competitiveness We have not found significant negative competitiveness impacts for any sector from current environmentally related taxes. But, this is probably largely due to numerous mitigation measures, such as: –Complete exemptions for certain products or sectors –Reduced tax rates for certain products or sectors –Tax refunds for certain products or sectors –Upper ceilings on the tax payments in some sectors –Recycling of revenues to certain taxpayers

32. OECD Competitiveness impacts (1) Any policy instrument used to achieve environmental targets should cause changes in consumption and/or production patterns. The relevant issues are who should change their behaviour, by how much and within which timeframe. It is important to distinguish between competitiveness impacts at a national and at a sector or firm level – and focus should be given to the former. The Kyoto Protocol now gives most OECD member countries a legally binding and quantified obligation to limit emissions of greenhouse gases.

33. OECD Competitiveness impacts (2) The impacts of such policies on the competitiveness of most sectors will be modest. However, the use of economic instruments to significantly reduce greenhouse gas emissions is likely to have negative impacts on the international competitiveness position of some industrial sectors, especially when such instruments are implemented in a non-global manner. Different firms within a given energy-intensive sector would be affected differently.

34. OECD One should take into account possible adjustments in related markets when considering the impacts of a given policy. –For example, for the steel sector changes in the scrap prices would significantly impact on the relative competitiveness position of ‘mini-mills’ and ‘integrated steel plants’. In spite of some ‘carbon leakage’, significant global reductions in carbon emissions can be achieved. The larger the group of countries that put similar policies in place, the more limited the impacts on sectoral competitiveness. Competitiveness impacts (3)

35. OECD Recycling part of the tax revenue back to the sector in question could help overcome the competitiveness obstacle. This would, however, reduce global emission reductions. ‘Border tax adjustments’ could have better environmental impacts – but practical and legal issues would need to be solved. Competitiveness impacts (4)

36. OECD Relatively modest compensation mechanisms can often suffice when introducing a tax or a trading scheme (even based on auctioning), in order to make the owners of the affected firms equally well-off as before. The size of the ‘necessary’ compensation depends on how insulated the domestic market is from international competition. If some degree of compensation is “the price one has to pay” to be able to put in place a new environmental policy, this can often be done at a fairly modest cost to society as a whole. Competitiveness impacts (5)

37. OECD The prime reason for this is that far from all the ‘scarcity rent’ related to the policy needs to be given to the most affected firms in order to maintain their profit or equity value. If an ‘unnecessary’ large share of the rent is given to the firms, the economic efficiency costs will increase – because less money would be available to reduce distortionary taxes. Competitiveness impacts (6)

38. OECD It is important to provide firms with incentives to abate emissions at the margin. Recycling (part of) any tax revenues back to the firms or sectors in questions can be done in ways that secure this. Reduced tax rates / exemptions for certain sectors, or for certain uses of a tax-base, immediately limit the incentives to abate emissions. Doubtful whether one can get around this problem by combining e.g. a tax with a ‘voluntary approach’ to limit emissions. Competitiveness impacts (7)

39. OECD Obstacle to overcome: Fear of negative social impacts

40. OECD Distributive impacts (1) Any undesirable distribution effects of economic instruments can in general be addressed through the social security systems and the tax systems. The choice between the two will depend on each country’s situation. Distinguish between mitigation measures (reduction of the tax rates of the environmental tax) and compensation measures (modifications to other policy instruments). Compensation measures are preferable – as they maintain the marginal incentive to reduce emissions.

41. OECD Several approaches may provide compensation through a country’s personal income tax system, including: –An increase in the basic personal allowance – i.e. deductions from the tax base ; –The introduction of a ‘wastable tax credit’; –The introduction of a ‘non-wastable tax credit’ – with cash transfers for credit amounts that cannot be used to offset personal income tax liabilities. Distributive impacts (2)

42. OECD Administrative costs It is possible to design a number of economic instruments for environmental policy with relatively low administrative costs. However, many economic instruments involve a large number of ‘mechanisms’ that increase these costs. Such mechanisms are often introduced for non- environmental reasons, e.g. to address competitiveness or income distribution concerns.

43. OECD There often seems to be a trade-off between the size of the administrative costs and the possibilities for creating a ‘fair’ or ‘politically acceptable’ scheme. In certain cases the administrative costs could be higher than the revenues raised. This would not necessarily be a major problem if the environmental improvements obtained are sufficiently important – and the tax is the most effective way to achieve them. Administrative costs (2)

44. OECD Political acceptance The ‘acceptance’ of an economic instrument seems to be related to the degree of awareness of the environmental problem the instrument is to address. It is advisable to ‘prepare the ground’ for later instruments by providing correct and targeted information to the public on the causes and impacts of relevant environmental problems. The degree of political acceptance also depends on the perceived ‘fairness’ of the instrument in question. Policy makers could do well in trying to shift the discussion of ‘fairness’ more towards ‘who are the most important contributors to the problem at hand’.

45. OECD Conclusions

46. OECD Conclusions The use of environmentally related taxes and charges remains relatively limited in scope, and the environmental and economic efficiency of the existing levies is hampered by a number of shortcomings. In many cases, the link between actual tax rates and estimated externalities is weak or non-existent. This is most evident concerning industry and some other economic sectors, where a large number of exemptions, etc., undermines the environmental effectiveness and economic efficiency of the existing taxes.

47. OECD Conclusions (2) Many environmentally important tax-bases, like coal and coke, are hardly taxed at all. Existing levies are often complex, with a confusing variety of tax rates and special provisions. While a complex structure might be required to reflect differences in environmental externalities, etc., many of the existing complexities seems to be due to other political concerns. It is often not clear that these concerns are most effectively addressed through special provisions in environmentally related taxes and charges.

48. OECD Conclusions (3) Taxes often combine with other environmental policy instruments in an inconsistent and overlapping way. There can also be conflicting incentives between different taxes. For example, while fuel tax rates (unfortunately) tend to be lower for diesel than for petrol, motor vehicle taxes are sometimes higher for diesel-driven than for petrol-driven vehicles. The fear of loss of international competitiveness remains the main political obstacle to a broader use of environmentally related taxes. The importance of this obstacle could be reduced through more international policy co-ordination.

49. OECD Conclusion (4) Environmentally related taxes and charges are nevertheless potentially effective instruments for environmental protection. They could very well play an increasing role in addressing greenhouse gas emissions (alongside emission trading schemes) – and they should also be used to address a broad spectre of other environmental externalities.