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Competitiveness effects of environmental tax reform ( COMETR ) Paper read to the seminar: “ Environmental Tax Reform ” Institute of European Affairs M.

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Presentation on theme: "Competitiveness effects of environmental tax reform ( COMETR ) Paper read to the seminar: “ Environmental Tax Reform ” Institute of European Affairs M."— Presentation transcript:

1 Competitiveness effects of environmental tax reform ( COMETR ) Paper read to the seminar: “ Environmental Tax Reform ” Institute of European Affairs M. S. Andersen (NERI) J. Fitz Gerald (ESRI) S. Scott (ESRI) 20 June 2007

2 Outline of talk COMETR an ex post study ETR background Competitiveness issues Pricing power Technology Macro

3 COMETR C ompetitiveness Effects of Environmental Tax Reform A Specific Targeted Research Project (STREP) of the ‘Scientific Support to Policies’ initiative under the EU’s Sixth Framework Programme for Research (FP6) Partners: 1. Cambridge Econometrics 2. ESRI Dublin 3. Institute for Economic and Environmental Policy, Prague 4. Policy Studies Institute, London 5. Vienna Institute for International Economics 6. NERI, Aarhus University (coordinator) Modules: Conceptual: revenue-neutral carbon tax and competitiveness issues Sectors vulnerable to competition - Pricing power Micro sectoral effects - technology potential Macroeconomic effects Case studies - threat of relocation ’carbon leakage’ Mitigation and compensation mechanisms.

4 Competitiveness definition Competitiveness is lost if cost of production rises relatively faster than for competitors  Share of global production and export intensity decrease, and import penetration rises  A sustained loss in standard of living.

5 ETR background EC 1990 proposed carbon/energy tax + rev recycling Least cost strategy. Encourages technology. Targets the true objective. 6 EU states implemented ETR of this sort 1990 Sweden 1992 Denmark 1996 Netherlands 1997 Finland 1998 Germany 1999 UK Detail: Energy-environment taxes introduced as part of policy to lower income taxes for employees (SW, FN). Employers’ social security contributions replaced by climate change levy/CO 2 taxes (UK, DK). Mixed approach, recycling split between employers and employees (DE, NL).

6 Competitiveness issues Labour intensive sectors have little to fear. Potentially vulnerable? Energy intensive Trade intensive Low abatement potential, and Low pricing power ?  Lose market share? Close down? Relocate?

7 Potentially vulnerable sectors to be analysed for pricing power Pulp, paper and board Wood and products Basic chemicals Pharamaceuticals Non-metallic mineral products Basic metals Food and beverages

8 Pricing power explored Using sector’s past behaviour on cost increases: a. Output price externally determined? ( price-taker, vulnerable ) OR b. Mark-up on domestic costs? ( price-setter, market power, less vulnerable ) This question was tested using an econometric model for ETR countries.

9 Results on pricing power: Sectors ranked from most vulnerable

10 Vulnerability on energy intensity and pricing power

11 Vulnerability on technical scope and pricing power (UK only)

12 Conclusions: vulnerability Important differences in PRICING POWER Sectors can be assessed and ranked: Basic metals has least pricing power (most vulnerable), Non-metallic mineral products has most pricing power (least vulnerable).  Can prioritise sectors in policies to alleviate vulnerability Where the foreign price is dominant it is the EU price (not US or world price)  EU-wide ETR application effective.

13 Micro study of selected sectors in ETR countries

14 How to reduce vulnerability? Negotiated agreements – e.g. UK CCA 80% rebate on CCL Exemptions – but problems of EU State Aid rules ! Reduced rates - to sectors or processes - above certain thresholds Recycling – in addition to reducing labour taxes, earmark some revenue to energy efficiency subsidies e.g. UK Carbon Trust.  ETR was very modest !

15 Technology: UK Climate Change Agreements Specific energy consumption better than targets Chemicals

16 Technology: UK Climate Change Agreements Specific energy consumption better than targets Cement lime and plaster

17 Technology: UK Climate Change Agreements Specific energy consumption trends index Meat processing – mixed results

18 Technology: UK Climate Change Agreements Specific energy consumption better than targets Ferrous metal

19 Macro impact of ETR - emissions of GHG Cambridge Econometrics E3ME

20 Macro impact of ETR - GDP Cambridge Econometrics E3ME

21 Conclusions: Competitiveness effects of environmental tax reform Some sectors are potentially vulnerable Fewer are truly threatened – e.g. Basic metals Use e.g. agreements Technology was encouraged EU-wide ETR would be best Modest ETR in 6 countries had good results COMETR website: www2.dmu.dk/cometr/ Follow Link to conference page Report with Policy BriefLink to conference pageReport with Policy Brief

22 Appendix: Price-setting model The following model is considered: p i =  0 +  1 mc i + p f i where for sector i p i = the domestic output price mc i = the domestic marginal cost p f i = the foreign or world price (US or German prices) Specifically: P d * = f(P j, R j, W k ), where: P d * = the long-run wholesale price for the sector’s domestic output P j = the wholesale price index in the ‘competing’ country or bloc j R j = the exchange rate with country or bloc j. PPP imposed W k = the price index for domestic input factor k. Wage rates are used. Error Correction Model representation:

23 Appendix: nominal tax rates for industry Effective rates were lower. Idea of scale: initial Swedish rate is 10 to 12 $US per barrel of oil

24 Appendix: Technology scope: UK estimated abatement costs, example (ETSU)

25 Appendix: Technology scope UK estimated abatement costs, example (ETSU)

26 Appendix: Micro analysis of energy intensity H o : Carbon tax reduces energy intensity (consistent with Porter H o ) Tested: savings in energy costs due to Δ energy intensity > Δ Costs due to new tax. Results: 19 out of 32 tested positive (consistent). Inconsistencies can be explained by low tax rate or low energy intensity, except: Cement (FN):high tax, high intensity but no improvement.

27 Appendix: micro study of change in competitiveness Details of nine losses of competitiveness:

28 Appendix: Ireland’s possible ETR 1994 Losers / gainers: Net effect of carbon tax with reduction in social insurance contributions – £ m, first round effects, O’Donoghue 1997 ESRI WP no. 82

29 Appendix cont’d: Sector codes

30 Appendix: Ireland Energy elasticities (EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004) Long-Run Income Elasticity Long-Run Price Elasticity Long-Run “Max Price Elasticity” Household0.41-0.26 Services0.63-0.36 Industry0.78-1.09

31 Appendix cont’d: Ireland Electricity elasticities (EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004) Long-Run Income Elasticity Long-Run Price Elasticity Household1.12-0.24 Services0.74-0.29 Industry0.28-0.29

32 Appendix: Ireland’s proposed ETR Effects on prices in 2003 of Tax of €20 a tonne of CO 2 (EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004) %CoalOilGasElec.Peat House holds 18.611.07.83.236.2 Electri city 103.649.227.887.1

33 Appendix: Ireland - proposed ETR (EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004)

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