1. Work of the OECD in the field of environmental taxation
Jacques Baveye
FPS Finance
Workshop on Environmental Fiscal Reform
8 July, 2014

2. Introduction Joint Meetings of Tax and Environment Experts
Twice a year
First meeting: 6 May 1999
For this presentation, selection of six topics:
Taxing energy use
Taxation of diesel for road transport
Distributional effects of energy taxes
Tax treatment of company cars
Tax preferences for environmental goals
Interactions between ETS and other overlapping instruments
All that follows comes from OECD documents

3. Taxing Energy Use: A Graphical Analysis
Presents for each OECD country:
Tax rates in terms of energy content
and carbon emissions
Reported tax expenditures
The size of the relevant tax base
An illustration of the revenues raised or foregone
The OECD shows substantial difference
Both across and within countries
In the tax treatment of different forms, uses and users of energy

5. Taxing Energy Use: A Graphical Analysis
Belgium: reported tax expenditures and rebates:
Diesel used by trucks, taxis and public buses
Fuels used in agriculture
LPG used as heating and process fuel
No data available for other tax expenditures
Natural gas used by energy intensive industries:
60% of industrial consumption of natural gas has been considered energy-intensive use and entitled to an exemption

6. Taxing Energy Use: A Graphical Analysis
Key assumptions for Belgium:
Professional diesel represents 15% of total diesel consumption for transport purposes
Electricity
for residential and commercial use: ≤ 1 kV => EUR per MWh
Commercial use also subject to business rate of EUR per MWh
Used in industry or energy transformation: > 1 kV => only subject to business rate of EUR per MWh
Caveats for Belgium:
Several exemptions could not be included in the map (no data available)
Source: Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels 2013 (OECD 2012)

9. Taxation of diesel for road transport
A litre of diesel contains about 10% more energy than a litre of gasoline
A litre of diesel produces about 18% more CO2 emissions than a litre of gasoline

10. Taxation of diesel for road transport
The externalities associated with diesel and gasoline use support a higher tax per litre on diesel than on gasoline
GHG emissions (i.e., mainly CO2) are higher
Level of most harmful air pollutants is generally higher for diesel cars

11. Taxation of diesel for road transport
The other externalities (congestion, accidents, noise and infrastructure costs) are more a function of distance travelled than of fuel volumes
Diesel cars drive further on a litre of fuel than comparable gasoline vehicles, due to
The greater energy content of diesel fuel per litre
The greater efficiency of diesel engines in converting fuel energy into motive energy
This also implies a higher tax per litre on diesel

12. Taxation of diesel for road transport
Is the greater fuel efficiency of diesel cars a sound rationale for a tax preference to encourage greater use of diesel cars? No
The higher efficiency of diesel cars
Is reflected in lower fuel costs over time
Is thus internalised into the decisions of the owner
Consequently need not be taken into account in fuel taxes
NB: the use of road pricing would lower the externalities that should be included in the taxes

13. The distributional effects of energy taxes
Concern that the impact of energy taxes would be regressive, hitting the poor particularly hard = major obstacle to the more widespread use of energy taxation
The distributional impact of can be assessed using income or expenditure
Households with low transitory income (which are not lifetime poor)
Strongly affect the average income of households in lower income deciles
Do not affect the average expenditure

14. The distributional effects of energy taxes
Typical households with transitory low income are self-employed, retirees and students
New evidence for 10 European OECD countries (excluding Belgium)
Based on data from household budget surveys
Shows that the distributional impact of energy taxes differs by energy carrier

15. The distributional effects of energy taxes

16. The distributional effects of energy taxes
On an expenditure basis:
Taxes on transport fuels on average tend to be progressive
Taxes on heating fuels are slightly regressive
Taxes on electricity are more strongly regressive
Possible explanations
Transport fuels
Poorer households do not use a motor vehicle

17. The distributional effects of energy taxes
Possible explanations
Heating fuels: poorer households
Have less surface area to heat
May heat up only to lower temperatures
May heat up only part of their house
May turn off the heating when not being at home
Electricity
Some « fixed » amount of electricity is needed
Poorer households are likely to own older electric appliances

18. Company cars Tax systems 25 countries examined
Treatment of the benefit associated with use of a company car for personal purposes

19. Company cars Fiscal cost
OECD has developed a benchmark treatment, which represents a neutral tax setting, relatively to cash wage income
Benefit assessed by reference to the cost that would be incurred if the employee were to purchase the same benefits (employee-cost approach)
The benchmark has two components: a component to reflect the fixed costs of ownership and a component to reflect variable ownership costs

20. Company cars Standard assumptions about costs and driving patterns:
Fixed component:
28% of vehicle value per year
Applied to 95% of car list value
Variable component:
EUR 0.04 for repairs and maintenance
Fuel costs, estimated for each country
Company cars are driven for
km per year for personal purposes
km per year for business purposes
Stock of company cars was calculated using data from R.L. Polk Ltd.

21. Company cars
Aggregate taxable benefit under the benchmark treatment compared with aggregate taxable benefit under the current tax settings
Calculation of fiscal cost

22. Company cars

23. Company cars
The difference between the tax system and the benchmark is largely explained by two factors:
The capital charge in all countries is significantly lower than the 28% per year assumption used by the benchmark
Only 6 countries explicitly include a charge for the number of kilometers driven

25. Company cars

26. Company cars Conclusions
A considerable amount of tax is currently foregone on company cars as country tax systems do not fully capture the benefit to the employee of company car use
While both the capital and distance component are under-captured by the tax system, the distance component is particularly under-captured
Most countries do not include a component that varies with distance driven in the calculation of taxable benefit, which is likely to have an environmental impact in giving individuals an incentive to drive more
Revisiting company car tax settings can therefore have positive fiscal and environmental impacts

27. Environmentally motivated tax preferences
Variously referred to as tax preferences, tax incentives, tax expenditures, targeted tax relief, tax reductions or tax subsidies
Are politically attractive because
They provide benefits to a clear set of beneficiaries (which facilitates their lobbying)
Their costs in terms of higher taxes tend to be hidden
NB: the opposite is true for environmentally related taxes

28. Environmentally motivated tax preferences
Characteristics and preferred practices
Tax preferences can address positive externalities
Consider subsidies for true positive externalities
Tax preferences often attempt to « pick winners »
Eligibility should ideally be based on technology-neutral measures rather than use of particular inputs or technology
Certain market failures may be best addressed by other policies
Credit policies for capital market failures
Regulation for principal-agent problems (e.g., stricter building codes in case of split incentives between landlords and tenants)
Information for information problems (e.g., energy-labelling)
Tax preference can lead to increased pollution (-> rebound effect)

29. Environmentally motivated tax preferences
Preventing windfalls (« free-riding ») from tax preferences is challenging
Support should be limited to actions that go beyond a business- as-usual baseline
Review criteria regularly
Cost of tax preference is often not transparent
Issue regular and comprehensive tax expenditure reports
Integrate planning and reporting on environmental tax with environmental policies

30. Environmentally motivated tax preferences
More generally: start with the problem, not the solution
Consideration of new policies should be supported by a robust analysis of the policy problem, the case for intervention and alternative instruments

31. Interactions between ETS and other overlapping instruments
Cap-and-trade systems are generally combined with other policy instruments addressing the same emission sources…
… but doing so will not cause any extra emission reduction – as long as the cap is binding and remains unchanged

32. Interactions between ETS and other overlapping instruments
Impacts in the short run
‘additional’ instrument
=> further abating effort by some emission sources
=> reduction in permit prices
=> increased emissions from some other source(s) included in the trading system

33. Interactions between ETS and other overlapping instruments
As the EU ETS covers CO2 emissions stemming from electricity generation, this affects a long range of ‘additional’ instruments:
Instruments that address electricity use
(e.g., measures to increase the energy-efficiency of electrical appliances and taxes on electricity use)
Instruments that address CO2 emissions caused by electricity generation
(e.g., subsidies for renewable energy sources, feed-in tariffs for renewables, and standards for the renewables content in electricity generation)
It also affects any other policy instruments that aim to reduce emissions in the industrial sectors covered by the scheme

34. Interactions between ETS and other overlapping instruments
Impacts in the medium to long term
« If an additional instrument in practice contributes to reducing the costs of complying with the cap, it could, however, contribute to a stricter cap being set in the future – on the assumption that such considerations are taken into account when future ‘caps’ are set. »

35. www.oecd.org www.oecd.org/env/policies/database
Thank you for your attention!