Fiscal Policy of Environmentally Sound Economic Growth

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Fiscal Policy of Environmentally Sound Economic
Growth

• Prof. Rumen Gechev, Ph.D.

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• The Fiscal Policy as one of the key instruments
  of the Economic Policy
• Deepening conflict between Economic Growth
  (rising GDP) and the State of the Environment
• Market Economy vs. Sustainable
  Development

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• The environmentally oriented Fiscal Policy
  consists of few main instruments
• Taxation
• Fees and Charges
• Tradable permits
• Budget subsidies

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• The Taxation is among the most powerful and the
  most market oriented tools of Sustainable
  Development.
• It is characterized by number of parameters,
  including structure, absolute value, percentage
  level, differentiation, scope (exemptions),
• level of application (local, national,
  regional, international.

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Tax Structure

• Tax structure is interrelated with the structure
  of the National Economy and especially with the
  Energy sector structure
• The Carbon taxes in Denmark , Norway and Sweden
  these taxes are high but more industry
  differentiated, while in Finland and Holland are
  lower but more general.

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• Coal based electricity production in USA and
  Denmark is 50 and 70 respectively, while in
  Sweden and Norway is 2 and 1. It explains why
  there are quite different approaches when
  selecting between CARBON, ENERGY or HYBRID tax
  schemes.
• Poland relies heavily on the coal based energy
  production while Czech Republic, Bulgaria and
  Romania widely use nuclear electric generators.
  These energy source differences determine
  different structure and intensity of the Fiscal
  Policy.

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• Interdependences between the energy sector policy
  and the Fiscal policy (environmental taxation,
  subsidies, government investment spending)
• The Bulgarian
  Case
• The closing of the first 4 reactors of the
  nuclear plant would cause number of environmental
  , social and economic problems
• Extended use of coal based electricity
  production much higher air pollution (SO2)
  and other negative side effects on the
  environment, including human health
• Extreme difficulties fulfilling the Oslo
  Protocol (1994) and Kyoto protocol. Possible
  financial sanction by the EU
• Energy shortages, higher electricity
  prices, lower competitiveness, higher trade
  deficit, etc.

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Taxation and Competitiveness

• The Environmental Fiscal Policy
• (Taxation, Import/Export regime, Subsidies)
• Fully Harmonized vs. Nationally
  Differentiated
• Differentiation YES, but relevant to the
  common rules and principles, otherwise, such
  differentiation can be used as an additional tool
  for competitive advantages. Such hidden
  instruments are a) symbolic environmental
  taxation b) fixed, artificially low prices on
  non-renewable resources c) direct or indirect
  subsidization d) tariff and non-tariff barriers,
  preventing from better resource allocation.

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Tax Neutrality

• Higher taxes on pollution and natural resource
  depletion, but decreased taxes on labor and
  capital formation. More financial burden will be
  transferred to the heavy polluters while the
  investments in new technologies and improved
  products will be rewarded.
• Problem Corporate and individual tax
  revenues are much higher (both in and absolute
  value) than the environmental tax revenues .

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The Kuznets Curve Hypothesis (GDP/per Capita
Pollution)

• Main problem of discussion
• The higher pollution level depends only (mainly)
  on the level of GDP per capita or the defining
  factor id the Applied Technologies and/or the
  type of Product?
• Despite the higher economic output, the
  environmental degradation has slow down in many
  of the highly developed countries.

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Pollution Taxation

• Industry specific or universal taxes?
• heavy vs. light industries
• vulnerability to business cycle
  fluctuations. During recessions, an increase of
  the environmental taxation may cause chain of
  bankruptcies.
• Shall we fiscally tolerate the inherited
  industrial companies on expense of the new ones?
  How long and under what conditions the tolerance
  could take place? Can we apply the asymmetric
  approach EU-New member states?

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Specific restraints on the Environmental Fiscal
policy in Eastern Europe

• Lowered GDP potential, problems with the B.of
  Payments, Budget deficit imbalances, foreign and
  domestic government debts, relatively lower
  standard of living.
• Heavy polluted environment contradiction
  between the amount of financial resources
  necessary for environmental recovery and the
  severe financial restriction because of the
  economic problems. Political difficulties when
  giving higher priority to environmental spending
  on expense of socially sound programs.
• Pressure from the EU for speeded up harmonization
  of the environmental legislation and the
  respective technical standards of production.

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Possible solutions

• Debt to environment swaps
• Tax holidays and/or free land for foreign and
  domestic investments which transfer
  environmentally friendly technologies.
• Using the environmentally oriented funding from
  EU, The World bank, EBRD, EIB as a generator for
  further attraction of private investments.
• Downsized or even zero subsidies for the loss
  making public sectors and transfer of the scarce
  budget resources into sustainable production.

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Spending on Environmental Programs in Bulgaria

• Environmental spending - 2 of GDP in 2000,
  the basic trend during the last years slow
  increase
• 80 for operational expenses and only 1/5 on
  Investment spending.
• R D activities only 1 of the overall budget
  of the Ministry of Environment.

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Environmental Taxation Producers vs. Consumers

• We argue that much more attention has to be paid
  on the taxation on Consumers (importers). The
  market economy is Demand driven and the expected
  multiplier effect from Sustainable Consumption is
  higher than the traditional approach (producer
  pay principle).
• Current marketing principles are in sharp
  contradiction with the prerequisites for
  Sustainable economic growth because now the
  more you buy (consume), the less you pay sales
  or VAT taxes are neutral to the quantity of
  commodities used (consumed) aggressive
  advertisement which often stimulates consumption
  of useless, health risky products low prices on
  exported raw materials and energy sources, which
  force the exporting countries to produce and
  export more, i.e. speeding up the process of
  environmental degradation

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Tax recycling

• Direct recycling (back to the polluters) or
  Indirect recycling first to the most efficient
  fiscal utilization
• Debt retirement
• Public investment projects
• FDI government guaranties
• Reduction of other taxes, etc.)

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Tax exemptions

• Immediate inputs of fuels in manufacturing are
  tax exempt in Finland. The tax refund is up to
  85 of the amount of tax on energy products that
  exceeds 3.7 of its value added.
• In Sweden, 65 refund of CO2 taxes when fuels
  are used in manufacturing industries.
• Similar tax heavens are have been made in
  Denmark.
• Germany and Spain have applied Zero implicit CO2
  combined with heavily subsidized coal production.

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Taxes vs. Tradable Permits

• Tradable permit advantages
• gives pressure on producers to improve their
  products and technologies
• It stimulates both producers with modern or aging
  technologies. Modern producers may generate
  additional income by selling the quota while the
  Old fashion producer may prefer quota than
  taxes in period of few years till the renovation
  of the production capacity
• Problem Tradable permit market is well developed
  in the highly developed countries. Will it be
  possible similar market to be organized in
  Eastern Europe or we shall use mainly taxes and
  environmental standards at least in the short
  run?

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Which is the best model for Sustainable
development?

• We believe that there is no universal model.
  Indeed, few key criteria can be applied when
  selecting the appropriate set of INTERRELATED
  Fiscal, Monetary and other instruments of the
  Macroeconomic policy
• Economic efficiency
• Degree of environmental protection
• Political acceptability
• Time dimensions (Long-short run)
• Positive and negative spin-off effects
  
• Scope of the effect (local, national,
  global)
• Control and monitoring opportunities

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Japanese lesson

• Seiyu, LTD supermarket operator have introduced
  last ECOTAX intro-company environmental tax
  system
• Principle
• Reducing the companys environmental burden by
  levying a green tax on energy consumption and
  waste generation which a converted into an
  equivalent of taxable carbon dioxide emissions.
• The proposed Tax rate is 0.80 per metric tone.
• All tax revenues will be recycled into
  environmental programs.

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• The fiscal policy has to be reshaped in
  correspondence with the criteria for Sustainable
  Development. The broader the scope of the reforms
  and the higher the level of harmonization on the
  basic rules and principles at a international
  level, the better the chances for mutual
  benefits.