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Environmental Fiscal Reform in OECD Countries

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Title: Environmental Fiscal Reform in OECD Countries


1
Environmental Fiscal Reform in OECD Countries
Presentation at the conference The Consolidation
of Governance and Entrepreneurship in the Czech
Republic and the European Union Prague, 1
November 2002 by Nils Axel Braathen OECD,
Environment Directorate
2
Outline of the presentation
  • Extent of Environmental Fiscal Reforms
  • Removal of environmentally harmful subsidies
  • Use of environmentally related taxes
  • Fiscal reforms
  • Some experiences
  • Environmental impacts
  • Social impacts
  • Economic impacts
  • The way forward
  • Overcoming the income distribution obstacle
  • Overcoming the competitiveness obstacle

3
Removal of environmentally harmful subsidies
  • Very few examples of a systematic removal of
    subsidies due to their environmental harm.
  • New Zealand removed almost all subsidies
  • The Green Tax Commission in Norway looked at
    environmental impacts of many types of
    expenditures
  • More examples of reform of subsidy schemes, to
    make them less environmentally harmful
  • Agriculture
  • Fisheries
  • Economic restructuring in transition countries
  • Subsidy removal is now a priority area for OECD.

4
Use of environmentally related taxes
  • Detailed description in the OECD/EU database on
    environmentally related taxes, fees and charges.
  • Is available to everybody, free of charge, at
  • www.oecd.org/env/tax-database
  • Will be supplemented by another database on
    tradable permits, deposit-refund systems,
    environmentally motivated subsidies and voluntary
    approaches.

5
Environmentally Related Taxes and Green Tax Reform
  • All countries apply several 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 and Netherlands
  • United Kingdom, Germany

6
Revenues from environmentally related taxes in
per cent of GDP
7
Tax revenue raised on different environmentally
related tax-bases
8
Tax rates on petrol and diesel, 1.1.2002
9
Tax rates on final treatment of waste, 1.1.2002
10
Environmental impacts
11
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 gt Technologies are given
  • Longer term gt Impacts on technological change
  • The link between the tax base and the
    environmental problem at stake

12
Estimates of price elasticities
  • Significant differences between different studies
  • Time perspective
  • Cross-section / Time-series / Panel data / etc.
  • However, for many types of energy products,
    values in the area of -0.4 in the short run and
    -0.6 in the long run have been found.
  • Hence, a 10 price increase could reduce use of
    energy products by about 6 in the long term.

13
Fuel Efficiency of New Cars and Real Gasoline
Price in USA
14
Social impacts
15
Income distribution
  • There are some indications that certain
    environmentally related taxes can have a slight
    negative impact on low-income households.
  • However, little empirical evidence is available.
  • The improvements in environmental quality should
    also be taken into account.
  • Poor people often live in areas that are
    particularly affected by pollution.

16
Employment impacts
  • There is no indication that Environmental Fiscal
    Reforms have significant negative impacts on
    total employment.
  • Is there also a double dividend?
  • Recent economic theory make it not seem likely.
  • Still, most tax 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 the
    approach.

17
Economic impacts
18
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

19
Economic costs of environmental policies
  • The flip-side of the coin (the exemptions) is
    that the burden on other sectors increases if a
    given environmental target is to be reached.
  • The marginal abatement costs are not equalised
    between different polluters.
  • Hence, total economic costs of environmental
    policy are higher than necessary.
  • However, there are no indications that the total
    abatement costs are excessive at present.

20
Overcoming the income distribution obstacle
21
Expenditure on domestic fuels in EU countries
(1988)
Source Presentation made by Terry Barker at
EEBs annual conference, Brussels, 10 October
2002
22
A Czech case
  • I'm NOT an expert on the Czech situation!
  • However, concern for the impacts on low-income
    households seems to explain the full refund given
    in taxes on fuel when the fuel is used to produce
    heat.
  • This lowers the incentives for energy efficiency
    improvements and thus leads to higher emissions.
  • Better to address the concerns by modest
    increases in pensions, some subsidies for housing
    insulation, non-wasteable tax credits, etc?

23
Overcoming the sectoral competitiveness obstacle
24
Case study the steel sector
  • Sectoral competitiveness impacts is a real issue.
  • A model-based simulation of a 25 per tonne CO2
    tax.
  • An OECD-wide carbon tax would reduce OECD steel
    production -- and related CO2 emissions --
    significantly.
  • Also global CO2 emissions would decrease.
  • The production reduction would be much greater
    for integrated mills (BOF) than for scrap-based
    mills (EAF).
  • Unilateral policies by single regions or
    countries may lead to quite dramatic cut-backs in
    the production of BOF steel, because there would
    be smaller opportunities to shift the tax burden
    over to suppliers or customers.

25
Case study the steel sector (continued)
  • Most of the emissions in the steel industry are
    related to energy consumption. To exempt
    process-related emissions from a carbon tax would
    therefore not imply a big relief in the tax
    burden of BOF steel producers.
  • If the tax revenues were recycled back to the
    steel industry as an output subsidy, the decline
    in OECD steel production would be quite small.
    There could, however, be a significant
    restructuring towards the relatively clean EAF
    steel making.
  • Revenue recycling could, nevertheless, reduce
    global emission reductions.

26
Possible policy approaches
  • Integrate EFR with broader fiscal reforms.
  • Phase-out current rebates and exemptions
    gradually.
  • Use a two-tier rate structure, rather than full
    exemptions, for internationally exposed sectors.
  • Announce new taxes and tax rate increases well in
    advance.
  • Impose eventually full tax rates on industry, but
    channel part of the revenues back in such a way
    that marginal abatement incentives are maintained
    -- e.g. the Swedish NOx charge.
  • Work for increased international co-operation.

27
Current OECD work
  • The impacts on sectoral competitiveness and
    income distribution are at the core of OECDs
    current work on environmentally related taxes.
  • We are undertaking a quantification of
    environmentally harmful subsidies.
  • We encourage greater international co-operation.
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