Environmental Fiscal Reform in OECD Countries

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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
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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

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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.

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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.

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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

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Revenues from environmentally related taxes in
per cent of GDP
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Tax revenue raised on different environmentally
related tax-bases
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Tax rates on petrol and diesel, 1.1.2002
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Tax rates on final treatment of waste, 1.1.2002
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Environmental impacts
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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

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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.

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Fuel Efficiency of New Cars and Real Gasoline
Price in USA
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Social impacts
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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.

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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.

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Economic impacts
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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

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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.

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Overcoming the income distribution obstacle
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Expenditure on domestic fuels in EU countries
(1988)
Source Presentation made by Terry Barker at
EEBs annual conference, Brussels, 10 October
2002
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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?

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Overcoming the sectoral competitiveness obstacle
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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.

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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.

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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.

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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.