Environmental taxes and competitiveness

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Environmental taxes and competitiveness
Presentation at the IMPRINT workshop on charges
for heavy goods vehicles Brussels, 1 October
2003 by Nils Axel Braathen OECD, Environment
Directorate
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Some transport-related tax-bases
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Taxes on motor vehicle fuels

• Exist in all OECD countries -- and many other
• Came into use at an early stage -- primarily for
  fiscal reasons
• In some countries several different taxes are
  levied on petrol and diesel
• There is sometimes differentiation according to
  environmental criteria
• There is often lower rates for heavy goods
  vehicles and/or public transport

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Tax rates on unleaded petrol and diesel1.1.2002
Normal rates
?
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Motor vehicle taxes

• Three main categories
• Taxes on first-time purchase of the vehicles
• Annual taxes levied on the right to use the
  vehicle
• Charges more directly linked to the road use
• Often introduced primarily for fiscal reasons
• All categories have environmental impacts and
  can be environmentally modulated, e.g. related
  to
• Engine size or power
• Vehicle weight
• CO2 emissions, according to vehicle type
  certification

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Fuel Efficiency of new cars and real gasoline
price in USA
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The competitiveness issue
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What is competitiveness

• For an individual business enterprise,
  competitiveness is primarily a matter of being
  able to produce products that are either cheaper
  or better than those of other (domestic or
  foreign) firms.

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What is competitiveness (Cont)

• Applying the concept of competitiveness to
  industrial sectors or to whole economies is more
  controversial.
• One key reason is that it is necessary to take
  account of the macroeconomic adjustment
  mechanisms (such as exchange rate changes) that
  would be prompted by a deteriorating trade
  balance, or rising output prices.

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What is competitiveness (Cont)

• The principle of comparative advantage implies
  that a country can always trade successfully in
  some commodity, even if its firms are inefficient
  (or burdened with environmental taxes or
  regulations), while the same is not true of an
  individual business enterprise.
• Whether environmental taxes harm a countrys
  competitiveness can be gauged by whether or not
  they require a fall in the countrys exchange
  rate, to restore macroeconomic balance.

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Assessing competitiveness impacts

• Assessing the impact of environmental taxes on
  competitiveness requires a clear specification of
  what is the alternative baseline policy against
  which the impact is being assessed. Two
  dimensions are particularly relevant
• The impact on the government budget is the
  comparison done on a revenue-neutral basis?
• The impact on the environment is the comparison
  between two ways of achieving an equivalent
  standard of environmental protection?

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Competitiveness impacts of taxes applying to
heavy goods vehicles

• Direct impacts on road transport companies in
  different countries
• Direct impacts on road transport vs. other
  transport modes
• Indirect impacts on other sectors depending on
  their transport intensities.
• Indirect impacts on different regions depending
  on their transport intensities.

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Impacts on road transport companies

• Differences between countries in fuel tax rates
  is unlikely to have very large impacts on the
  competitiveness of transport companies involved
  in international freight, as they will all (try
  to) buy their fuel where it is cheapest.
• Firms involved in international freight could
  gain an advantage compared to firms only
  operating in a high-tax country.

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Impacts on road transport companies (Continued)

• Large differences between countries in taxes on
  the purchase of heavy motor vehicles could have
  stronger impacts on international
  competitiveness.
• However, differences in other taxes of relevance
  to the transport firms (labour, profits, etc.)
  could cancel out much of the differences in
  vehicle costs.

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Impacts on road transport companies (Continued)

• Road user charges based on (e.g.) tonne-km
  driven, location of road use, congestion levels
  and environmental characteristics of the vehicles
  would not distort international competitiveness
  of the firms.
• Firms using clean vehicles would obtain an
  advantage but that would be an intended
  outcome, not a distortion.
• The aim should be to cover marginal social costs,
  not to charge (foreign) firms for average
  infrastructure costs.
• If it is deemed that foreign users should pay
  their share of infrastructure costs, it would
  be better to use fixed annual charges for such a
  purpose.

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Impacts on road transport vs. other transport
modes

• In order to achieve a welfare optimum, it is
  necessary to correct two types of market failure
  in transport
• the under-pricing that follows from the absence
  of taxes on externalities, and
• the over-pricing that follows from the absence of
  transfers to cover fixed costs.
• These two current deviations from optimal prices
  do not offset each other
• the first is most acute in the case of congested
  urban roads,
• the second is most acute in the case of rail.
• To correct one without the other will result in a
  sub-optimal outcome.

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Impacts on road transport vs. other transport
modes (Continued)

• Increased taxes/charges on road transport would
  (of course) weaken the competitiveness of this
  mode compared to rail, air and water transport.
• Recent ECMT work strongly indicates that such a
  shift in favour of rail would be welfare
  enhancing.
• Optimal prices for using trucks on urban roads
  were estimated to be around 40 higher in peak
  periods than the prices prevailing in 2000.
• Non-taxation of air transport would remain a
  problem.

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Impacts on other sectors

• Increased road transport taxes/charges would
  affect other sectors of the economy differently,
  depending on their road transport intensities.
• However, in most cases, road transport costs
  would only constitute a minor share of total
  costs.
• Hence, the impacts on different sectors
  competitiveness are likely to be modest.

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Impacts on different regions

• Increased taxes/charges on road transport in
  congested /polluted areas in the centre of Europe
  would entail increased transport costs for firms
  in peripheral parts of the continent in reaching
  their markets.
• Such cross-border freight should, nevertheless,
  be charged in the same way as local trucks
  based on non-discrimination, economic efficiency
  and environmental effectiveness.
• On the other hand Charging for all should be
  based on marginal social costs and not be used
  as a means to recuperate average infrastructure
  costs.

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Impacts on different regions (Continued)

• Large distances from peripheral regions to the
  markets represents a real comparative
  disadvantage that one from the perspective of
  economic efficiency should not try to
  subsidise away.
• One should instead improve transport
  infrastructure of these regions if that passes
  normal cost-benefit analyses.
• In addition, regional development policies can be
  applied to address income distribution concerns.

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Where to find more information

• www.oecd.org/env/taxes
• www.oecd.org/env/tax-database