Green Taxes and Environmental Tax Reform

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Green Taxes and Environmental Tax Reform

• Presentation to the first international
• Cambridge Climate Summit
• Entrepreneurship for a Zero Carbon Society
• By
• Paul Ekins
• Professor of Energy and Environment Policy
• Kings College London
• Tuesday 23rd September, 2008
• Cambridge

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Dangerous anthropogenic climate change

• Pre-industrial CO2 concentrations 280 ppm
• Current CO2 concentrations 380 ppm
• Current GHG (CO2e) concentrations 430 ppm
• Rate of GHG concentration increase 2.5 ppm p.a.
• Current global average temperature increase since
  1900 0.7oC
• Target temperature increase for acceptable
  climate change 2oC
• Probability that this will be exceeded at 450ppm
  80

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Emissions scenario to limit temperature change
Source Stern Review, Part III, Chapter 9
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The necessary improvements in energy productivity

• Energy productivity GDP/energy energy
  intensity energy/GDP
• Carbon productivity GDP/carbon carbon
  intensity carbon/GDP
• Carbon intensity of energy carbon/energy
• Carbon emissions Population GDP/capita
  energy/GDP carbon/energy
• Carbon emissions Population GDP/capita
  carbon/GDP
• To achieve 450ppmv atmospheric concentration of
  CO2, assuming ongoing economic and population
  growth (3.1 p.a. real), need to increase carbon
  productivity by a factor of 10-15 by 2050, or
  approx. 6 p.a.
• Compare current increase in carbon productivity
  of 0 p.a. over 2000-2006, i.e. global carbon
  emissions rose at 3.1 p.a. also
• Compare 10-fold improvement in labour
  productivity in US over 1830-1955, must achieve
  the same factor increase in carbon in 42 years

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UK emissions targets
Millions of tonnes of CO2 equivalent
Climate Change Bill Commitments
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An unprecedented policy challenge

• The Stern Review Policy Prescription
• Carbon pricing carbon taxes emission trading
• Technology policy low-carbon energy sources
  high-efficiency end-use appliances/buildings
• Remove other barriers and promote behaviour
  change take-up of new technologies and
  high-efficiency end-use options low-energy
  (carbon) behaviours

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Carbon rationing

• Rationing is necessary because people have an
  extraordinary innate ability to think up new ways
  of using energy (patio heaters, plasma TVs, SUVs,
  indoor ski slopes, outdoor skating rinks,
  stand-by etc. etc.)
• Either set the quantity of emission allowances
  (reducing on an annual basis), allow trading, and
  the carbon market sets the price of carbon (EU
  Emission Trading Scheme Carbon Reduction
  Commitment Personal Carbon Allowances - PCAs)
• Or set the price of carbon through a carbon tax,
  and the quantity will adjust (downwards if the
  tax is increasing)
• To get on the required carbon trajectory, either
  allowances will have to be reduced quickly (high
  allowance prices) or carbon taxes will have to
  increase to a high level
• Both approaches are problematic politically
• People are used to taxes and dislike them
  intensely
• People associate quantity rationing with war-time
  austerity
• How best to proceed?

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Carbon taxes

• Theory demand for goods is negatively related to
  price increase the price, two things happen
• People will consume less of the taxed good
  (because it is more expensive)
• People will substitute away from the taxed good
  (e.g. sweaters, energy efficiency in the home,
  low-carbon energy sources etc.)
• Third thing happens unless consumption of good
  falls to zero (which with energy it doesnt)
  Government gets revenue. Very important what is
  done with it recycling.
• For the first two things to happen
• People must be aware of the price and the price
  rise (for energy they are not need revolution in
  metering etc.)
• People must be aware of how much they consume
  (for energy they are not need a revolution in
  billing etc.)
• People must be aware of the substitutes, and
  these need to be affordable and socially
  acceptable (for energy they are not need
  high-profile EEACS, incentives to use them,
  funding mechanisms energy efficiency is
  cost-effective, but people dont do it)
• These issues must be tackled for carbon taxes to
  be effective. Good news is that they are being
  tackled. Bad news is that it is happening much
  too slowly. It will have to happen much more
  quickly whatever rationing mechanism is being
  employed.

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Carbon taxes and fuel poverty

• Proper metering, billing, advice, funding
  mechanisms, and incentives provided by a carbon
  tax escalator could resolve the problem for the
  richest 80 of the population.
• The poorest 20 would need special provisions.
  Many of them are in fuel poverty (would need to
  spend more than 10 of their income on energy
  services to attain given level of warmth). Fuel
  poverty is driven by
• Incomes, energy prices, thermal efficiency of the
  dwelling, energy behaviour, other factors, i.e.
  It is a complex concept, and government has only
  a tenuous influence over many of the key
  variables. Is fuel poverty as a policy concept
  past its sell-by date?
• In the lowest income decile, households at the
  80th percentile of energy use consume more than 6
  times as much energy as at the 20th percentile.
  Why?
• Factors thermal efficiency of dwelling energy
  behaviour large, under-occupied home old or ill
  (need more warmth) in all day household size
  etc.
• Need to understand the relative importance of
  these factors.
• Carbon taxes have the potential to exacerbate
  fuel poverty, but do not need to do so. Key
  issues are use of tax revenues action on the
  thermal efficiency of dwellings

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An equitable carbon tax

• Social guarantee those on low incomes would pay
  no carbon tax until their dwelling satisfied good
  energy efficiency standards (e.g. SAP 70-80)
• Those paying no carbon tax would get priority for
  comprehensive thermal efficiency measures (after
  installation they would pay the carbon tax)
• Tax increases by annual escalator (say start at
  2p/kWh about 20 of current price) and increase
  by 5-10 p.a. Would raise billions.
• Increase tax thresholds reduce income tax
  (reinstate 10p. rate?) reinforce tax credits
  could also redistribute Winter Fuel Allowance to
  target low-income households (carbon tax to be
  revenue-neutral overall, need to balance tax
  gains for low-income households and others, in
  principle could be more redistributive than PCAs,
  because paying for all emissions, and not just
  for those traded). In reality would need to
  strike a very sensitive political balance between
  winners and losers.
• Importance of presentation as Environmental Tax
  Reform (ETR), not tax increase

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Environmental Tax Reform (ETR)/Green Tax and
Budget Reform

• EC 1993, Chapter 10 An insufficient use of
  labour resources and an excessive use of
  environmental resources, leading to the
  conclusion If the twin challenge of
  unemployment/environmental pollution is to be
  addressed, a trade-off can be envisaged between
  lower labour costs higher pollution charges.
• Green taxes/charges are levied on resource use or
  polluting environmental emissions
• Revenues from green taxes (or from reducing
  environmentally harmful subsidies) allow other
  taxes to be reduced
• Some portion of the revenues can be used for
  essential environmental spending (e.g. on
  infrastructure) that is otherwise difficult to
  finance

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ETRs in Europe

• Denmark, Finland, Germany, Netherlands, Sweden
  and UK all very small different tax base
  (energy, CO2, sectors), tax rates, revenue
  recycling, exemptions all have exemptions
  because of competitiveness fears (COMETR)
• Economic and environmental effects of ETR
• Green taxes reduce environmental resource use
• Green taxes achieve efficient resource use and
  environmental improvement at least cost by
  promoting
• Static efficiency (equal abatement cost)
• Dynamic efficiency (incentives for innovation)
• Awareness of inefficient resource use
• Abatement technologies can lead to new industries
• Reduction of other distorting taxes reduces net
  cost of abatement (revenue neutrality)
• If innovation, awareness, industrial cost
  reduction, reduced distortions are greater than
  abatement costs, then environmental improvement
  can be achieved at net gain to the economy
  green economic growth (double dividend)

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ETR and competitiveness

• Ceteris paribus
• Rise in environmental tax(es) may be expected to
  reduce competitiveness
• Compensating reduction in other tax(es) may be
  expected to increase competitiveness
• Possible increase in employment/output if
  reduced taxes are employment taxes, and there is
  involuntary unemployment
• Improvement in efficiency of resource use may be
  expected to increase competitiveness (and
  economic security)
• Improvement in environmental quality may be
  expected to increase competitiveness (if local)
• Stimulation of environmental industries may lead
  to new industries/exports (if other countries
  also seek environmental improvement)

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Conclusions on macro-economic competitiveness

• Fuel use and greenhouse gas emissions (GHGs)
  reductions in all six countries
• Taxes and revenues tax shift relatively small
  (1.25 GDP max.)
• GDP and employment quite small increase in both
• Impacts on prices depends on method of revenue
  recycling, but no need for an increase in the
  price

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Conclusions on sectoral competitiveness

• Energy/electricity taxes determine relatively
  small part of prices of energy
• Country variations in ex-tax price of energy are
  larger than difference in energy taxes these
  have not led to discernible difference in
  competitiveness
• Industrial energy taxes are a small proportion of
  nominal headline rates because of special
  arrangements major source of economic
  inefficiency
• No country most energy efficient
• No evidence of even likely major impact on
  competitiveness misplaced effort, complexity,
  and efficiency in seeking to mitigate it

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Green Fiscal Commission

• Launch November 2007 experts from business,
  leading academics, senior MPs from all three main
  UK political parties, three members of the House
  of Lords, and representatives from consumer and
  environmental organisations
• Supportive poll
• Background papers, modelling and engagement
  strategy politics as important as evidence

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Issues for evidence and modelling

• ETR and public opinion polls
• Experience of fuel duty escalator/income tax
  reduction
• International comparisons on the effectiveness of
  economic instruments
• ETR and innovation
• ETR and competitiveness
• Border tax adjustments
• The role of a tax shift in broader environmental
  policy
• Distributional issues
• Report on deliberative days
• Principle of taxing resource rents
• Revenue stability
• Modelling a really large tax shift to 2020
  approx. 20 revenues (up from about 7 now)

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Implications for business/entrepreneurs

• Attaining the 2oC target or anything near it will
  require huge investments in low-carbon
  technologies right along the innovation chain
  (research, development, demonstration,
  diffusion).
• IEA ETP estimates of additional investment needs
  in energy sector USD 45 trillion (1.1 global
  GDP from now until 2050)
• Buildings and appliances USD 7.4 trillion Power
  sector USD 3.6 trillion
• Transport sector USD 33 trillion Industry USD
  2.5 trillion
• Government funding of R,DD must increase
  dramatically, but demonstration and diffusion can
  only be driven at scale by markets
• This will require high (now) and rising carbon
  prices over the next half century, to choke off
  investment in high-carbon technologies (e.g.
  runways) and incentivise low-carbon investments
• These high carbon prices will also greatly change
  lifestyles and consumption patterns
• A carbon-tax driven ETR would change patterns of
  production/consumption, rather that reduce
  GDP/incomes
• Provided that the world goes cooperatively in
  this direction, there are enormous profits to be
  made from these carbon prices and changing
  consumption patterns
• Technological and policy uncertainty mean that
  the risks are also high