OECD Experience with Environmental Taxes and Charges

1
OECD Experience with Environmental Taxes and
Charges
Presentation at the Seminar on Tax Reform
Trends Institute for Fiscal Studies Madrid 16
May 2005 by Nils Axel Braathen OECD, Environment
Directorate
2
Use of environmentally related taxes

• A detailed description of current use of
• environmentally related taxes, fees and charges,
• tradable permits,
• deposit-refund systems,
• environmentally motivated subsidies, and
• voluntary approaches
• is available to everybody in the OECD/EEA
  database on instruments used for environmental
  policy at
• www.oecd.org/env/policies/database

3
Revenues from environmentally related taxes in
per cent of GDP
AUS
BEL
NOR
POR
ESP
SWI
UK
HUN
IRL
JAP
LUX
NET
CZE
FIN
GER
AUT
CAN
POL
SVK
SWE
TUR
US
ISL
ITA
KOR
MEX
NZE
DEN
FRA
GRE
4
Tax revenue raised on different environmentally
related tax-bases
5
Environmentally Related Taxes and Green Tax Reform

• All countries apply one or more 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, Netherlands,
  United Kingdom, Germany

6
Green Tax Reform options

• Remove environmentally harmful subsidies and tax
  provisions.
• Restructure existing environmentally related
  taxes according to environmental criteria.
• Introduce new environmentally related taxes.
• Several options for the use of increased
  revenues
• Reduce budget deficits/increase budget surpluses
• Increase public spending generally or
  selectively
• Reduce distortionary taxes a Double dividend?

7
The double dividend issue

• There is no indication that Environmental Fiscal
  Reforms have significant negative impacts on
  employment in general.
• Is there also a double dividend?
• Recent economic theory make it not seem very
  likely.
• Most 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 their
  approach.

8

• Some commonly used tax-bases

9
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.
• In most OECD countries, the tax rate on petrol is
  higher than on diesel which makes no sense from
  an environmental point of view.
• There is sometimes differentiation according to
  environmental criteria (lead and sulphur
  content).
• Often special rates for commercial uses and/or
  public transport.

10
Tax rates on unleaded petrol and diesel1.1.2002
?
Based on exchange rates as of 1.1.2002.
11
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
• Interesting new road-charging schemes in UK
  (London), Switzerland, Austria, Germany,

12
Waste management levies

• User charges on waste collection and treatment
• Flat charges
• Variable charges (Frequency, volume, weight,
  bags, )
• Taxes on the final treatment/landfilling of waste
• (Australia NSW, Austria, Czech republic,
  Denmark, Finland, France, Hungary, Netherlands,
  Norway, Poland, Sweden, Switzerland, UK, )
• Tax on measured emissions from incinerator in
  Norway.
• Waste-motivated taxes on individual products
• Batteries, Packaging, Disposable products,
  ODS-containing products, Lubricants, etc.
• (Same Belgium, Canada, Italy, Japan, Slovak
  Republic, US.)
• Sometimes links with deposit-refund systems and
  Extended Producer Responsibility schemes

13

• A special case
• The Load-based Licensing scheme in New South Wales

14
New South Wales, AustraliaLoad-based Licensing
Scheme

• Each polluter needs a licence to be allowed to
  pollute.
• Everyone has to pay an administrative fee to
  obtain a licence.
• Above a certain pollution level, the price for
  the licence varies with the size of the pollution
  allowed.
• Above another, higher level, the price per unit
  doubles up to a specified annual load limit.
• Polluters can commit to reduce their emission
  within a 3 year period and will in this case
  pay a fee as if they had already reduced the
  pollution.
• Repayment of the tax reductions with interests
  if the commitments are not kept.

15
Load-based Licensing Scheme New South Wales,
Australia
www.environment.nsw.gov.au/licensing/lbl/index.htm
16
Load-based Licensing Scheme In summary

• The scheme takes into account
• differences in the danger of different
  pollutants
• different characteristics of recipients located
  at different places
• different emission characteristics of different
  sectors. (This is not necessarily a good idea!)
• The scheme is relatively complicated ? but
  implementation is facilitated by the use of IT.
• The scheme combines an economic instrument and
  negotiated agreements ? through fee reductions
  (subsidies).

17

• Another case
• Aviation charges

18
Emission and noise charges Zurich and Geneva
airports

• Taxation of international commercial air traffic
  is complicated, i.a. due to the Chicago
  Convention and some thousand bilateral
  agreements.
• A few countries do, however, tax domestic
  commercial aviation.
• Also, authorities at the airports in Zurich and
  Geneva have introduced an elaborate system of
  landing charges, depending on
• Emission characteristics of the aircraft
• Noise characteristics of the aircraft
• The actual hour of landings and departures

www.uniqueairport.com
19
Emission and noise charges The emissions part

• Jet aircraft and shaft-engine powered aircraft
  are each grouped into 5 emission classes.
• The emission classes are calculated based on the
  nitrogen oxide and hydrocarbon load over the
  landing and take-off cycle and the engine trust
  or power
• g Emissions / kN Engine trust

20
Emission and noise charges The noise part

• One sub-part depending on aircraft noise class,
  calculated by comparing the mean value for the
  aircraft of the energetic noise level at
  measuring points around the airport to the
  overall mean value of such measurements.
• One sub-part depending on the hour (minute!) of
  take-off and landing.

21

• The tax on ozone-depleting chemicals in the US

22
Tax on ozone depleting chemicalsUSA

• Taxes sales of ozone depleting substances
  according to their estimated harm
• Taxes the holding of stocks of such chemicals
• Finally, it taxes imported finished products
  based on assumed ODS-usage in their production,
  i.e. it involves Border Tax Adjustments.
• http//www.irs.gov/pub/irs-pdf/p510.pdf
  http//www.irs.gov/pub/irs-pdf/f6627.pdf

23
Tax on ozone depleting chemicals More on the
Border Tax Adjustments

• ODS usage in the production of numerous
  finalproducts is estimated, based on the
  predominant production method in the US.
• By default, taxation is based on these values.
• If importers can document a lower usage of ODS,
  taxation will be based on this lower weight.
• If the ODS weight is unknown, the tax is 1 of
  the entry value of the product.
• A similar system has been accepted by WTO.

24

• Environmental effectiveness

25
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 used and the
  environmental problem at stake.

26
Estimated price elasticities of gasoline
27
Fuel Efficiency of new cars and real gasoline
price in USA
28
Estimated price elasticities of residential
electricity
For additional references, see Runa Nesbakken
Price Sensitivity in Residential Energy
Consumption in Norway. Discussion Papers No.
232, September 1998, Statistics Norway.
http//www.ssb.no/cgi-bin/publsoek?jobforsideid
dp-232kodedplangen
29
Electricity prices and electricity intensity
Source Birol Keppler, Energy Policy 28 (2000).
Observations from 27 OECD and 22 non-OECD
countries, 1996.
30

• Obstacle to overcome
• Fear of loss of sectoral competitiveness

31
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

32
Competitiveness impacts (1)

• Any policy instrument used to achieve
  environmental targets should cause changes in
  consumption and/or production patterns.
• The relevant issues are who should change their
  behaviour, by how much and within which
  timeframe.
• It is important to distinguish between
  competitiveness impacts at a national and at a
  sector or firm level and focus should be given
  to the former.
• The Kyoto Protocol now gives most OECD member
  countries a legally binding and quantified
  obligation to limit emissions of greenhouse
  gases.

33
Competitiveness impacts (2)

• The impacts of such policies on the
  competitiveness of most sectors will be modest.
• However, the use of economic instruments to
  significantly reduce greenhouse gas emissions is
  likely to have negative impacts on the
  international competitiveness position of some
  industrial sectors, especially when such
  instruments are implemented in a non-global
  manner.
• Different firms within a given energy-intensive
  sector would be affected differently.

34
Competitiveness impacts (3)

• One should take into account possible adjustments
  in related markets when considering the impacts
  of a given policy.
• For example, for the steel sector changes in the
  scrap prices would significantly impact on the
  relative competitiveness position of mini-mills
  and integrated steel plants.
• In spite of some carbon leakage, significant
  global reductions in carbon emissions can be
  achieved.
• The larger the group of countries that put
  similar policies in place, the more limited the
  impacts on sectoral competitiveness.

35
Competitiveness impacts (4)

• Recycling part of the tax revenue back to the
  sector in question could help overcome the
  competitiveness obstacle.
• This would, however, reduce global emission
  reductions.
• Border tax adjustments could have better
  environmental impacts but practical and legal
  issues would need to be solved.

36
Competitiveness impacts (5)

• Relatively modest compensation mechanisms can
  often suffice when introducing a tax or a trading
  scheme (even based on auctioning), in order to
  make the owners of the affected firms equally
  well-off as before.
• The size of the necessary compensation depends
  on how insulated the domestic market is from
  international competition.
• If some degree of compensation is the price one
  has to pay to be able to put in place a new
  environmental policy, this can often be done at a
  fairly modest cost to society as a whole.

37
Competitiveness impacts (6)

• The prime reason for this is that far from all
  the scarcity rent related to the policy needs
  to be given to the most affected firms in order
  to maintain their profit or equity value.
• If an unnecessary large share of the rent is
  given to the firms, the economic efficiency costs
  will increase because less money would be
  available to reduce distortionary taxes.

38
Competitiveness impacts (7)

• It is important to provide firms with incentives
  to abate emissions at the margin.
• Recycling (part of) any tax revenues back to the
  firms or sectors in questions can be done in ways
  that secure this.
• Reduced tax rates / exemptions for certain
  sectors, or for certain uses of a tax-base,
  immediately limit the incentives to abate
  emissions.
• Doubtful whether one can get around this problem
  by combining e.g. a tax with a voluntary
  approach to limit emissions.

39

• Obstacle to overcome
• Fear of negative social impacts

40
Distributive impacts (1)

• Any undesirable distribution effects of economic
  instruments can in general be addressed through
  the social security systems and the tax systems.
• The choice between the two will depend on each
  countrys situation.
• Distinguish between mitigation measures
  (reduction of the tax rates of the environmental
  tax) and compensation measures (modifications to
  other policy instruments).
• Compensation measures are preferable as they
  maintain the marginal incentive to reduce
  emissions.

41
Distributive impacts (2)

• Several approaches may provide compensation
  through a countrys personal income tax system,
  including
• An increase in the basic personal allowance
  i.e. deductions from the tax base
• The introduction of a wastable tax credit
• The introduction of a non-wastable tax credit
  with cash transfers for credit amounts that
  cannot be used to offset personal income tax
  liabilities.

42
Administrative costs

• It is possible to design a number of economic
  instruments for environmental policy with
  relatively low administrative costs.
• However, many economic instruments involve a
  large number of mechanisms that increase these
  costs.
• Such mechanisms are often introduced for
  non-environmental reasons, e.g. to address
  competitiveness or income distribution concerns.

43
Administrative costs (2)

• There often seems to be a trade-off between the
  size of the administrative costs and the
  possibilities for creating a fair or
  politically acceptable scheme.
• In certain cases the administrative costs could
  be higher than the revenues raised.
• This would not necessarily be a major problem if
  the environmental improvements obtained are
  sufficiently important and the tax is the most
  effective way to achieve them.

44
Political acceptance

• The acceptance of an economic instrument seems
  to be related to the degree of awareness of the
  environmental problem the instrument is to
  address.
• It is advisable to prepare the ground for later
  instruments by providing correct and targeted
  information to the public on the causes and
  impacts of relevant environmental problems.
• The degree of political acceptance also depends
  on the perceived fairness of the instrument in
  question.
• Policy makers could do well in trying to shift
  the discussion of fairness more towards who
  are the most important contributors to the
  problem at hand.

45

• Conclusions

46
Conclusions

• The use of environmentally related taxes and
  charges remains relatively limited in scope, and
  the environmental and economic efficiency of the
  existing levies is hampered by a number of
  shortcomings.
• In many cases, the link between actual tax rates
  and estimated externalities is weak or
  non-existent.
• This is most evident concerning industry and some
  other economic sectors, where a large number of
  exemptions, etc., undermines the environmental
  effectiveness and economic efficiency of the
  existing taxes.

47
Conclusions (2)

• Many environmentally important tax-bases, like
  coal and coke, are hardly taxed at all.
• Existing levies are often complex, with a
  confusing variety of tax rates and special
  provisions. While a complex structure might be
  required to reflect differences in environmental
  externalities, etc., many of the existing
  complexities seems to be due to other political
  concerns.
• It is often not clear that these concerns are
  most effectively addressed through special
  provisions in environmentally related taxes and
  charges.

48
Conclusions (3)

• Taxes often combine with other environmental
  policy instruments in an inconsistent and
  overlapping way.
• There can also be conflicting incentives between
  different taxes. For example, while fuel tax
  rates (unfortunately) tend to be lower for diesel
  than for petrol, motor vehicle taxes are
  sometimes higher for diesel-driven than for
  petrol-driven vehicles.
• The fear of loss of international competitiveness
  remains the main political obstacle to a broader
  use of environmentally related taxes.
• The importance of this obstacle could be reduced
  through more international policy co-ordination.

49
Conclusion (4)

• Environmentally related taxes and charges are
  nevertheless potentially effective instruments
  for environmental protection.
• They could very well play an increasing role in
  addressing greenhouse gas emissions (alongside
  emission trading schemes) and they should also
  be used to address a broad spectre of other
  environmental externalities.