Distributional and competitiveness implications of environmental tax reforms – revisited

European Environment Agency1

Distributional and competitiveness implications of environmental tax

reforms – revisited

Stefan Speck and David Gee

11th Global Conference on Environmental Taxation 3-5 November 2010Bangkok, Thailand


Content

ETR in the European context

Recent projects assessing the effects of an ETR

• Competitiveness Effects of Environmental Tax Reform (COMETR)

• Resource Productivity, Environmental Tax Reform and Sustainable Growth in Europe (PETRE)

• The European Environmental Agency (ETR) project on ETR

• The UK Green Fiscal Commission

A summary - the potential of environmental taxes and ETR in the current policy and fiscal debate

The views expressed in this presentation are those of the author and may not in any circumstances be regarded as stating an official position of the European Environment Agency


EEA: European Environment Agency

• “The EEA aims to support sustainable development and to help achieve significant and measurable improvement in Europe’s environment…

• … through the provision of timely, targeted, relevant and reliable information to policy making agents and the public.”

• EEA is an independent EU institution with 32 member countries incl. Turkey, Switzerland and Norway

• 200 staff in Copenhagen headquarters - and 5-6 Topic Centres with wide network throughout Europe

Collaborating countriesMember countries


ETR – the European context

Environmental Tax Reform (ETR) is a particular public policy tool applying revenue-raising economic instruments to resource use and pollution, in order to increase the efficiency of resource use and improve the environment.

Revenues can be used for different policy purposes. ETRs implemented in Europe closely followed the revenue-neutrality principle – a tax-shifting policy programme!

Main obstacles hindering the more radical implementation of ETR:

• Competitiveness considerations – topic not only relevant in the context of ETR (environmental taxes) but also regarding the auctioning of emission allowances (EU Emission Trading Scheme)

• Equity issues – social considerations• Unstable tax base / revenue stability


Competitiveness Effects of Environmental Tax Reform (COMETR)

Analysis of ETRs implemented in Europe (ex-post analysis)

Focus was on studying the ETR effects on competitiveness • Six EU countries have implemented ETRs: Denmark,

Finland, Germany, Netherlands, Sweden, UK• The outcomes – environmental and economic – have been

broadly positive: energy demand and emissions are reduced; employment is increased; effects on GDP are very small

• Effects on industrial competitiveness have been small

See Andersen, M.S. and Ekins, P. (Eds.), 2009, Carbon Taxation: Lessons from Europe, Oxford University Press, Oxford and http://www2.dmu.dk/cometr/


COMETR – the economic impacts of ETR on GDP


COMETR – the impacts of ETR on CO2 emissions


Resource Productivity, Environmental Tax Reform and Sustainable Growth in Europe (PETRE)

Analysis of a large scale ETR in Europe (EU-27) and what would be its implications for the rest of the world (ex-ante analysis)

• a carbon tax was introduced on all non-EU emission trading scheme (EU ETS) sectors. The carbon tax rate was equal to the carbon price in the EU ETS

• the taxation of material inputs apart from energy products

The ETRs were modelled in a revenue-neutral fashion as all revenues were recycled back to the economy as the revenues paid by industries were used for a reduction in employers’ social security contributions and the revenues paid by households via an income tax reduction


Two macro-econometric models • Scenario HS1: ETR with

revenue recycling designed to meet unilateral EU 2020 GHG target (20% reduction from 1990 levels)

• Scenario HS2: ETR with revenue recycling designed to meet unilateral EU 2020 GHG target, with 10% of revenues spent on eco-innovation measures.

Models deliver no forecasts but insights how economies develop!

E3ME (GINFORS)

HS1 HS2

Carbon price (€ per ton 2008)

59 (68) 53 (61)

GDP 0.3 (-0.6) 0.8 (-0.3)

Employment 1.1 (0.4) 1.1 (0.4)

Note: Figures show percentage change in EU27 main indicators in 2020 compared to the relevant baseline for each scenario



Results: • ETR would raise employment, lower resource consumption and will have only small effects on GDP

• Labour intensity increases, meaning that average labour productivity falls. This is a trade-off with the reductions in unemployment.

• Carbon productivity (defined by GDP per unit of CO2 emission and material productivity (GDP per unit of material consumption) increase

Ekins, P. and Speck S. (Eds.), 2011 (forthcoming) Environmental Tax Reform: A Policy for Green Growth, Oxford University Press, Oxford.



The EEA project on ETRThe European Environment Agency (EEA) funded a follow-up project based on the PETRE project and studied aspects of:

• eco-innovation and ETR;

• equity effects/distributional implications of an ETR; and

• the feasibility of implementing a radical ETR and its acceptance

The feasibility of implementing a radical ETR and its acceptance:a qualitative analysis aiming to understand the scope for using ETR to address current and future environmental challenges as well as assessing possible paths to develop a more harmonised approach to ETR in the EU


Eco-innovation and ETR

The literature review suggests “that price-based policy instruments can (in theory) and do (in practice) have a positive impact on both innovation and diffusion of environmental technologies”.

“... caution should be exercised in drawing general, definitive conclusions about the impacts of price-based policy instruments such as environmental taxes and investment subsidies on innovation – particularly relative to other policy instruments”.

Based on scenarios it can be summarised that an ETR with spending revenues for eco-innovation leads to a positive outcome in terms of GDP and employment as compared to the results of other (PETRE) scenarios.


Distributional implications of an ETRThe actual distributional impact depends, inter alia, on the subject of taxation: notably, taxes on household energy tend to be clearly regressive, while transport-related taxes have mixed distributional results.

Result of the modelling exercise: In most countries, and at the aggregate EU level, the impacts were not found to be regressive across income groups

The modelling results showed that the ETR would generally create a positive change in real incomes for all socio-economic groups and that only a limited number of households in some EU member states would be facing a lower income as a consequence of the ETR.


Distributional implications of an ETR – change in household income by quintile, 2020


The UK Green Fiscal Commission

Objective: to prepare the ground for a significant programme of green fiscal reform in the UK, in terms of both assembling the evidence base for such a reform, and raising stakeholder and public awareness of it.

Key message: “Green fiscal reform emerges as a crucial policy to get the UK on a low-carbon trajectory; help develop the new industries that will both keep it there and provide competitive advantage for the UK in the future; and contribute to restoring UK fiscal stability after the recession. It is a key to future environmental sustainability and low-carbon prosperity”

“The politics is difficult, so need to develop a compelling narrative!”

Final report published 10/2009: www.greenfiscalcommission.org.uk

European Environment Agency

Last but not least … and most recent

ETR Public/Policymakers Awareness Campaign

• Disseminating results of ETR projects and potential of ETR based on experience in other European countries

• Workshop with politicians and civil servants • Conference with the civil society

First event took place in Dublin/Ireland on 28/29 October 2010


Summary - the potential of ETR• ETR has a minimal effect on national competitiveness and economic growth

• ETR can stimulate resource-efficient innovation – need to support this with complementary policies

•“Environmental taxes can spur innovation” (OECD)

• ETR doesn’t need to be regressive – significance of ETR design / recycling and compensation mechanism

• Public finances deteriorated during the financial and economic crises of the last years

• Fiscal consolidation strategies can be implemented at the revenue and at the spending side (austerity programmes)

• IMF – revenue side: “to strengthen broad-based taxes by an increase in excise tax rates and by introducing (and capturing revenues from) efficient carbon pricing”


Summary - the potential of ETRThe aspect that environmental taxes are least detrimental to growth, in particular in comparison to labour taxes, is also highlighted by the EC (2010):

“…simulations …indicate that a shift from the most distortionary taxes (on labour and capital) to the least distortionary taxes (on consumption, housing) could mitigate the output losses associated with fiscal consolidation in the short run and have a positive impact on GDP in the long run”.

OECD Secretary-General Angel Gurría: “Shifting part of the tax burden onto pollution makes it more attractive to develop and adopt these clean technologies and promotes green growth.”

ETR is a key policy tool for fostering green growth


Thank you for your attention!

Stefan Speck

European Environment Agency

email: [email protected] http://www.eea.europa.eu

Documents

Distributional and competitiveness implications of environmental tax reforms – revisited