OECD

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 2002by

Nils Axel BraathenOECD, 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

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Per

cen

t of

GD

P

1994 2000

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Tax revenue raised on different environmentally related tax-bases

OtherWaste

Electricity

Heating- and process fuels

Other

Motor vehicles

Transport fuels

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Tax rates on petrol and diesel, 1.1.2002

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

€ p

er li

tre

Unleaded petrol Diesel

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Tax rates on final treatment of waste, 1.1.2002

0

10

20

30

40

50

60

70

€ pe

r to

nne

AUTAUS, Sidney US,

New JerseyUK

SWI

SWEPOLNORNET

FIN

DEN

CZE

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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 => Technologies are given Longer term => 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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0

50

100

150

200

250

1970 1975 1980 1985 1990 1995

Ind

ex, 1

970

= 1

00

Fuel efficiency (km per litre)

Real Petrol Price(Nominal Price/CPI)

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)

0

2

4

6

8

10

12

14

16

<0.

4

0.4-

0.6

0.6-

0.8

0.8-

1.2

1.2-

1.6

>1.6

Expenditure group

% o

f tot

al e

xpen

ditu

re

Be

Dk

W. Ger

Sp

Fra

0

2

4

6

8

10

12

14

16

<0.

4

0.4-

0.6

0.6-

0.8

0.8-

1.2

1.2-

1.6

>1.6

Expenditure group

% o

f tot

al e

xpen

ditu

re

Irl

It

Lux

Neth

Po

UK

Source: Presentation made by Terry Barker at EEB’s 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 OECD’s current work on environmentally related taxes.

• We are undertaking a quantification of environmentally harmful subsidies.

• We encourage greater international co-operation.