THE POLITICAL ECONMY OF THE POLITICAL ECONMY OF ENVIRONMENTALLY - - PowerPoint PPT Presentation

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THE POLITICAL ECONMY OF THE POLITICAL ECONMY OF ENVIRONMENTALLY RELATED TAXES IN A ENVIRONMENTALLY RELATED TAXES IN A CONTEXT OF HIGH OIL PRICES CONTEXT OF HIGH OIL PRICES Jean Jean-

• Philippe Barde

Philippe Barde OECD Environment Directorate OECD Environment Directorate

Session 3, Session 3, 18 18th

th Regional Seminar on Fiscal Policy

Regional Seminar on Fiscal Policy

ECLAC, Santiago Chile ECLAC, Santiago Chile 24 January 2006 24 January 2006

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CONTENTS CONTENTS

Part 1: Background Part 1: Background Part 2: Energy and transport related taxes Part 2: Energy and transport related taxes Part 3: Dealing with competitiveness Part 3: Dealing with competitiveness

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Part 1: BACKGROUND Part 1: BACKGROUND

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Definition of environmentally related taxes

• Any

Any compulsory, unrequited compulsory, unrequited payment to payment to general governmental levied on a tax general governmental levied on a tax-

• base

base deemed to be of particular environmental deemed to be of particular environmental relevance. relevance.

• The

The name or purpose name or purpose of the tax is not a

• f the tax is not a

criterion. criterion.

• A tax can be earmarked, but this is not a

A tax can be earmarked, but this is not a criterion. criterion.

• Levies paid to environmental funds outside

Levies paid to environmental funds outside “ “general government general government” ” are not included. are not included.

• Information on fees and charges (requited

Information on fees and charges (requited payments) is, however, now also included in payments) is, however, now also included in the database. the database.

www.oecd.org/env/policies/database

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Revenues from environmentally related taxes Revenues from environmentally related taxes In per cent of GDP In per cent of GDP

1 2 3 4 5 6

Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kindom United States Arithmetic average Weighted average Per cent of GDP

1995 1999 2003

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Revenues from environmentally related taxes Revenues from environmentally related taxes In per cent of total tax revenue In per cent of total tax revenue

2 4 6 8 10 12 14 16 18 Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States Weighted average Arithmetic average Per cent of total tax revenue

1995 1999 2003

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THE REVENUE OF ENVIRONMENTALLY THE REVENUE OF ENVIRONMENTALLY RELATED TAXES in OECD RELATED TAXES in OECD

• 7 % of total tax

7 % of total tax revenue (OECD revenue (OECD average) average)

• 2.5 % of GDP (range

2.5 % of GDP (range 1 1-

• 5%)

5%)

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Revenues from environmentally related taxes per capita

500 1,000 1,500 2,000 2,500

Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States Weighted average Arithmetic average USD per capita

1995 1999 2003

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TAX BASES TAX BASES

• What matters is less the alleged purpose of the

What matters is less the alleged purpose of the tax, BUT tax, BUT the relevance of the tax base the relevance of the tax base. .

• All in all, 375 ERT in OECD countries

All in all, 375 ERT in OECD countries

Energy

Energy (150 taxes) (150 taxes)

Transport

Transport (motor vehicles) 125 taxes (motor vehicles) 125 taxes

Waste (50 taxes)

Waste (50 taxes)

Others (Water, Various products) 50 taxes

Others (Water, Various products) 50 taxes

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PART 2 PART 2 ENERGY AND TRANSPORT ENERGY AND TRANSPORT RELATED TAXES RELATED TAXES

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ENERGY AND TRANSPORT RELATED TAXES ENERGY AND TRANSPORT RELATED TAXES

• Most taxes are related to

Most taxes are related to ENERGY ENERGY and and TRANSPORT TRANSPORT: represent about 90 % of the : represent about 90 % of the total revenue. total revenue.

• Mostly affect households.

Mostly affect households.

• Industry pays very little environmentally

Industry pays very little environmentally related taxes. related taxes.

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Remarks on motor fuel taxes Remarks on motor fuel taxes

Considerable variations between countries Relatively low in US and Canada High in E.U (15), Japan, Korea, Turkey Significant increases in several countries

(2000-2005). Increases in new EU Member States to comply with EU Directive

In many countries, lower taxes on diesel

(environmental non-sense), except in Australia, Switzerland, UK and US

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Are motor fuel taxes optimal? Are motor fuel taxes optimal? The optimal level of emissions

Marginal cost MAC MEC t* O A P* B Pollution

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Parry and Small (2002) Parry and Small (2002) estimate the marginal estimate the marginal social cost of automobiles (environmental social cost of automobiles (environmental externalities and congestion) in UK and US. externalities and congestion) in UK and US. According to these estimates the optimal rate of According to these estimates the optimal rate of gasoline taxes in UK is gasoline taxes in UK is lower lower than existing than existing gasoline taxes in many countries, but much gasoline taxes in many countries, but much higher higher than in the US. than in the US.

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Newberry (2005) Newberry (2005) estimates higher optimal rates estimates higher optimal rates for the UK: 0.6 for the UK: 0.6 € € per litre for gasoline, 0.67 per litre for gasoline, 0.67 € € per litre for diesel. per litre for diesel. According to these estimates, France, Germany According to these estimates, France, Germany and the Netherlands would tax at the and the Netherlands would tax at the approximate right level. approximate right level. UK would be taxing too high. UK would be taxing too high.

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Tax rates on petrol and diesel in OECD member Tax rates on petrol and diesel in OECD member countries countries

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

A u s t r a l i a A u s t r i a B e l g i u m C a n a d a

• F

e d C a n a d a

• F

e d + P r

• v

C z e c h R e p u b l i c D e n m a r k F i n l a n d F r a n c e G e r m a n y G r e e c e H u n g a r y I c e l a n d I r e l a n d I t a l y J a p a n K

• r

e a L u x e m b

• u

r g N e t h e r l a n d s N e w Z e a l a n d N

• r

w a y P

• l

a n d P

• r

t u g a l S l

• v

a k R e p u b l i c S p a i n S w e d e n S w i t z e r l a n d T u r k e y U n i t e d K i n d

• m

U S

• F

e d e r a l U S

• F

e d e r a l + S t a t e € per litre Petrol, 1.1.2000 Petrol, 1.1.2005 Diesel, 1.1.2000 Diesel, 1.1.2005

Parry & Small (2002) Newbery (2005)

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Energy taxes in the context of high oil Energy taxes in the context of high oil prices prices

• Between 1998 and the end of 2005 oil prices

Between 1998 and the end of 2005 oil prices increased by 229 % increased by 229 %

• In 2005 alone by 40 % (with a peak of + 67 %

In 2005 alone by 40 % (with a peak of + 67 % in August). in August).

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Total World Crude Oil Prices (Dollars per barrel)

5 10 15 20 25 30 35 40 45 50 Jan 02, 1998 Mar 20, 1998 Jun 05, 1998 Aug 21, 1998 Nov 06, 1998 Jan 22, 1999 Apr 09, 1999 Jun 25, 1999 Sep 10, 1999 Nov 26, 1999 Feb 11, 2000 Apr 28, 2000 Jul 14, 2000 Sep 29, 2000 Dec 15, 2000 Mar 02, 2001 May 18, 2001 Aug 03, 2001 Oct 19, 2001 Jan 04, 2002 Mar 22, 2002 Jun 07, 2002 Aug 23, 2002 Nov 08, 2002 Jan 24, 2003 Apr 11, 2003 Jun 27, 2003 Sep 12, 2003 Nov 28, 2003 Feb 13, 2004 Apr 30, 2004 Jul 16, 2004 Oct 01, 2004 Dec 17, 2004

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Total World Crude Oil Prices (Dollars per barrel)

10 20 30 40 50 60 70 Jan 07, 2005 Jan 21, 2005 Feb 04, 2005 Feb 18, 2005 Mar 04, 2005 Mar 18, 2005 Apr 01, 2005 Apr 15, 2005 Apr 29, 2005 May 13, 2005 May 27, 2005 Jun 10, 2005 Jun 24, 2005 Jul 08, 2005 Jul 22, 2005 Aug 05, 2005 Aug 19, 2005 Sep 02, 2005 Sep 16, 2005 Sep 30, 2005 Oct 14, 2005 Oct 28, 2005 Nov 11, 2005 Nov 25, 2005

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• Claim that government revenue will increase

Claim that government revenue will increase substantially (due to VAT) substantially (due to VAT)

• Increased public opposition to gasoline taxes

Increased public opposition to gasoline taxes

• Does that mean that energy taxes, in

Does that mean that energy taxes, in particular fuel taxes, should not increase or particular fuel taxes, should not increase or even decrease? even decrease?

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Some remarks on this issue. Some remarks on this issue.

• Tax revenue may not increase and even

Tax revenue may not increase and even decrease: decrease:

Increase in VAT revenue on

Increase in VAT revenue on gasoline gasoline will be will be (at least partially) compensated by (at least partially) compensated by decrease in VAT revenue on decrease in VAT revenue on other goods

• ther goods

and services. and services.

Consumption of gasoline and diesel fuel

Consumption of gasoline and diesel fuel will decrease. will decrease.

Level playing field because oil price

Level playing field because oil price increase is a increase is a global phenomenon. global phenomenon.

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Environmental

Environmental externalities externalities are not fully are not fully internalised in fuel prices in most countries. internalised in fuel prices in most countries. Reducing taxes would worsen the situation. Reducing taxes would worsen the situation.

If Governments reduce tax rates, oil

If Governments reduce tax rates, oil exporters would be have no restraint to exporters would be have no restraint to increasing export prices increasing export prices

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Evolution in Europe Evolution in Europe

• 1994

1994-

• 2000: in Europe, the weighted average

2000: in Europe, the weighted average nominal tax rate nominal tax rate on

• n gasoline

gasoline increased by 50 % increased by 50 %

• 1994

1994-

• 2000: the

2000: the import price of oil import price of oil was roughly was roughly constant, wit a strong increase since mid 1999. constant, wit a strong increase since mid 1999.

• High oil prices and taxes have resulted in a

High oil prices and taxes have resulted in a significant decrease in gasoline use significant decrease in gasoline use in Europe: in Europe: minus 10 % (1999 minus 10 % (1999-

• 2003)

2003)

• Diesel

Diesel prices increased much less (nominal tax prices increased much less (nominal tax rate on average half of gasoline) rate on average half of gasoline)

• Hence a significant shift to

Hence a significant shift to diesel diesel vehicles vehicles

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Sales of, and taxes on, petrol and diesel in OECD Sales of, and taxes on, petrol and diesel in OECD Europe 1994 Europe 1994-

• 2004

2004

50,000 100,000 150,000 200,000 250,000 300,000 350,000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1000 tonnes oil equivalents 0.0 0.2 0.4 0.6 0.8 1.0 1.2 Euro per litre

Petrol use Diesel use Average petrol tax rate Average diesel tax rate Rotterdam spot price, 98 octane unleaded petrol

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TAX EXEMPTIONS TAX EXEMPTIONS

• A very large number of tax exemptions,

A very large number of tax exemptions, rebates etc. are granted in OECD countries: rebates etc. are granted in OECD countries: more than 1150 recorded in the OECD more than 1150 recorded in the OECD database database… …

Reduced rates for diesel

Reduced rates for diesel

Reduced rates (or exemptions) for agriculture, road

Reduced rates (or exemptions) for agriculture, road transport, aviation, fisheries. transport, aviation, fisheries.

Tax ceilings for certain industries

Tax ceilings for certain industries

• There are also refund mechanisms (175

There are also refund mechanisms (175 recorded) recorded)

• All in all, industry pays very little energy

All in all, industry pays very little energy related taxes related taxes

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Energy use and energy taxes paid. Sweden, Norway, Finland and Denmark. 1999.

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Part 3 Part 3 COMPETITIVENESS COMPETITIVENESS

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• Competitiveness concerns are mainly related

Competitiveness concerns are mainly related to to energy related taxes and prices. energy related taxes and prices.

• BUT competitiveness has different

BUT competitiveness has different implications according to the geographical implications according to the geographical and sectoral levels and time horizon. and sectoral levels and time horizon.

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Defining competitiveness Defining competitiveness

• Applies to: company, industry sector, country.

Applies to: company, industry sector, country.

• At firm or company level, there are losers and winners

At firm or company level, there are losers and winners

• Environmental taxes are

Environmental taxes are more more “ “visible visible” ”

• In case of emission taxes: payment on

In case of emission taxes: payment on residual residual emissions (hence additional cost). emissions (hence additional cost).

• But, at country level, taxes are a

But, at country level, taxes are a transfer transfer. .

• Economically efficient taxes should

Economically efficient taxes should minimise overall minimise overall cost, cost, thus increase competitiveness. thus increase competitiveness.

• Threat of

Threat of relocation relocation of industries.

• f industries.

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• Competitiveness impact depend on

Competitiveness impact depend on market structure market structure (e.g. how far cost increases can be passed on to (e.g. how far cost increases can be passed on to prices). prices).

• Cost impacts depend on the

Cost impacts depend on the energy intensity energy intensity of the

• f the

sector sector

• Do taxes

Do taxes replace or supplement replace or supplement existing regulations existing regulations (usually a supplement)? Are taxes replacing cost (usually a supplement)? Are taxes replacing cost effective regulations? effective regulations?

• Is the tax reform

Is the tax reform revenue neutral revenue neutral? ?

• What tax shift

What tax shift (labour or capital)? (labour or capital)?

• Who benefits

Who benefits from environmental improvements? from environmental improvements?

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Taxes vs. tradable permits Taxes vs. tradable permits

Inefficient command and control regulation.

E.g. all polluters face same abatement requirements. Does not minimise costs of abatement.

Efficient command and control regulation.

Polluters face different abatement requirements, minimising aggregate costs of abatement Competitiveness improved due to reduction in aggregate abatement costs. Competitiveness effects of differences in abatement costs and tax payments between firms.

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Taxes vs. tradable permits (Cont.) Taxes vs. tradable permits (Cont.)

Environmental tax with lump-sum revenue recycling Competitiveness effects

• f differences in net tax

payments between firms Efficient command and control regulation.

Polluters face different abatement requirements, minimising aggregate costs of abatement

Grandfathered tradable permits Competitiveness effects of differences in net permit spending between firms

• Equivalence. With

equal environmental impact, permit price per unit emissions equals tax rate per unit emissions.

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Grandfathered tradable permits

Taxes vs. tradable permits (Cont.) Taxes vs. tradable permits (Cont.)

Environmental tax with lump-sum revenue recycling Competitiveness effects due to asymmetry in lump- sum repayments compared with value of tax reductions. Double dividend competitiveness effects?

Environmental tax, contributing revenues to general budget

• Equivalence. With

equal environmental impact, permit price per unit emissions equals tax rate per unit emissions, and equal revenues

Auctioned tradable permits, contributing revenues to general budget

• Equivalence. With

equal environmental impact, permit price per unit emissions equals tax rate per unit emissions.

Competitiveness effects due to asymmetry in grandfathered entitlements compared with value of tax reductions. Double dividend competitiveness effects?

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Dealing with competitiveness: Dealing with competitiveness: Lessons from recent OECD countries Lessons from recent OECD countries’ ’ experience experience

Mitigation measures Mitigation measures should not affect undermine should not affect undermine environmental protection objectives environmental protection objectives… … … …nor result in prohibited subsidies (PPP and WTO nor result in prohibited subsidies (PPP and WTO rules). rules). NOT reduce abatement incentives, e.g. NOT reduce abatement incentives, e.g.

• Apply full tax rate, but keep incentive at the margin:

Apply full tax rate, but keep incentive at the margin: e.g. recycling part of the revenue to the taxed sector, e.g. recycling part of the revenue to the taxed sector, based on historic production level or R&D subsidies based on historic production level or R&D subsidies

• Replace full exemptions by several

Replace full exemptions by several-

• tier tax rates to

tier tax rates to maintain incentives to reduce emissions (e.g. lower maintain incentives to reduce emissions (e.g. lower tax for internationally exposed sectors). tax for internationally exposed sectors).

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• Border tax adjustments (but difficult to apply).

Border tax adjustments (but difficult to apply).

• Gradual phasing out of exemptions.

Gradual phasing out of exemptions.

• Early warning and gradual phasing in of taxes

Early warning and gradual phasing in of taxes

• Better integration of environmental taxes in

Better integration of environmental taxes in comprehensive tax reforms (providing comprehensive tax reforms (providing efficiency gains). efficiency gains).

• International coordination needed

International coordination needed