OECD

IMPLEMENTING ENVIRONMENTALLY RELATED

TAXES

Outstanding issues

Jean-Philippe Barde and Nils Axel BraathenOECD, Environment Directorate

OECD

Setting the scene(Reminder)

• An increasing use of environmentally related taxes in all OECD countries.

• Comprehensive green tax reforms in a number of EU countries.

• Revenue of environmentally related taxes:– 2 - 3 % of GDP– 7 % of total tax revenue– 90 % of revenue comes from transport-related

taxes (fuels and vehicles).

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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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GREENING TAX SYSTEMS: policy options

• Remove and/or restructure existing environmentally harmful tax provisions

• Restructure existing taxes (e.g. energy taxes)

• Introduce new taxes

• Piecemeal vs. comprehensive tax reform

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Two outstanding implementation issues:

• Distributional impacts

• Impacts on sectoral competitiveness

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Distributional impacts

• Direct: related to the structure of household expenditure (in particular, expenditures on energy and transport)

• Indirect: due to taxation of production inputs (price effect on consumers goods)

• Final incidence: impacts on the remuneration of production factors (lower wages or lower return on capital).

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Little available evidence:

• Probable regressivity of energy-related taxes (simulations in Sweden, UK), water (Denmark).

• Higher taxes (e.g. at the level required to achieve Kyoto targets) could induce more significant regressivity.

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Policy options

• MITIGATION: tax breaks for specific segments of the population (e.g. heating fuels). Will defeat the purpose of the tax. Administrative complexities.

• COMPENSATION: e.g. lump sum payments to households. Examples: energy saving subsidies to households, tax refund (Switzerland).

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Policy options (cont)

• TAX SHIFT: reduction in other taxes like income taxes (but may be regressive as poorest households pay the least taxes).

More analysis is needed: current OECD work

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Competitiveness: issues

• Applies to: company, sector, country.• Environmental taxes are more “visible”• In case of emission taxes: payment on

residual emissions (hence additional cost).• But, at country level, taxes are a transfer.• Economically efficient taxes should

minimise overall cost, thus increase competitiveness.

• Threat of relocation of industries.

OECD

Competitiveness: issues (cont)

• Competitiveness impact depend on market structure (e.g. whether taxes affect prices or profits)

• Do taxes replace or supplement existing regulations (usually a supplement)?

• Is the tax reform revenue neutral?• What tax shift (labour or capital)?• Who benefits from environmental

improvements?

OECD

Competitiveness: evidence and practice

Literature reviews indicate NO evidence of significant impact.BUT, this is largely due to numerous mitigation measures, such as:

– Reduced tax rates for products, sectors, inputs– Tax exemptions for specific activities: More than 1000

recorded in OECD tax database (but not all exemptions are for competitiveness purpose)

– Tax refunds / recycling

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Competitiveness: policy options (cont)

A prisoner's dilemma situation?

The recent OECD report concludes that: “Countries…could consider possible concerted

policy options and changes, decided and implemented at the national level, but within a framework which provides a multilateral dialogue.”

One priority area would be a concerted reduction of existing tax exemptions.

OECD

Current OECD work

Analyse “second best” unilateral options to alleviate the competitiveness impact such as:

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

• Early warning and progressive tax increase

OECD

• Gradual phasing out of exemptions.

• Replace full exemptions by several-tier tax rates to maintain incentives to reduce emissions.

• Channel back revenue to the taxed sectors, while maintaining incentives at the margin.

OECD

Analyse Competitiveness impact of energy taxation on presently exempted sectors (steel industry).

Promote a multilateral dialogue.