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IMPLEMENTING ENVIRONMENTALLY RELATED TAXES Outstanding issues

IMPLEMENTING ENVIRONMENTALLY RELATED TAXES Outstanding issues Jean-Philippe Barde and Nils Axel Braathen OECD, Environment Directorate. Setting the scene (Reminder). An increasing use of environmentally related taxes in all OECD countries.

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IMPLEMENTING ENVIRONMENTALLY RELATED TAXES Outstanding issues

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  1. IMPLEMENTING ENVIRONMENTALLY RELATED TAXES Outstanding issues Jean-Philippe Barde and Nils Axel Braathen OECD, Environment Directorate

  2. 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).

  3. Tax revenue raised on different environmentally related tax-bases

  4. 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

  5. Two outstanding implementation issues: • Distributional impacts • Impacts on sectoral competitiveness

  6. 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).

  7. 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.

  8. 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).

  9. 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

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

  11. 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?

  12. 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

  13. 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.

  14. 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

  15. 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.

  16. Analyse Competitiveness impact of energy taxation on presently exempted sectors (steel industry). • Promote a multilateral dialogue.

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