Environmental fiscal reform in Europe: Research, experience and best practice

Environmental fiscal reform in Europe: Research, experience and best practice Jacqueline Cottrell, Green Budget Europe ETUI annual conference, Brussels, 29-30 March 2011

expert platform on Market-Based Instruments for environmental policy members in almost all EU Member States a platform for all – representatives of ministries, politicians, policy makers, international organisations, EU Commission, NGOs, research community, business NEW MEMBERS WELCOME!

Introduction to Environmental Fiscal Reform (EFR) An overview of recent research on EFR in Europe The European experience: EFR at European level Some examples of best practice: EFR in member states Conclusions Presentation structure

EFR refers to “a range of taxation and pricing measures which can raise fiscal revenues while promoting environmental goals, for example, taxes on natural resource use, pollution charges, fees charged for environmentally damaging practices, and reducing and / or restructuring environmentally harmful subsidies” (OECD 2005). Economic activities generate pollution and waste that have external costs for others, EFR can help ‘internalise’ these costs EFR addresses environmental problems by increasing the price of polluting scarce environmental assets or consuming scarce goods and resources which in turn creates a price signal which creates an incentive to change behaviour Introduction to Environmental Fiscal Reform (EFR)

Polluter Pays Principle User Pays Principle Sustainable Development Principle Prevention and Precautionary Principles Modern integrated pollution prevention and control instruments Promotion of environmental technologies, environmental industry and technological innovation EFR supports the implementation of key environmental policy principles

EFR results in reduced rates of pollution and increased energy and resource efficiency EFR raises revenues which can be used to reduce distortions in the economy by reducing income taxes or ancillary wage costs Reduced labour costs incentivise employment Price signals stimulate innovation in greener technologies and allow green industries to become more competitive This creates employment in green industriese.g. Eco-industries employ 3.4 million (10x more than steel)e.g. Renewables currently employ 1.4 million, if reduction target for GHGs increased to 30%, 3.5 million jobs by 2020e.g. 1,000 jobs are directly created by each MTOE saved The benefits of EFR

Productivity and Environmental Tax Reform in Europe - petrE modelled high carbon price to achieve CO2 reduction targets positive impact on growth 0.2-0.8% of GDP generate revenues of 1.2-6.8% of GDP increase in employment 1-2.7% The Green Fiscal Commission, UK UK can meet CO2 targets in 2020 using EFR alone would create 455,000 new jobs by 2020 economic growth would be slightly negatively effected Recent research on EFR in Europe (1)

COMETR project modelled impacts of environmental taxes on competitiveness and growth CO2 emissions reduced 3-4% as a result of tax reform small increase GDP growth in relation to BAU positive impact on economic performance – attributed to energy savings and innovation to improve competitiveness Climate Change and Employment (ETUC, ISTAS, SDA, Syndex, Wupperthal) application of EFR will create many more new jobs in energy-efficient sectors than will be lost in energy-intensive sectors Recent research on EFR in Europe (2)

current directive from 2003 set (low) minimum tax rates on energy products including diesel, petrol and electricity numerous exemptions revision expected in April 2011 new rates with carbon and energy element energy element to reflect energy content of energy source expected to create maximum carbon price of € 30 per tonne Will new rates create strong enough price signal to stimulate innovation, take-up of new technologies? The Energy Tax Directive

launched 2005, largest cap and trade scheme in the world  carbon price has been too low, largely symbolic concerns about too few domestic emissions reductions from 2013, ETS to be more comprehensive and cover more sectors, e.g. aviation, and will include full auctioning for energy sector linear reduction of cap 1.74% per year will allowances be withdrawn to tighten the cap in the future to meet stricter GHG emission reduction targets of 25% (or even 30%)? if the target were increased to 30% ETS could generate well over € 60 billion in additional revenues (CAN Europe 2010) The EU Emissions Trading Scheme (ETS)

“Where taxes may have to rise, this should, where possible, be done in conjunction with measures to make tax systems more growth- friendly by shifting the tax burden from labour to other tax bases, for example environmentally harmful activities.” “...at national level, Member States will need: To phase out environmentally harmful subsidies, limiting exceptions to people with social needs; To deploy market-based instruments such as fiscal incentives and procurement to adapt production and consumption methods; To use regulation, building performance standards and market-based instruments such as taxation, subsidies and procurement to reduce energy and resource use... The Europe 2020 strategy

The Commission is under pressure to produce a roadmap for the elimination of EHS: EHS phase out is in 2006 renewed sustainable development strategy and the 2007 6th EAP Council has made repeated requests for a roadmap EHS are central to the 2010 Europe 2020 strategy 2010 European Parliament urged the Commission to act e.g. company car taxation direct revenue losses estimated as 0.5% EU GDP (€54 bn) welfare losses a further 0.1-0.3% GDP (€12-37 bn) In the UK, reform reduced total car CO2 emissions by 1% and reduced driven business distances by 45%. Elimination of environmentally harmful subsidies

Sweden- introduction of a carbon tax of 0.25 SEK/kg ($100 per ton) - substantially modified in 1997 to 0.365 SEK/kg ($150/ton)  CO2 reduction of 9% between 1990 and 2007 compared to BAU emissions would be 20% higher  Economic growth amounted to 48% in the same period Emissions reductions can be achieved alongside reasonable rates of growth. Crucial for success – cross-party willingness to implement elements of EFR EFR in practice: Sweden

the ecological tax reform – a tax on energy, including electricity, natural gas, heating and transport fuels resulted in a 2-3% reduction of overall CO2 emissions between 1999-2003 created well over 250,000 jobs, mainly in the energy efficiency and renewable energy industry Transport fuel consumption fell by 17% by the end of 2008 in comparison with the 1999 levels Car sharing increased by 70% Numbers of electric and fuel efficient cars increased rapidly Public transport passengers increased by 3-5% per annum between 1999 and 2008 EFR in practice: Germany

one of the first MS to introduce a CO2- and sulphur tax in the late 1970s revenues generated were used to reduce labour related taxes lessening the effects of indirect environmental taxation on lower income groups in 1996, energy and CO2-taxes on business energy use were reformed to include natural gas in the energy and CO2-tax base the level of CO2-tax reimbursements was further lowered and conditioned on the conclusion of energy efficiency agreements The Danish Environmental Protection Agency estimates CO2 emissions reductions of 24% between 1990 and 2001 compared with a BAU scenario EFR in practice: Denmark

introduced air ticket tax in 2008 survey revealed significant influence on passenger behaviour 10% will choose to travel by train or car 45% will not make journeys they would otherwise have undertaken 45% will travel for a foreign airport... (phased out 2009 for this reason) while not a success story, reveals considerable potential for such a tax to reduce emissions from aviation group of states need to implement at same time to reduce evasion EFR in practice: the Netherlands

The most common Counterarguments to EFR We should concentrate on the economy NOT the environment EFR has a negative impact on competitiveness EFR results in job losses EFRis regressive EFRslows growth

Integration of subsidy reform and environmental taxation into austerity plans throughout the EU An increase in GHG emissions reduction target to 30% - as called for in February 2011 by 7 EU MS governments A 10% shift of total tax revenues towards environment and away from labour A ‘greener’ and more robust Energy Tax Directive Publication of a roadmap for the elimination of EHS Use of more innovative taxation, e.g. financial transactions tax (‘Tobin tax’), taxes on assets and wealth A broad and measured public debate about EFR, in EU MS and at EU level What GBE would like to see

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Environmental fiscal reform in Europe: Research, experience and best practice