Environmental Tax Reform:
Potential and Experience in Europe
By
Professor Paul Ekins
Member of UNEP’s International Resources Panel
Professor of Resources and Environmental Policy and Director
UCL Institute for Sustainable Resources, University College London
A presentation to the Corporate Leaders Group on Climate Change-CLG Chile
Santiago, Chile
May 29th, 2014
The potential of ETR/GFR:
ETR/GFR is the shifting of taxation from ‘goods’ (like income,
profits) to ‘bads’ (like resource use and pollution)
Economic impacts
Increased output
Higher employment
ETR
Green innovation
Green technology development
Environmental impacts
Less pollution
Less resource use
Higher
human
well-being
Relevant projects on environmental tax
reform (ETR) or green fiscal reform (GFR)
• COMETR: Competitiveness effects of environmental tax reforms,
2007. http://www2.dmu.dk/cometr/
See Andersen, M.S. & Ekins, P. (Eds.) Carbon Taxation: Lessons from Europe, Oxford
University Press, Oxford/New York, 2009
• petrE: ‘Resource productivity, environmental tax reform (ETR) and
sustainable growth in Europe’. One of four final projects of the
Anglo-German Foundation under the collective title ‘Creating
Sustainable Growth in Europe’. Final report published
October/November 2009, London/Berlin. www.petre.org.uk
See Ekins, P. & Speck S. Eds. 2011 Environmental Tax Reform: A Policy for Green
Growth, Oxford University Press, Oxford
• UK Green Fiscal Commission. Final report published October 2009,
London. www.greenfiscalcommission.org.uk
What is the experience to date of ETR in Europe?
• Six EU countries have implemented ETRs: Denmark,
Finland, Germany, Netherlands, Sweden, UK
• The outcomes – environmental and economic – have been
broadly positive: energy demand and emissions are
reduced; employment is increased; effects on GDP are
very small
• Effects on industrial competitiveness have been minimal
• See Andersen, M.S. & Ekins, P. (Eds.) Carbon Taxation:
Lessons from Europe, Oxford University Press, Oxford/New
York, 2009
Environmental and economic impacts of
ETR, from COMETR study, 2007
CHART 7.28: THE EFFECTS OF ETR: GDP IN ETR AND NON ETR
COUNTRIES
% difference
0.3
ETR Countries
0.2
0.1
Non ETR Countries
0.0
-0.1
1994
1997
2000
2003
2006
2009
2012
% difference is the difference between the base case and the counterfactual
reference case.
Source(s) : CE.
Note(s)
:
Insights from PETRE (Resource productivity and
ETR in Europe)
• What opportunities are presented by ETR in Europe?
• What might a large-scale ETR in Europe look like and what
would be its implications for the rest of the world?
• What are the obstacles to ETR in Europe?
• What might be a way forward for ETR in Europe?
• How can single European countries like Germany seek to
implement their own ETRs?
• What are the implications of ETR for ‘sustainable growth’ in
Europe?
See Ekins, P. & Speck S. Eds. 2011 Environmental Tax Reform: A
Policy for Green Growth, Oxford University Press, Oxford
What might a large-scale ETR in Europe look
like.....? (1)
• Two European macro-econometric models: E3ME,
GINFORS.
• Models deliver insights, not forecasts or ‘truth’
• Six scenarios:
– Baseline with low energy price (LEP)
– Baseline sensitivity with high energy price (HEP, reference case)
– Scenario 1: ETR with revenue recycling designed to meet 20% EU 2020
GHG target (S1 – scenario compared with LEP Baseline)
– Scenario 2: ETR with revenue recycling designed to meet 20% EU 2020
GHG target (S2 – scenario compared with HEP Baseline)
– Scenario 3: ETR with revenue recycling designed to meet 20% EU 2020
GHG target (S3 – scenario compared with HEP Baseline)
• proportion of revenues spent on eco-innovation measures
– Scenario 4: ETR with revenue recycling designed to meet 30%
‘international cooperation’ EU 2020 GHG target (S4 – scenario compared
with Baseline with HEP)
What might a large-scale ETR in Europe look
like.....? (2)
Scenario
CO2 price
Euro2008/t
GDP
% change
from
baseline
Employment
Labour productivity
% change
from baseline
% change from
baseline
S1(L)
E3ME
GINFORS
142
120
0.6
-3.0
2.2
0.0
-1.6
-3.0
S1(H)
E3ME
GINFORS
59
68
0.2
-0.6
1.1
0.4
-0.9
-1.0
S2(H)
E3ME
GINFORS
53
61
0.8
-0.3
1.1
0.4
-0.3
-0.7
S3(H)
E3ME
GINFORS
204
184
0.5
-1.9
2.7
0.8
-2.1
-2.6
... and what would be its implications for the rest
of the world?
CO2 emissions- GINFORS
40
Base LEP
Base
36
S2
S4
32
28
24
20
1990
2005
2010
2015
2020
What might be a way forward for ETR in Europe (in
a time of financial crisis)?
• Need for substantial new sources of tax revenue (tax pollution)
• Need for substantial new sources of employment (make employment
cheaper)
• Carbon tax very similar to permit auction
• Energy Tax Directive in place – proposal to split between energy and
carbon
• Carbon tax would put floor on permit price
• EU-wide carbon tax would dilute concerns about competitiveness (cf
China)
UK Green Fiscal Commission
•
•
•
•
•
Formed May 2007
Running to October 2009
Independent of government (funded by Esmée Fairbairn
Foundation and Ashden Trust)
22 Commissioners – to review and advise on work
–
4 MPs, 3 Lords – politically balanced, senior political
representation, shadow ministers
–
business, academic, NGOs (social and environmental)
–
FSA, MPC members
–
government observers – Defra and Treasury
Paul Ekins, Director and Secretariat provided by PSI
Green Fiscal Commission - objectives
•
To break the political logjam on environmental tax reform
•
To prepare the ground for a significant programme of green
fiscal reform in the UK
•
–
Creation of evidence
–
Raising awareness of evidence – communications and
engagement
To understand the social, environmental and economic
implications of a major programme of environmental tax reform
Green Fiscal Commission – starting point
•
•
Working assumption - environmental tax reform is a good idea in
principle
Considering:
–
a substantial tax shift – approx 20 per cent of tax revenues from
green taxes by 2020 – quite a challenge
–
Use of proportion of tax revenues to amplify environmental
benefits – technology and behaviour – revenue neutrality?
–
Should not have a disproportionate impact on already
disadvantaged groups
–
Will take account of and seek to mitigate negative effects on
business, and foster new sources of comparative advantage as the
basis for new businesses
–
No view on appropriate level of overall taxation – a shift in the
basis of taxation, not an increase.
Green Fiscal Commission - research
New research and review/collation of existing work on (see Briefing
Papers on website):
•
Public opinion (including deliberative days)
•
Modelling of economic, environmental and social implications of a
major tax shift - CE
•
Distributional issues
•
Experience of UK fuel duty escalator/income tax reduction
•
International comparisons on the effectiveness of economic
instruments
•
ETR and innovation
•
ETR and competitiveness
•
Border tax adjustments
•
ETR and transport
•
Revenue stability
Engagement and communications
Engagement
•
Meetings with, and presentations, to target audiences
•
Stakeholder engagement meetings – business, groups with distributional
concerns
•
Meetings of Commission
Communications
–
Parliamentary Launch
–
Blog – ETR news and commentary
–
Website
–
Summary briefings/supporting papers/book
–
Press work
–
Events at political party conferences
The politics is difficult, so need to develop a compelling narrative: see
Briefing Paper No.4
Green Fiscal Commission - scenarios
•
•
•
Three Baselines, with different assumed fossil fuel prices –
medium (B1), low (B2) and high (B3)
Two GFR scenarios (S1, S2) were compared against these
Baselines. Range of carbon/energy and environmental
taxes; reductions in income tax (households) and social
security contributions (business) [B3 same end-user prices
as S1, S2]
Two ‘Eco-innovation’ scenarios: 10% of extra green tax
revenues invested in household energy efficiency, fuelefficient cars and renewable energy sources.
Green Fiscal Commission – oil prices
OIL PRICE ASSUMPTIONS
$/bl
500
B3
400
300
200
B1
100
B2
0
2005
2010
Source(s) : BERR, Cambridge Econometrics.
2015
2020
Green Fiscal Commission – revenues
COMPOSITION OF TAX REVENUE IN S1
COMPOSITION OF TAX REVENUE
IN B1
Other
2006
Other
product
taxes
8%
Other
taxes
11%
2006
Income
tax
35%
Environ
mental
taxes
6%
VAT
19%
National
insurance
contribut
ions
21%
Source(s) : ONS and Cambridge Econometrics.
Other
taxes
product
11%
taxes
8%
2020
Other
Other
product
taxes
Environ
taxes
13%
mental
6%
taxes
Environ 6%
Income
tax
35%
Income
tax
mental
38%
taxes
National
5%
insurance
contribut
VAT
VAT
ions
19%
18%
21%
National
insurance
contribut
Source(s) : ONS and Cambridge Econometrics.
ions
20%
Other
taxes
Other 13%
product
taxes
6%
2020
Income
tax
35%
Environ
mental
taxes
15%
VAT
18%
National
insurance
contribut
ions
13%
Green Fiscal Commission – GHGs
GHG EMISSIONS IN 2020
MtCO2e
800
700
34% reduction
target
600
500
400
1990
B1 2020 B2 2020 B3 2020 S1 2020 S2 2020
Source(s) : NAEI, Cambridge Econometrics.
Green Fiscal Commission – GDP/GHGs
COMPARISON OF GDP AND GHG EMISSIONS IN 2020
GDP (B1 = 100)
104
E2
102
B2
S2
100
E1
98
B1
S1
96
B3
94
92
80
85
90
95
100
105
GHG (B1 = 100)
Note(s) : GHG figures have been calculated on a net carbon account basis in MtCO2e.
Source(s) : ONS, NAEI, Cambridge Econometrics.
Green Fiscal Commission – Summary of Findings
•
•
•
•
•
•
•
•
•
•
Environmental taxes work: they reduce environmental impacts
Environmental taxes are efficient: they improve the environment at least cost
Environmental taxes can raise stable revenues
The public can be won round to Green Fiscal Reform (GFR)
The UK’s 2020 greenhouse gas targets could be met through GFR: small effects on
output; positive effects on employment (450k in 2020)
GFR would stimulate investment in the low-carbon industries of the future
GFR can mitigate the impact of high world energy prices: unlike GFR, high world
energy prices are bad for the UK economy
The impacts of GFR on competitiveness can be mitigated: concerns of relatively few
economic sectors can be addressed.
Low-income households would need special arrangements
GFR emerges as a crucial policy to get the UK on a low-carbon trajectory; help
develop the new industries that will both keep it there and provide competitive
advantage for the UK in the future; and contribute to restoring UK fiscal stability
after the recession. It is a key to future environmental sustainability and lowcarbon prosperity.
How could single countries implement ETR?
• ETR has a minimal effect on national competitiveness and
economic growth
• ETR will stimulate resource-efficient innovation – need to
support this with complementary policies
• Germany has demonstrated this (low-carbon vehicles,
energy-efficient houses, renewable energy, waste
management technologies)
• If all countries were committed to low-resource
development, the leading countries would be those with
strongly developed resource-efficient technologies and
industries
Will ETR lead to ‘sustainable growth’?
• ‘Sustainable’ growth will be resource-efficient and may in time turn out to
be slower growth, with higher employment (lower productivity and
incomes); depends on innovation - ETR would stimulate such innovation,
supported by other policies
• Relatively high-growth countries in a sustainable future will be those that
have developed, and can export, resource-efficient technologies and
industries
• ETR is a key policy for fostering sustainable growth
• There is no evidence that ETR or other policies for environmental
sustainability would choke off economic growth altogether
• ‘Unsustainable’ growth will not last beyond this century, and could lead to
environmental collapse well before 2100 (“there is no low-cost, highcarbon future”)
• The choice is clear from a cost-benefit angle at any but the highest
discount rates (cf Stern Report).
• That will not make implementing the choice politically easy
Thank you
EMAIL@ucl.ac.uk
www.bartlett.ucl.ac.uk/sustainable