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Implementing Environmentally Related Taxes: Addressing Distributional and Competitiveness Issues

Explore the challenges and strategies for implementing environmentally related taxes, focusing on distributional impacts and sectoral competitiveness. Learn about policy options, mitigation measures, and the importance of balancing environmental benefits with economic concerns.

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Implementing Environmentally Related Taxes: Addressing Distributional and Competitiveness 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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