Outline

1. Tax Relief for energy-intensive business in the framework of the ecological tax reform and the climate change levyMichael KohlhaasPresented atECOTAXES IN GERMANY AND THE UNITED KINGDOM - A BUSINESS VIEWBerlin, 25 June 2004

2. Outline • Ecological Tax Reform in Germany • What are special provisions / tax concessions? • Motives for tax concessions • Criteria and constraints for special provisions • Design of special provisions • Tax concessions in Germany and the UK • Perspectives for Germany

3. Ecological tax reform in Germany • Revenue-neutral tax reform • 5 steps between 1999 and 2003 • Energy taxation • Increase of taxes on petroleum products • New tax on electricity • Special provisions for energy-intensive production • Additional revenue about € 18.6 milliard (billion) • Revenue recycling • Reduction of social security contributions

4. What are special provisions? • Economic theory: uniform taxes induce efficient reduction of energy use or emissions • Special provisions: deviations from a uniform taxation • Tax differentiation between • energy carriers • users and • usage

5. Motives for special provisions Fear of adverse effects of taxes • Economic Effects • International competitiveness • Premature retirement of capital (physical, human) • Distributive effects • Principle of “protection of confidence” • Environmental Effects • Carbon leakage: reduction of emissions in one country may be (partially or (over-)compensated by increase of emissions in other countries • Political acceptance

6. Criteria and constraints for special provisions • Avoid negative economic effects • Avoid carbon leakage • Preserve incentive effect of eco-tax • Legal constraints (national, European, international) • Administrative constraints • Market-based instrument, not discretionary • Conflicting objectives: weighting necessary

7. Demarcation of beneficiaries • The more precise the demarcation of the beneficiaries, the smaller will be the loss of incentive to reduce emissions and the loss of tax revenue. • However, the necessary administrative procedures would be very complicated, be subject to substantial uncertainties and require ample scope of discretion. • Discretionary special provisions should be kept to a minimum if the idea of environmental taxes as a market-oriented instrument is taken seriously.

8. Special provisions in Germany • Do not apply to road fuels • Broad and rules-based system: • Tax rates differentiated by energy carriers • Reduced rates for broad-based categories • Firm-specific tax rebates

9. Tax rates (Euro per ton CO2)

10. Germany 1 (draft law - not implemented) • Reduced tax rates of 25% for all producers of the goods and materials sectors • Tax exemption for producers which belong to an “energy-intensive” sector (energy-intensity > 2% • Criticism: • energy intensity inappropriate indicator • statistical categories imply unequal treatment • reduction of net tax burden for energy-intensive activities (perverse incentive effect)

11. Germany 2 (1999 - 2002) • Reduced tax rates of 20% (of the regular rates) for all producers of the goods and materials sectors • Individual compensation for all tax payments exceeding reduction of pension contributions by more than 20% (tax cap)

12. Germany 2: Criticism • No perverse incentive effect • Individual firm data and not statistical categories important for tax rebates • Restriction to goods and materials sectors may imply unequal treatment • No incentive to improve energy efficiency for energy-intensive enterprises

13. Germany 3 • Reduced tax rates of 60% for all producers of the goods and materials sectors • Tax rebates of all 95% of tax payments exceeding the reduction of pension contributions (effective marginal tax rate: 3% of regular rate)

14. Germany 2 and 3: Comparison • Incentive effect is higher for some enterprises, but lower for others: net effect ambiguous • Average tax burden is higher for most enterprises: positive revenue effect • Danger: revenue raising may dominate environmental objectives

15. Climate Change Levy • Non-domestic users only • Taxable commodities • Electricity • Natural gas • Coal and lignite • Coke, semi-coke and petroleum coke • LPG • Not taxable commodities • Oil, gas oil, kerosene (subject to excise duties) • Road fuel gas (subject to fuel price escalator) • Heat • Steam

16. Special provisions in UK • Tax exemptions • Energy supplied in small quantities • Electricity used in electrolysis processes • primary aluminum smelting • chlor-alkali processes • Others: • Electricity from “new” renewables • good quality CHP • Tax reductions: -80% • Energy-intensive sectors (as defined in PPC Regulations) • that are covered by Climate Change Agreements

17. Some stylised differences Germany • Broad rules-based system with little scope and need for discretionary decisions • Weak incentive effect in industry UK • CCL integrated with CCA and ET from the beginning

18. Perspectives for Germany • Review for ETR in 2004 • Should Germany continue ETR? • Emissions trading only partial • Tax revenue and labour costs • Exemptions for ET sector? • Reduction of social security contributions • Emission certificates issued for free • Issue does not “go away”