Economic Instruments in Environmental Policies in Europe

1. Economic Instruments in Environmental Policies in Europe Hans Vos European Environment Agency CAFE/NEBEI Conference Policy instruments to reduce air pollution Brussels, 11-12 November 2004

2. A new report.. • On the use of economic instruments in EU-25, plus other European countries • Emissions trading, taxes, charges and deposit-refund systems, ETR and EFR, subsidies, subsidy reform and green purchasing, liability • Focus on main and recent developments; interesting cases, report is meant to give an overview

3. Earlier EEA reports • 1996: Report “Environmental Taxes - Implementation and Environmental Effectiveness” • 1997: Report “Environmental Agreements – Environmental Effectiveness” • 2000: Report “Environmental taxes - Recent developments in tools for integration“ • Environmental Signals 2002 and 2002, chapters on taxes, tax bases and tax revenues

4. Why a new report? • EI at EU level for the first time (EU-ETS) • Energy products tax directive adopted • SD and the Lisbon process • ETAP and role of EI to encourage innovation • Increasing attention for environmentally harmful subsidies • More realistic prices for energy and water in new EU member states • Communication on the use of MBI in the internal market • Kok report: “..progressively including externalities in prices..”

5. The process • Contract with consultants • 1st expert meeting (Dec. 2003) • 1st draft (August 2004) • Reviews by experts + EEA network (ongoing) • 2nd expert meeting (end 2004) • Final report early 2005

6. So… The results in my presentation are not the EEA’s findings (yet)

7. Database of economic instruments and VA • (1998) OECD/CEC: Taxes and charges EU + other OECD countries • (2002) EEA: plus 14 non-OECD countries (REC data under the Sofia Initiative) • (2003) OECD/EEA*: EI and VA for 42 countries • (2004+) Improved administration, information and presentation * With support from DG ENV

8. Emissions trading-what and where?- • Individual Transferable Quotas in fishery (ICE, NL, DK, P, IT) • EU-ETS: first economic instrument at EU level • National CO2 systems in UK and Denmark • NOx trading in Netherlands (2005) • SO2 trading in Slovakia (2002) • More plans for NEC-related systems? • Packaging Recovery Note system (UK)

9. Rating of key aspects of EU-ETS-by the consultants-

10. Rating of key aspects of EU-ETS-by the consultants-

11. Rating of key aspects of EU-ETS-by the consultants-

12. Rating of key aspects of EU-ETS-by the consultants-

13. Rating of key aspects of EU-ETS-by the consultants-

14. Rating of key aspects of EU-ETS-by the consultants-

15. Rating of key aspects of EU-ETS-by the consultants-

16. Rating of key aspects of EU-ETS-by the consultants-

17. Rating of key aspects of EU-ETS-by the consultants-

18. Emissions trading- a few key points - • At the EU level: new policies not to inhibit but accommodate the potential for ET • At national level: new ET schemes to be “transnational” to profit from wide scope • “Grandfathering” to be restricted as far as feasible • Choice of sector caps in NAPs: risk of unfair treatment across boundaries • Data availability, monitoring, and verification key to smooth running

19. Tax bases in EEA-17 (1996)

20. Tax bases in EEA-17 (2000)

21. New tax bases in 2000

22. Tax bases in EEA-17 (2004)

23. New tax bases in 2004

24. Tax bases in other European countries (2004) New EU Member States Other countries

25. Comparing groups of countries on tax basesAIR

26. Comparing groups of countries on tax basesWATER

27. Comparing groups of countries on tax basesWASTE

28. Comparing groups of countries on tax basesOTHER

29. Environmental taxes and charges- a few key points - • Tax bases and applications are spreading steadily over European countries • Very few attempts to base tax rates on externalities • Tax bases designed more closely to the environmental problem • Little evidence of damage to competitiveness • Design important: recycling of revenues, exemptions, cuts in exchange for good performance • Road pricing: promising at national level

30. Environmental tax reform? Evolution of the share of labour taxes to GDP and environmental taxes to GDP in the period 1995-2002 (% change) Source of data: Eurostat

31. Subsidies, subsidy reform- some key points - • Lack of information and definitions: no reliable overview • Subsidies important in accelerating the commercialisation of new technologies • Increasing attention for technological innovation (ETAP) : subsidise new not existing technology • Growing desire to reduce environmentally harmful subsidies • Public procurement to include environmental criteria • Subsidies should be effective, if they can’t be efficient

32. Economic instruments- some key points - Effectiveness • Instrument champion • Picking the winners • Simple, understandable and transparent • Realistic structure and rates • Give advanced notice… • …and stick to what was announced • Correct unacceptable trade-offs by flanking policy • Possibility to respond • Indexation, or even escalation

33. Economic instruments- some more key points - Competitiveness • No evidence of major impact on sector level • Always victims on firms level possible Innovation • Very difficult to find evidence • Financial support crucial • Traditional technology too cheap Equity • Flanking policies

34. Policy mixes • From optimal instrument to optimal mix • Many combinations found • “Two birds with one stone”? • Balance of effectiveness and efficiency/costs -> conditions

35. Ideal mix? "….if we had not installed catalytic converters back then [the 1980ies] , we would have to reduce our driving by 90% today to get the same air quality”. Andreas Troge Chief of German Environment Agency

36. To conclude…. Whoever thinks a faultless piece to see, Thinks what never was, nor is, nor ever shall be. Good nature and good sense must ever join, To err is human, to forgive divine. Alexander Pope (1688 – 1744)