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THE USE OF ECONOMIC
INSTRUMENTS FOR
ENVIRONMENTAL POLICY IN OECD
COUNTRIESNils Axel Braathen, Principal Administrator, OECD’s Environment Directorate
Why use environmental taxes?
They provide economic incentives to change environmentally harmful behaviour.
They equalise marginal costs of compliance => Least-cost instruments (Static efficiency).
They provide incentives for continued technological development (Dynamic efficiency).
They raise revenues that can be recycled, be used to reduce distorting taxes (e.g. on labour) or be used to strengthen public finances.
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Environmentally related taxes
OECD defines environmentally related taxes as any compulsory, unrequited payment to general government levied on tax-bases deemed to be of particular environmental relevance (e.g., energy use, motor vehicles, measured emissions, hazardous chemicals).
“Unrequited”: benefits provided by government to taxpayers are not normally in proportion to payments.
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Revenues from environmentally related taxes in OECD countries, Per cent of GDP, 2013
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1
2
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4
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Other Motor vehicles Energy
% o
f GD
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Revenues from the Carbon Pricing Mechanism was equal to 0.38% of GDP in fiscal year 2013.
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Taxes on petrol and diesel in selected countries01.01.2014
Uni
ted
Sta
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Aus
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Chi
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0.0
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0.9Petrol Diesel
EU
R p
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itre
Taxing Energy Use
Energy use is important to modern economies, but it also has important environmental consequences Taxing Energy Use: A Graphical Analysis (2013)
Systematically described taxes on all energy use in OECD countriesAnalysed tax patterns for different fuels & users
Taxing Energy Use 2015: OECD and Selected Partner EconomiesCross-country analysis for all 41 countriesDetailed country chapters for Argentina, Brazil, China, India, Indonesia, Russia & South AfricaCountry chapters & graphical profiles of energy use & taxation
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0 100000000 200000000 300000000 400000000
0% 20% 40% 60% 80% 100%
World energy use
Total energy use (EJs)
% of world energy use
0 100000000 200000000 300000000 400000000
0% 20% 40% 60% 80% 100%
OECD
USA JPN
DE
UC
AN
FR
AK
OR
Re
st o
f OE
CD
Rest of world
Total energy use (EJs)
% of world energy use
0 100000000 200000000 300000000 400000000
0% 20% 40% 60% 80% 100%
OECD SPE
Rest of worldUSA JPN
DE
UC
AN
FR
AK
OR
Re
st o
f OE
CD
CHN IND RUS
BR
AID
NZ
AF
AR
G
Total energy use (EJs)
% of world energy use
World energy use
Source | Taxing Energy Use 2015: OECD & Selected Partner Economies (OECD, 2015)
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Taxes on energy use in selected countries EUR per tonne of CO2, energy use of 2009, tax rates as of 01.05. or 01.07.2012 (Australia).
0% 20% 40% 60% 80% 100%0
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SWE
KORJPN
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CHN
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Effective tax rate (EUR per tonne CO2)
Cumulative carbon emissions from energy use
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40
80
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GB
R
Oil products Coal Natural gas Combustibles, biofuels & waste Economy-wide
Tax rate (EUR per tonne CO2)Size of bubbles represents each fuel’s share in total emissions from energy use
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CH
L
DN
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FR
A
DE
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ITA
JP
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KO
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CH
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GB
R
US
A
=>
AR
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=>
BR
A
=>
CH
N
=>
IND
=>
IDN
=>
RU
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=>
ZA
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Oil products Coal Natural gas Combustibles, biofuels & waste Economy-wide
Tax rate (EUR per tonne CO2)Size of bubbles represents each fuel’s share in total emissions from energy use
0
40
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120
160
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Oil products Coal Natural gas Combustibles, biofuels & waste Economy-wide
Size of bubbles represents each fuel’s share in total emissions from energy useTax rate (EUR per tonne CO2)
Effective tax rates on CO₂ from different energy sources
COMPETITIVENESS IMPACTS OF ENERGY TAXES
Carbon prices increase abatement.No effects of carbon and energy taxes on various competitiveness indicators, one small negative effect of energy taxes on employment.Generally no effects of the EU ETS on various indicators of competitiveness
slight decreases in employment found in one sectorincreased profitability for power generators.
Evaluations of energy price fluctuations identify slight increases in imports as a response to increased energy prices.Most estimations are based on schemes which include exemptions.Industry sometimes claims that it is the exemptions that “save them”.
Survey of all ex post studies suggestsOECD Environment Working Paper, No. 87.
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Tax introduced in steps from 1999 to 2003.Full rate: EUR 20.5 per MWh from 2003.
wholesale electricity price ~ EUR 30 – 65 per MWh.
effective tax on carbon content EUR 44.4 per MWh.
Reduced rates for firms in manufacturing sector.Apply above certain thresholds of electricity use.
Resulting variation used to identify effect of reduced electricity tax rates.
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German tax on electricityOECD Environment Working Paper, No. 88.
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Effect of reduced marginal tax rate on
Source: Based on Flues and Lutz (2014)
THE DISTRIBUTIONAL EFFECTS OF ENERGY TAXES
Methodology:
Calculate energy taxes with a micro-simulation model based on Household Budget Survey (HBS) expenditure micro-data
Assess income (or expenditure share) spent on energy taxes as percentage of net income (or pre-tax expenditure) across income (or expenditure) deciles.
Possible measures of distributional effects:
Share of net income by income deciles
Share of pre-tax expenditure by expenditure deciles
Money spent on energy taxes by income or expenditure deciles
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IntroductionOECD Taxation Working Papers, No. 23.
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Transport fuels
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Heating fuels
Heating fuel taxes are slightly regressiveCounteracting effects
More heating by poorer households required
Older houses with poorer insulation
Less heating by poorer households required
Fewer square metres
Apartment blocks instead of detached houses
Potentially more vigilant.
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Heating fuels
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Electricity
Electricity taxes are more regressive than heating fuel taxes
Likely difficult for poorer households to conserve on electricity use
Fixed amount needed for, e.g., fridge and freezer
Substitutes for fuel use
Transport fuels: public transport, ride sharing, bicycle
Heating fuels: fewer m2, apartment blocks, increased vigilance
Electricity ???
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Electricity
Distributional effects ~ relative expenditures on energy (as % of income or total expenditure).
Energy affordability ~ absolute expenditures on energy. Any additional spending on energy may be a challenge poor households.
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Energy affordability & distributional effects
A third of the revenues is distributed back to households via
A targeted cash-transfer, or
A lump-sum transfer
Two reform scenarios are analysed
No behavioural adjustments assumed
Households adjust energy use in response to reform
The reform increases prices on heating fuels and electricity in most, but not all countries – as the simulated reform replaces any pre-existing taxes.
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Simulation of an energy tax reform I
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Effects of reform on high domestic energy expenditure share
Percentage change in share of households with high domestic energy expenditure,accounting for behavioural adjustments
ENVIRONMENTAL EFFECTIVENESS
Impacts of the Danish tax on SO2
Million kg 1995 2000 2005 2010 2013
Energy Industries 110.7 12.7 8.0 3.9 3.6
Industries and construction 12.9 7.9 6.6 3.7 2.8
Transport 7.4 2.2 2.4 1.6 1.4
Non-industrial combustion 8.0 4.5 4.2 3.0 2.6
Fugitive emissions from fuels 3.2 1.0 0.6 1.3 0.7
Industrial processes 3.5 3.4 3.4 1.3 2.0
Waste 0.7 0.6 0.6 0.6 0.6
Total 146.5 32.4 25.8 15.3 13.6
The tax give incentives to (1) shift to fuels with less sulphur, (2) remove sulphur from fuels (3) invest in equipment, which clean smoke (4) use less fuels.
Tax rate = 1.5 Euro per kg. Introduced in 1996Power plants were included from 2000.
The Swedish NOx tax: Emissions
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0.05
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92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
kt N
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Kt
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mit
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& T
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en
erg
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rod
uc
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kt NOx emitted
TWh useful energy
kt NOx per TWh (right axis)
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Changes in revenues due to sulphur-differentiation of fuel tax rates in the United Kingdom
0
2 000
4 000
6 000
8 000
10 000
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1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
GB
P m
illio
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- Uneaded petrol
- Leaded petrol
- Ultra-low sulphur petrol
- Diesel
- Ultra-low sulphur diesel
Reduced tax rate for ultra-low sulphur petrol
Reduced tax rate for ultra-low sulphur diesel
EFFECTIVE CARBON PRICES
Effective carbon prices
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OECD published the book Effective Carbon Prices in November 2013
The book looked at the amount of GHG abatement different policy instruments contribute to; the costs to society of achieving this abatement; and, hence, the costs to society per tonne of CO2eq abated.
Covers electricity generation, road transport, pulp & paper, cement, as well as households’ domestic energy use in 15 Countries, including Australia.
Keep in mind: A high effective carbon price can stem from an ambitious policy – or from an inefficient policy.
www.oecd.org/env/tools-evaluation/carbon-prices.htm
The highest costs per tonne of CO2 abated are associated with subsidies for renewables, energy-efficient appliances, etc., and feed-in tariff systems.
The lowest costs per tonne were found for trading systems.
The costs were particularly low when the trading systems addressed the environmental externality as directly as possible – like with a trading system for GHG emission allowances (rather than indirectly, such as e.g. “tradable renewables certificates”).
This confirms “textbook suggestions” that trading systems (and broad-based fuel taxes) are the most economically efficient policy tools to mitigate climate change.
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Electricity generation
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Average effective carbon prices in the electricity sector, by instrument category, EUR2010 per tonne CO2
0
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2010
EU
R pe
r to
nne
of C
O 2ab
ated Min
MaxSimple average
There are clear differences in effective carbon prices:within a given sector, across the countries covered;
across the different sectors, within each country;
across the different instrument types, across all the countries covered.
The study demonstrates clearly that taxes and emission trading systems are much more cost-effective than other policy instruments that countries apply.
Many of the other instruments countries apply to limit GHG emissions (feed-in tariffs and other subsidies to renewables, various subsidies for low-emission product alternatives, etc.) are very costly per tonne of CO2eq abated.
It will be very difficult to reach more ambitious, and urgently needed, abatement objectives if countries continue to focus their efforts on such inefficient instruments. 3
2
To sum up …
STEPS TOWARDS SETTING TAX RATES THAT REFLECT MARGINAL DAMAGES
Textbooks in environmental economics suggest internalising environmental externalities through “Pigouvian” tax rates – using tax rates that reflect the marginal external costs to society.
In practical policy making, this is easier said than done – e.g. due to a lack of knowledge about the magnitude of these marginal social costs.
There will always be “gaps” to fill in this regard, but recent and on-going OECD work should allow some further steps to be taken.
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Introduction
This 2014 book combined estimates of mortalities caused by outdoor air pollution from the 2010 GBD study with VSL figures based on an OECD meta-analysis of VSL estimates.
Outdoor air pollution cost OECD countries alone almost USD 1.6 trillion in 2010; China USD 1.3 trillion and India USD 0.5 trillion.
Somewhat lower 2013 GDB mortality estimates have just been published, but the cost in OECD countries nevertheless were USD 1.5 trillion.
VSL in China has been increased 15%.
A very recent study by KCL indicates that NO2 cause more mortalities (in London, UK) than what PM2.5 does. 3
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The Cost of Air Pollution
For setting “Pigouvian” tax rates it is necessary to know how much each of the taxable goods or services contributes at the margin to the total air pollution costs.
This requires information about how much of the pollution is caused per litre of transport fuels; per tonne of different fuels used per kWh of electricity generated; etc.
The book estimated that on average in OECD countries, road transport caused approximately 50% of the air pollution.
Estimates for individual countries are lacking, as earlier indications on the shares of different pollution sources in total emissions have not been updated.
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The Cost of Air Pollution
The Cost of Air Pollution added 10% to reflect social costs of morbidity impacts of outdoor air pollution.
Recent empirical evidence indicate such an order of magnitude, but more work is needed.
An upcoming ENV Working Paper will provide a more in-depth discussion of morbidity costs of outdoor air pollution.
Agrees that the greatest impacts are from increased mortality in adults attributable to long-term exposure to outdoor PM, …
…but both PM and ozone also cause a wide range of less serious health outcomes.
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Social costs of morbidity impacts of outdoor air pollution I
Many projects and public policies in various sectors can have large impacts on GHG emissions.
It is thus important how countries take these impacts into account in their assessments, ex ante and ex post.
This is of relevance for any attempt to set “Pigouvian” tax rates in relation to energy use and transport.
An upcoming ENV Working Paper discusses the range of approaches which can be employed to value changes in GHG emissions in policy and project appraisals, and presents a survey of current practice in OECD countries.
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Monetary carbon values in policy appraisalOECD Environment Working Papers, No. 92
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Summary of questionnaire responses
Transport investments
Energy investments
New policy assessments
Ex post assessments
Are there clear criteria for how to include GHG emission changes in CBAs?
Yes 63% 40% 24% 13%No 37% 60% 76% 87%
Total 100% 100% 100% 100%
What is the share of cases in the last 3-5 years where impacts on GHG emissions have been part of the CBAs?
All 6% 7% 7% 0%Most 41% 21% 14% 20%Some 12% 29% 7% 0%A few 18% 7% 21% 10%Not known 12% 14% 36% 30%None 12% 21% 14% 40%Total 100% 100% 100% 100%
What is the unweighted average of the values of a tonne of CO2eq that have been reported – in USD in 2014 money value?
2014 57 38 56 532020 66 47 82 682030 99 67 115 1042050 164 153 237 2482100 349 467 467 467Average 147 154 191 188
www.oecd.org/env/policies/database
www.oecd.org/env/tools-evaluation/
www.oecd.org/greengrowth/greening-transport/transport-and-environment.htm
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Further information
