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Case study: The Danish pesticide tax

This presentation was given at IEEP's capacity building for environmental tax reform conference on 5 October 2017 in Brussels, Belgium.

Speaker: Jens Holger Helbo Hansen (Danish Ministry of Taxation)

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Case study: The Danish pesticide tax

  1. 1. Experiences with the new Danish tax on Pesticides IEEP conference Bruxelles 5. October 2017 Jens Holger Helbo Hansen Ministry of Taxation
  2. 2. History • 1972 Fee to cover administrative cost for approving Pesticides 3 pct. of wholesale price • 1982 + Tax on Pesticides in Packaging max 1 kg or max 1 litre approved before middle of 1982 (In practice not for professional farmers) tax rate 20 pct. of wholesale price • 1996 1. January. Introduction of a general Pesticide tax on retail max value of Pesticides • 1998 1. November. Rates increased with 100 pct. on average • 2012 June. Parliament vote to change the tax from a value tax to a specific tax differentiated according to environmental load etc. + Rates increased with about 100 pct. on average • 2013 1. July. Introduction of the new tax
  3. 3. Content of presentation 1. Brief description of the new Danish tax on Pesticides 2. Questions/opposition - Involving civil society organizations
  4. 4. The new tax Tax base was changed from a value tax to weight tax which was differentiated according to indicators of external load The average rates was increased with 125 pct. Revenue was given back to farmers Expected, that the load would decrease with 40 pct.
  5. 5. New political target – environmental load indicator The old Pesticide tax base (value) and political target (treatment frequency) was rightly criticized for not taking into account that there are (sometimes huge) differences in the harm of different pesticides even if they have the same ability to protect plants from unwanted pests and weed etc. The different Pesticides are approved or rejected in an EU procedure. Many aspects are considered. But those Pesticides which are approved might be close to or far from the failing grade at the exam. There must have been an unofficial marking system. And a way to weight the different marks. Why could these unofficial marks not be used as a base for the tax? It might also be in better accordance with the ”rule of law” that it is made more transparent, why some active substances are given a green, yellow or red light .
  6. 6. Why a tax on Pesticides? Pesticides cause external costs The costs are mainly in the form of I. Health for those employed with using Pesticides. Some pesticides might cause irritation of eyes and other result in instant death (if handle improperly). The personal health cost is not an external cost as such, but the cost of the health service inflicted by using pesticides are external II. Environmental effects (toxic) on other species than those for which the pesticides are intended (Birds, Bees, Fish, Water Plants etc.), biodiversity III. Environmental behaviour (general pollution) – persistence, polluting groundwater bioaccumulation. Too many Pesticides are used, if marked is not regulated. The price will be below total social cost = private cost + external cost.
  7. 7. Reform of tax on Pesticides Before mainly a tax of value After mainly a tax on weight differentiated according to load indicators Rates was on average increased with 125 pct. + Environmental load was expected to decrease with 40 pct. = net revenue expected to increase with 35 pct. Revenue was returned to farmers by reduced taxes on land. Before revenue index = 1 After = 1 x 2,25 x 0,6 = 1,35
  8. 8. Involving the public Easy to involve the public on the general principles of a tax on Pesticides or not. Very many technical questions and details. Only those with very special technical knowledge do in practice have influence on the technical questions
  9. 9. Involving the public. When the new taxed was designed Organisation of producers and importers of pesticides + Organisation of farmers (scientific branch) was involved supplying technical information. In practice they where given opportunity to come with (technical) critique and suggestions. Political level was briefed by civil servant on the likely opposition. In many cases the technical suggestions was followed. In some cases the draft was adjusted to prevent political opposition. Those who is harmed by Pesticides was not involved nearly as much. Mainly because they do not have the very technical know how/is not organised. The political position of those harmed by Pesticides is known in advance.
  10. 10. Involving the public Hearing when the new tax was proposed During adoption in Parliament
  11. 11. Opposition – Discussion To much weight on Health. The load indicator is often not the actual harm, but the potential harm. It is potentially fatal to swallow or inhale the most toxic pesticides, but you only drink pesticides by mistake. Irritation of eyes might happen more often by carelessness. But harm to birds is more certain. Labour Union organising Greenhouse labour found, that Health was given to little weight. It was suggested that more indicators should be taken into account – working environment for those employed with crops etc. that had been treaded with pesticides.
  12. 12. Opposition - Discussion Resistance. Those organisms which cause the decease might develop resistance to a pesticide if it is used often. As a consequence the dose has to be increased. Resistance might be prevented if the farmer does not use the same pesticide each time. But the tax give incentive to use the cheapest. Answer the rational farmer will take resistance into account. (But might ignore resistance harming other farmers) The organisation for Pesticides producers and importers highlighted the question together with the organisation for farmers. They had a point, but no solutions other than to abolish the tax An institute at an University described the problem and possible solutions. No one was very good.
  13. 13. Opposition - Discussion Distribution. Even if revenue generally is given back to farmers, some will be net burdened (while other will get an advantage). The net burden for those growing potatoes for industrial use and white clover seed farmers complained about the net burden. Greenhouse organisation complained that some Pesticides would be much more expensive. Danish Golf Union complained that they would contribute to the extra revenue but would not be compensated.
  14. 14. Opposition – Discussions Legal certainty. Calculations of the different values, how to weight the different loads etc. is not transparent to most people. Parliament and count control of the tax is theoretical. Danish Auditors Union made the comment that the administrative cost of the old system was huge, but the cost would be even higher with the new system. Some of the technical parameters used to calculate the rates are not published. No possibilities to complain at the administrative level
  15. 15. End of involving the public
  16. 16. The new tax For those who are interested in the new tax, they can find more information on the following slides.
  17. 17. System from 1. November 1998- 30. June 2013 A. Insecticides 35 pct. of max retail price ex VAT B. Herbicides +Fungicides 25 pct. of max retail price ex VAT C. Biocides + Rodenticides etc. 3 pct. of wholesale price ex VAT Example Insecticides: (1) = (2) + (3) Price with VAT and tax 125 Kr. (2) VAT 25 pct. of (3) 25 Kr. (3) Price with Pesticides tax with out VAT 100 Kr. (4) Tax 35 pct. of (3) 35 Kr. (5) = (3) – (4) Price with out Pesticides tax 65 Kr. (6) = (4)/(5) = 0,35 x ((5)/(1 – 0,35))/(5) = 0,35/0,65 = 53,85 pct. = Tax in percent of price without Tax The base of A and B was the max retail price according to the price tag which had to be printed on each package. Tax is collected from importer or producer.
  18. 18. How should the tax be structured and at what level? The tax rate should be equivalent to the total external cost. The base of the tax should be as close as possible to value of the external harm caused by using the Pesticides. However administrative costs are also to be taken into account. The harm depends on very many circumstances (weather, season, location and year etc.) besides the active substance in the Pesticide. And the external cost take many different forms. Even if it is not possible to have a 100 pct. correlation between the tax base and the external cost the total tax revenue should still be the same as the total external cost. Also the base should correlate as much as possible with the value of the environmental costs.
  19. 19. Political targets In 1986 it was made a target that use of Pesticides in agriculture should be reduced to 50 pct. of the 1981-85 level. There were three ways to measure the consumption of Pesticides: - Gross tons of Pesticides - Tons of active substance - Treatment frequency – how many times could 10.000 m2 be treated if the recommended dose/10.000 m2 was used. Treatment frequency was considered to be the best indicator. But it makes no sense to use it in greenhouses, for rodents, lice on cats and biocides. And recommended dose might be different for different crops. In addition the treatment frequency is far from 100 pct. correlated with external costs.
  20. 20. Why a value tax? A tax on the weight of Pesticides would distort the marked favouring those Pesticides where you need a small quantity to protect the plants – or obtain the required kill of Pests and Weed! There is not a strong correlations between the environmental load etc. and the weight of pesticides. At least for new products the producer will set the price to the value for the farmer. To treat 10.000 m2 you need 1 kg of substance (A). If price of substance (A) is 10 Euro and you can have the same ”kill” with 0,1 kg of substance (B), the farmer will be willing to pay 10 times as much for substance (B) = 100 Euro/kg as for substance (A). However for older products, where the patent does not apply any longer, the price is set in a marked with more producers. The price will be around the production cost. Insecticides were on average ”older” than many herbicides etc. and therefore cheaper. But there might not be a correlation between the wanted and the unwanted killing.
  21. 21. New tax rates and bases The new tax on pesticides has four elements Health tax 107 kr./kg pesticide pr. unit environmental load index Environmental effect tax 107 kr./kg active substance pr. unit environmental load index Environmental behaviour tax 107 kr./kg active substance pr. unit environmental load index Basic tax 50 kr./kg active substance (1 kr. = 0,1344 EURO) The rates and the many factors and parameters used to calculate the load was calibrated in a way so that the basic tax would give around 10 pct. of the total revenue and the three load taxes each around 30 pct. (If the sale is the same as in 2007) For Chemical biocides there was not enough data to calculate the load. The tax is either a value tax of 40 pct. (e.g. wasps, poison for lice on cats) or a 30 pct. tax on wholesale value (repellents for mosquitos and birds etc.). For the chemical biocides for wood, rodents etc. the rate is still 3 pct. of the wholesale price.
  22. 22. How is the load calculated for each element? Example: Environmental Effect Score = Reference value x 1/Parameter for Pesticide X Load factor = Factor established in the tax bill Load = Score x Load factor Reference value = Worst parameter for Pesticides approved in 2007. Example: Reference value for Birds acute = 49 mg pr. kg bird Value for Pesticide X = 441 mg pr. kg bird Load factor = 1 Load for this effect = 49/441 x 1 = 0,111111
  23. 23. Environment Example A B C Load effects Reference Parameter Load factor Unit value Value for X 1Birds acute mg/kg bird 49 441 1 0,111 2Mammal acute mg/kg mammal 20 115 1 0,174 3Fish acute mg/l water 0,00021 100 30 0,000 4Earth worms acute mg/kg Earth 3,4 320 2 0,021 5Bees acute Micro g/Bee 0,02 65,2 100 0,031 6Daphnia acute mg/l water 0,0003 31,7 30 0,000 7Water plants acute mg/l water 0,00036 5,3 3 0,000 8Algae acute mg/l water 0,000025 100 3 0,000 9Earth worms chronic mg/kg Earth 0,2 11 2 0,036 10Fish chronic mg/l water 0,000115 43,1 3 0,000 11Daphnia chronic mg/l water 0,000115 2,4 3 0,000 Total load pr. kg active substance 0,374 If there is 300 g active substance pr. kg, the tax will be 107 kr. x 0,3 x 0,374 = 12,0 kr./kg (1,6 EURO/kg)pesticide from environment effects – and 50 kr. x 0,3 = 15 kr./kg from basic tax (2 Euro/kg)
  24. 24. Health load The base is the weight of the pesticide When pesticides are sold, the dealer has to warn against health risks according to ”R” or ”H” codes. Examples: Harmful if swallowed (acute tox 4) 0,033 Toxic if swallowed (acute tox 3) 0,166 May cause harm to breast-fed 0,166 Toxic by inhalation (acute tox 3) 0,233 Fatal if swallowed (acute tox 2) 0,233 Fatal by inhalation (acute tox 2) 0,283 Fatal by inhalation (acute tox 1) 0,330 A Pesticide might have more than one code. The total load might be 0,199 (0,033 +0,166). The tax then is 107 kr. x 0,199 = 21,29 kr./kg pesticide eventually 31,94 kr.
  25. 25. Load Environmental behaviour The tax has three elements P Persistence (how long does it take before half of the substance has been degraded (reference value 354, weight 2,5) B Bioaccumulation (reference value 5100, weight 2,5) U Leaching to groundwater (reference value 10,91, weight 20) Example for pesticide with value 10 – 0,01 – 0,03 Load P 10/354 x 2,5 0,0706 B 0,01/5.100 x 2,5 0,0000 U 0,03/10,91 x 20 0,0550 Total load 0,1256 Tax with 30 pct. active substance: 0,3 x 0,1256 x 107 = 4,03 kr./kg pesticide
  26. 26. Revenue expectations Revenue from the former tax was used in 1996/98 to reduce taxes on value of farmland. Prior to the new tax, farmland taxes was reduced. Extra revenue from the new tax financed part of the tax reduction on farm land. Impact assessments A. Revenue before (2011) 480 Million Dkr. B. Extra revenue if sale is unchanged 600 Million DKr. C =A+B Revenue after with unchanged behaviour 1.080 Million Dkr. D = -0,4 x C Behaviour – 40 pct. -430 Million Dkr. E = C +D Revenue after behaviour 650 Million Dkr. F = C-A Net extra revenue +170 Million Dkr. 1.080 Million Dkr. = 145 million Euro = around 60 Euro/10.000 m3 normal farmland 1.080 Million Dkr. = 0,05 pct. of GDP
  27. 27. Revenue experience Year Million DKr. 2007 448 2008 570 2009 436 2010 466 2011 480 Average 2007-2011 = 480 Million Dkr. 2012 553 Hoarding 2013 656 Hoarding + higher rates 2014 446 Sales low due to prior hoarding 2015 598 Normal year ? 2016 512 Revenue in fiscal year
  28. 28. Change in load pr. treatment from 2007-2011 to 2015 Environment Environment Total Pct. Health Behaviour Effects Herbicides -41 -39 -44 -41 Growth Regulators -71 -83 -85 -78 Fungicides 24 5 -57 -7 Insecticides -26 -9 -68 -65 Total -4 -30 -67 -38 Large impact on environmental effects. Not so much for fungicides and health
  29. 29. 0 0.5 1 1.5 2 2.5 3 3.5 1985 1990 1995 2000 2005 2010 2015 Treatment frequency 1985 = average 81-85 Total Herbicider Fungicider Insekticider Vækstregulatorer Long term tendency to increased use of pesticides (new products cheaper pesticides) Introduction of the tax in 1996, and higher rates in 1998, reduced level but not growth rate especially for insecticides
  30. 30. 0 100 200 300 400 500 600 700 1994 1999 2004 2009 2014 Revenue mio. Dkr. Revenue in 2015`= 598 million DKr. = 80 million Euro = 0,03 pct. of GDP = 36 Euro/10.000 m2 arable land. Revenue in 2016 around 512 million DKr.
  31. 31. 0 1000 2000 3000 4000 5000 6000 7000 8000 1981 1986 1991 1996 2001 2006 2011 Active substance tons
  32. 32. 2007-11 2011 2012 2013 2014 2015 Active substance kg/ha 1,71 1,95 2,59 1,79 0,76 1,1 Treatment frequency 2,9 3,24 3,96 3,77 2,66 2,91 Load Health 1,02 1,37 1,63 1,37 0,75 0,92 Load Environment effects 1,2 0,97 2,28 1,52 0,37 0,43 Load Environment behaviour 0,86 0,94 1,37 0,9 0,46 0,6 Total load 3,08 3,28 5,29 3,79 1,59 1,95 Total load pr. treatment 1,06 1,01 1,33 1,01 0,6 0,67 In 2015 the calculated load was reduced with 40 percent compared with before the new design of the tax. Treatment frequency has not changed even if the rates was increased.
  33. 33. Denmark: • Population. 5,75 million inhabitants • GDP (2016) 2.065 billion kr. = 277 billion Euro • GDP pr. capita 48.400 Euro • Area 42.925 km2 • Population density 134 inhabitants pr. km2 Total area 100 pct. Urban areas, infrastructure 14 pct. Forrest 13 pct. Nature (lakes, rivers, beach) 12 pct. Farmland 61 pct.
  34. 34. Agriculture Farmland: - Cereals 56 pct. of area - Corn and temporary grass (forarge) 19 pct. of area - Sugar beet, Potatoes + oilseeds 10 pct. of area - Permanent grass, extensive farming 10 pct. of area - Other (horticulture etc.) 5 pct. of area Exports of agriculture products and similar 6 pct. of GDP Imports of agriculture products and similar 4 pct. of GDP