Environmental Fiscal Reform


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A presentation on Environmental Fiscal Reform

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Environmental Fiscal Reform

  1. 1. 02.08.10 Seite 1 Environmental Fiscal Reform A Practice-Orientated Training for Policy Makers, Administration Officials, Consultants and NGO Representatives
  2. 2. 02.08.10 Seite 2Page 2 Introduction to Environmental Fiscal Reform (EFR) and EFR Instruments By Marianne Fernagut, Envalue – consultant to GTZ
  3. 3. 02.08.10 Seite 3Page 3 Structure of this presentation 1. What is Environmental Fiscal Reform (EFR)? 2. EFR instruments and considerations 3. EFR in practice: selected examples
  4. 4. 02.08.10 Seite 4Page 4 1. What is Environmental Fiscal Reform (EFR)? 2. EFR instruments and considerations 3. EFR in practice: selected examples
  5. 5. 02.08.10 Seite 5Page 5 EFR can help solve problems like this... Deforestation on Mount Mulanje, Malawi By making the market work in favour of things like these... Wind energy in Columbia By making the market work in favour of things like these... Wind energy in Columbia
  6. 6. 02.08.10 Seite 6Page 6 “Environmental Fiscal Reform (EFR) refers to a range of taxation and pricing measures which can raise fiscal revenues while furthering environmental goals.” For example: ƒ taxes on petrol and other transport fuels ƒ service charges for water supply and sanitation ƒ a pollution levy on sulphur dioxide emissions ƒ subsidy removal (removing tax exemptions for environmentally damaging practices) Source: OECD/DAC
  7. 7. 02.08.10 Seite 7Page 7 Definition: Environmental Fiscal Reform 1) Environmental TAX reform (ETR) - Shift of the burden of taxation from 'goods' (f.e. labour) to 'bads' (f.e. environmental pollution) - Better distribution of tax burdens across the economy from a sustainable development perspective - Financial incentive to consumers and producers 2) Subsidy reform of economically motivated subsidies, harmful to the environment
  8. 8. 02.08.10 Seite 8Page 8 EFR supports the implementation of key environmental policy principles ƒ Polluter Pays Principle/ User Pays Principle ƒ Sustainable Development Principle ƒ Prevention and Precautionary Principles ƒ Promotion of environmental technologies, environmental industry and technological innovation
  9. 9. 02.08.10 Seite 9Page 9 EFR as economic instrument for environmental management Externalities: Internalizes external costs caused by pollution Scarcity: Most environmental assets are public goods with no price to signal relative scarcity. EFR can assign such price reflecting scarcity. Resource efficiency: More efficient allocation and use of natural resources because of price signals
  10. 10. 02.08.10 Seite 11Page 11 EFR in international development context ƒ World Summit for Sustainable Development Plan of Action ƒ Monterrey conference on Finance for Development ƒ Millennium Development Goals ƒ UNEP’s Green Economy Initiative ƒ Marrakech Process on SCP, UNEP – UNDESA ƒ OECD’s Green Growth Strategy ƒ “Green Economy” will be the leading theme at the Rio+20 Summit to be held in 2012 in Rio de Janeiro
  11. 11. 02.08.10 Seite 12Page 12 Tax ‘bads’ not 'goods' and reform subsidiesƒ Welfair gains through: Increased or new taxes on products/services that create 'external' costs f.e. energy increased green, innovation subsidies Decreased tax burden on labour, capital, sustainable consumption Reformed environmentally harmful subsidies Or – more relevant for developing countries – revenues can be used for investment in environmental projects, poverty alleviation, etc.
  12. 12. 02.08.10 Seite 13Page 13 Conclusion: Selected possible results of EFR ...if properly designed and implemented...
  13. 13. 02.08.10 Seite 14Page 14 1. What is Environmental Fiscal Reform (EFR)? 2. EFR instruments and considerations 3. EFR in practice: selected examples
  14. 14. 02.08.10 Seite 15Page 15 “Comprehensive” vs. “partial” EFR ƒ Only few (European) countries have implemented complex “comprehensive” EFR following the EFR definition ƒ Many more have experience with individual EFR instruments to address specific environmental problems – in these cases one could speak of “partial” EFR.
  15. 15. 02.08.10 Seite 16Page 16 Overview of EFR instruments ƒ Eco-taxes f.e. CO2, SO2 emission taxes ƒ Environmental charges f.e. Pollution charges on batteries, water effluent ƒ Other fiscal instruments such a`s import duty differentiation, VAT rate differentiation, accelerated depreciation, etc. ƒ Emissions trading ƒ Green investment subsidies f.e. Soft loans, investment grants, FIT ƒ Reform of environmentally harmful subsidies ƒ Green public procurement ƒ Greening commercial finance f.e. Financial products and services offered by commercial banks
  16. 16. 02.08.10 Seite 17Page 17 Instrument focus in EFR-Training ƒ Eco-taxes and enviornmental charges: a) Energy production and consumption related pollutants and emissions b) Transport c) Waste management, environmental harmful production and consumption ƒ Green subsidies ƒ Reform of environmental harmful subsidies
  17. 17. 02.08.10 Seite 18Page 18 General considerations ƒ Avoid policy overlap: 1) understand existing fiscal instruments, linkages with other policy areas 2) ensure new measures are complementary ƒ Consider & compensate for social impacts ƒ Define policy aims ƒ Property rights ƒ Administrative costs ƒ Integrate environmental considerations in other policy sectors, e.g. tax structure, planning policy
  18. 18. 02.08.10 Seite 19Page 19 1. What is Environmental Fiscal Reform (EFR)? 2. EFR instruments and considerations 3. EFR in practice: selected examples
  19. 19. 02.08.10 Seite 20Page 20 Comprehensive ETR in Germany, 1999-2003 ƒ Revenue-neutral shift of tax burden from labour taxes and energy taxes ƒ 5 major yearly steps between 1999 and 2003 ƒ Energy taxation ƒ Increase of taxes on fossil fuels used for transport and heating ƒ New tax on electricity ƒ Special provisions for energy-intensive production ƒ Reduced rates for environmentally-friendly technology/renewables ƒ Phasing in by announced and small increases
  20. 20. 02.08.10 Seite 21Page 21 ETR in Germany 1999-2003 (II) ƒ Apart from environmental concerns, the high unemployment (>10%) was of major concern ƒ High labour costs as >40% of payroll taken up by social security contributions in 1999 ƒ In order to achieve a double dividend, revenues were used as follows: ƒ 86% for reduction of social security contributions ƒ ~6% for supporting renewable and energy efficiency ƒ ~8% as contribution to general budget
  21. 21. 02.08.10 Seite 22Page 22 ¾ Fuel consumption (-17%) ¾ Unloaded truck mileage (- 2%-points between 1998-2000) ¾ Fossil fuel imports (-13%) ¾ Overall tax burden (-4 %) ¾ Car sharing (+70%) ¾ Public transport (+5%) ¾ Energy saving technologies ¾ Energy efficiency ¾ Gas-powered cars (x10) ¾ Biofuel cars (x2) ¾ Renewable energies Less More Overall impacts of energy price increases (including ETR) Source: Green Budget Germany calculations
  22. 22. 02.08.10 Seite 23Page 23 ¾ CO2-emissions (2-3%) ¾ Tax on ‘goods’: Pension costs (-16 bn € or -1.7%) ¾ Costs for industry (-€1 bn) + ¾ Partly also the impacts shown on the previous slide ¾ Tax on environmental ‘bads’: energy taxes (+€18.7 bn) ¾ Employment (+250,000 jobs) ¾ Pensions (+1.2%) + ¾ Partly also the impacts shown on the previous slide Less More Direct impacts of ETR only Source: Green Budget Germany calculations
  23. 23. 02.08.10 Seite 24Page 24 Partial EFR: All EU countries have some green taxes/ green subsidy scheme Examples from EEA 2005
  24. 24. 02.08.10 Seite 25Page 25 EFR in China ƒ Nationwide pollution taxes: air emissions, wastewater discharges, noise, solid waste, and radioactive waste ƒ Consumer taxes: large cars, environmentally un-sound goods (2006) ƒ Revenues for Environmental fund (80%); research and monitoring; administrative costs
  25. 25. 02.08.10 Seite 26Page 26 EFR in Vietnam ƒ Recently started EFR process ƒ Draft “Environmental pollution Tax law” ƒ Pollution taxes on fuels, coal, HCFC, soft plastic bags, harmful chemical substances used in agriculture and forestry ƒ Impact study (ex-ante) carried out: ƒ CO2 emission drop of 2,5% - 7,5% ƒ Fuel tax level must be high enough for impact
  26. 26. 02.08.10 Seite 27Page 27 Contact Sector project: Rioplus - Environmental Policy and Promotion of Strategies for Sustainable Development Unit 47 Environment and Climate Change Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH Tulpenfeld 2 53113 Bonn, Germany T +49 228 985 3329 F +49 228 985 7018 E rioplus@gtz.de I www.gtz.de/rioplus Green Budget Germany / Forum Ökologisch-Soziale Marktwirtschaft Jacqueline Cottrell / Kai Schlegelmilch Seestrasse 116 13353 Berlin /Germany T +49(89)520 113 13 F +49(89)520-113 14 E jlc@foes.de; foes@foes.de / kai.schlegelmilch@bmu.bund.de I www.foes.de/en/
  27. 27. 02.08.10 Seite 28Page 28 EXTRA's
  28. 28. 02.08.10 Seite 29Page 29 Impact of EFR on GDP Source: COMETR 2007 No country suffered from lower GDP, and in most cases it increased slightly! In %
  29. 29. 02.08.10 Seite 30Page 30 The EFR-Instrument Toolkit Subsidy policy: 1) Dismantling environmentally harmful subsidies 2) Green product subsidies 3) Targeted subsidies 4) Cross-subsidies Environmentally-related taxation, e.g. on environmentally harmful products, natural resource extraction Emission allowances/ certificate trading Regulation and/or judicial / legal developments Environmental charges / User charges / fees for environmental services Comprehensive or cross-sectoral EFR
  30. 30. 02.08.10 Seite 31Page 31 Taxation Considerations: ƒ What to tax? ƒ Potential to cause change ƒ Scope for switching – what are the alternatives? ƒ How to administer? ƒ Setting tax levels – marginal cost of abatement ƒ What to do with tax revenues: tax reductions/general budget/earmarking ƒ Fiscal context ƒ Competitiveness concerns ƒ Fiscal driver
  31. 31. 02.08.10 Seite 32Page 32 Environmental fees and charges = cover the cost of a service, e.g. water supply, waste collection, road use ƒ If service charges do not cover costs, revenues must be found elsewhere, or shortfall will result ƒ Environmental and fiscal sustainability can be achieved using fees / charges to secure long-term cost recovery ƒ Targeted subsidies should be considered to protect the poor from the negative impacts of price increases
  32. 32. 02.08.10 Seite 33Page 33 Green subsidy schemes in Eastern Europe ƒ Comprehensive environmental funds established in almost all Central and Eastern European countries: z Capitalized by earmarked product and pollution charges; often also loan repayments z Used to catalyze implementation of national environ- mental policy, recently also EU environmental policy z Provide investment grants; often also soft loans or interest subsidy (to soften commercial loans) ƒ In addition, debt-for-environment swap funds were established in Poland and Bulgaria ƒ The highest capitalized scheme is the Polish environmental fund system with more than 1500 million US$ revenues p.a. (!)
  33. 33. 02.08.10 Seite 34Page 34 Environmentally Harmful Subsidies (EHS) = any fiscal benefit that encourages environmentally damaging behaviour = non-payments, low-credit loans, tax exemptions, grants... Negative impacts: ƒ Environmental damage – encourage unsustainable practices ƒ Social impacts – rich benefit more than poor, missing revenues for poverty reduction ƒ Distort market competition ƒ Support inappropriate technologies – hinder structural change and modernisation ƒ Create dependency ƒ Deficits in the public budget ƒ High administrative costs ƒ Risk of misuse
  34. 34. 02.08.10 Seite 35Page 35 Subsidy reform ƒ Subsidy removal - explicit subsidies (visible – actual payments) - hidden subsidies (tax exemptions, grants...) Identification prerequisite for removal Analysis of impact? Existing alternatives? ƒ Targeted subsidies (cross-subsidies, third-party subsidies) ƒ Environmentally beneficial subsidies (must be transparent, limited in time, subject to review, carefully targeted)