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Transofmation of the economic system: green reform and green growth
This document discusses the challenges of transforming the global economic system to address climate change through green fiscal reform and growth. It notes misalignments in current tax structures that do not incentivize low-carbon transformation. While concerns exist around equity, competitiveness and growth, the document finds that well-designed environmental policies with revenue recycling need not harm, and may even benefit, economic outcomes if implemented in a coordinated manner across countries. Stringent climate policies that price carbon and support clean innovation are still needed to meet emissions targets.
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Transofmation of the economic system: green reform and green growth
- 1. Shardul Agrawala Head ofEnvironment and Economy Integration Division Environment Directorate Bocconi University, Milan May 18 2015 TRANSFORMATION OF THE ECONOMIC SYSTEM, GREEN FISCAL REFORM AND GREEN GROWTH: Some Observations from recent OECD work
- 2. 2 Outline The greentransformation challenge (focus on climate) Misalignments in tax structures for a low carbon transformation Concerns about equity, competitiveness and growth
- 3. 3 1. The transformationchallenge on climate IPCC Working Group III Fifth Assessment report (2014)
- 4. Clear, credible,stringent and economy wide GHG mitigation targets Covering all major emission sources, sectors, countries would lower costs and competitiveness concerns Putting a visible and credible price on CO2 and other GHGs Foster innovation and support for clean technologies Targeted government support for R&D Policies to reduce financial risks for investing and deploying low carbon technologies Complement carbon pricing with well designed regulations (e.g. fuel, vehicle and building efficiency standards) Strong climate policy signals clearly needed
- 5. But … climatepolicy comes on top of existing goals and instruments, developed for a fossil-fuel based economy ECONOMIC TRADE COMPETITION FISCAL DEVELOPMENT COOPERATION SOCIAL INVESTMENT CLIMATE
- 6. 2. Misalignments betweenfiscal structures and green transformation Most tax systems were set up when environmental damage and scarcity were low on the policy agenda The primary motivation of many green taxes was often revenue raising than environmental protection Increasing number of countries are making progress on environmental tax reforms But a number of misalignments persist between tax structures and incentives needed for green transformation
- 7. Source: Taxing EnergyUse in the OECD & Key Partner & Associate Countries (OECD, 2015, forthcoming) 7 2.2 Energy taxes lack a consistent carbon price signal Weighted average effective tax rates Transport Heating & process Electricity All fuels Energy EUR/GJ 5.0 0.3 0.3 1.1 Carbon emissions EUR/tonne CO2 70.1 3.1 3.4 14.8 Effective tax rates on energy and carbon in OECD 34 and 7 Partner countries
- 8. EXAMPLE – ENERGYMAP FOR THE UK • Source | OECD | Taxing Energy Use | 2013
- 9. Source: Taxing EnergyUse in the OECD & Key Partner & Associate Countries (OECD, 2015, forthcoming) DEU CHE POL IND BRA ZAF 0 25 50 75 100 100 300 500 700 900 Economy-wide effective tax rate on carbon emissions from energy (EUR per tonne CO2) Carbon emissions per unit of PPP-adjusted GDP (tonnes CO2 per million USD) AUS AUT BEL CAN CHL CZE DNK EST FIN FRA DEU GRC HUN ISL IRL ITA ISR JPN KOR LUX MEX NLD NZL NOR POL PRT SVK ESP SVN SWE CHE TUR GBR USA ARG BRA CHN IND IDN RUS ZAF 0 25 50 75 100 100 300 500 700 900 Economy-wide effective tax rate on carbon emissions from energy (EUR per tonne CO2) Carbon emissions per unit of PPP-adjusted GDP (tonnes CO2 per million USD) 9 2.3 Economy-wide effective tax rates on carbon vary widely … and correlate with with carbon intensity of GDP
- 10. 2.4 Diesel isconsistently taxed much lower than gasoline 0 10 20 30 TUR NLD NOR ITA GBR GRC DEU FIN SWE BEL FRA CHE IRL DNK ISR PRT JPN AUT SVK CZE KOR SVN ESP =>ARG LUX EST ISL HUN POL NZL CHL =>ZAF AUS =>IND =>CHN CAN USA MEX =>RUS =>IDN =>BRA Gasoline (road use) Diesel (road use) Tax rate (EUR per GJ) Source: OECD calculations 10
- 11. Company carsupport Under-pricing mobility Preferential treatment of home ownership Corporate income tax – investment incentives? 11 2.5 some other misalignments in taxation
- 12. 12 III. Concerns aboutequity, competitiveness and growth Many misalignments at least partly motivated by real or perceived concerns about social equity, competitiveness and economic growth Work by OECD on these aspects has involved a number of techniques including meta-analysis, micro-simulation and CGE models, and ex post empirical studies. Some highlights from recent work follow
- 13. 13 III a. Incomedistribution concerns: OECD experiences Environmental taxes can have significant effects on low income households. Distributional effects depend upon the tax (Flues et al. 2014). Transport fuel taxes not regressive Heating fuel taxes slightly regressive Electricity taxes more regressive than heating fuel taxes Some empirical evidence (1990-2011) that environmentally related taxes in OECD countries associated with slight increase in inequality in income sources (Oueslati et al. 2015) However this effect is fully offset if revenue recycling was part of the reform
- 14. -6 -4 -2 0 2 4 6 8 10 12 14 1 11 2131 41 51 61 71 81 91 Income centile groups Real income variation in 2020 (% baseline) Cash transfers Labour support Food subsidies Commodity price effect Source: ENV-Linkages Total effect An Emerging Economy case: Modelling distributional effects of fossil fuel subsidy phase out by 2020 in Indonesia Durand Lasserve et al. 2015
- 15. 15 III b. Competitivenessconcerns Environmentally related taxes are intended to affect production decisions and will have a disproportionate impact on large polluters Possible competitiveness impacts, however, are often overstated German electricity tax: no robust impact of the reduced marginal tax rate on firm’s turnover, investments, value-added, turnover abroad and employment (Flues and Lutz, 2015) UK Climate Change Levy: reductions in energy intensity and electricity use, without discernible impact on employment, gross output or productivity (Martin et al., 2011) Carbon tax in British Columbia: no competitive disadvantage for trade in the agricultural sector (Rivers and Schaufele, 2014
- 16. 16 III b. Competitivenessconcerns Lead-in time for affected firms to undertake mitigation measures can alleviate some competitiveness concerns … As can recycling revenues from environmental taxes back to affected firms (while maintaining the marginal abatement incentive) However rate reductions and exemptions, for example for heavy industry, shift some of the abatement burden to others, or result in an inferior environmental outcome
- 17. 0 2 4 6 8 10 12 14 EUacting alone AnnexI AnnexIand Brazil, Indiaand China Leakagerates,% 2050 Source: OECD (2009),The Economics of Climate Change Mitigation; Lanzi et al. 2014 The most effective response to competitiveness and leakage concerns is coordinated action across countries
- 18. Environmental policiesaim primarily at environmental outcomes. But, will also affect economic outcomes: e.g. they change relative prices and incentives to innovate and invest. e.g. they can distort competition. Empirical study across 24 OECD countries to examine: What is the effect of more stringent environmental policies on productivity growth ? What is the relationship between environmental policy stringency and the administrative and other burdens it might impose ? 18 IIIc. Concerns about productivity growth
- 19. Environmental policy stringencyand burdens vary considerably across countries (and over time)
- 20. B. Environmental policystringency proxy (OECD, de jure) AUS AUT BEL CAN CHE DEU DNK ESP GBR GRC HUN ITA JPN NLD NOR POL PRT SVK SWE USA IRL KOR FRA 1 2 3 4 5 0,5 1 1,5 2 2,5 3 3,5 4 4,5 Total BEEP indicator OECD EPS (de jure, 2012) Morestringentenvironmentalpolicies Policies more burdensome to entry and competition Negative anticipation effect Positive rebound effect Increasing Environmental Policy Stringency does not harm productivity growth Stringent environmental policies can be designed without imposing burdens to entry and competition Some insights on environmental policies and economic outcomes
- 21.