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Carbon Taxation. NEW CHAPTER. Environmental Taxes. Few would today dispute that humans are a part of the global warming problem - This is not the reason for the interest Our issue is how we create maximum CO2 reductions with least pain

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Environmental Taxes

Few would today dispute that humans are a part of the global warming problem

- This is not the reason for the interest

Our issue is how we create maximum CO2 reductions with least pain

Generally the idea is to allow society to function, GDP and growth to be maintained yet progressively lower CO2 emissions


Is Tax Right

Environmental taxes are unique - why?

Taxes are not about stopping or curtailing behaviour

Taxes are revenue raisers - at least in developed economies

Only comparables are sin taxes – alcohol, tobacco and similar


The Tax Theory

The optimal tax should be set so that :

Marginal environmental damage = Marginal economic benefit

(MED = MEB)

There fore MED = $50bn on car pollution may require another $1 / litre tax on fuel. But would create political problems

In addition while social welfare may increase by reducing CO2 emissions GDP may drop – currently or any other time not easy to accept by societies


Tax Theory

Optimisation may also be economically difficult if the Laffer Curve effect holds

This means the optimal rate could be where the tax take declines hence makes it even more difficult both economically and politically

In addition the optimal tax point is dynamic and may never be truly attainable


The European Approach

Tax policy inevitably lags

Politicians need to go through a parliamentary due process

Thus to track a difficult moving target has proved impractical


The Reality on the Ground

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07957 303 892


The Reality on the Ground

The UK has a declining trend

Many other EU countries the same

Scandinavia always seen as a leading light but

Denmark DK only 6% of GDP is environmental taxes


The Specifics

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The Specifics

Energy taxes are favourite

But no possible general trend

Cultural mind set and political expedience decides


The Trend

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The Trend

Quite a mix between EU states

Around 50% of member states have reduced their tax take from environmental taxes

Most interesting is that the net amount of take has also been reduced

Reduced for EU25, EU27, and EA 15


Energy Taxes - The Trend

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The Trend

1999 was the peak for EU Environmental Taxes

But clearly many such taxes were there as revenue raising instruments rather than to save the planet

We do not see the Tax Shift we all talk about with the introduction of environmental taxes in the 1990s


What Are The Taxes

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The Specifics

Shown are the obvious taxes

The UK Government has said that it wishes to use the market to address environmental issues

The taxes are there to address what it considers to be areas of market failure

“Market failure” is an euphemism for higher than desirable CO2 output for an activity

These euphemisms however raise suspicions for Taxpayers


The Specifics

There are also some very detailed tax measures

E.g. enhanced Capital Allowances for environmentally friendly building components.

Highly complex and technical

Relief can apply to a specified type of wall which could reduce energy use

Separate relief from Stamp Duty for zero emissions residential property


The Specifics

Taxation of cars has also changed from 2010

Annual road tax for cars has risen more that 300% for the most polluting vehicles 255g/km CO2 from 2010

In addition for above average emissions vehicles 160g/km and above depreciation allowances will be reduced significantly from 20% to 10%

Also addition “showroom” tax on high CO2 output vehicles polluting vehicles as much £1,000 - 2010.

Big push to fund electric vehicle production and promotion of £100m and provide public electric charging points and £5,000 per car subsidy on new technology cars e.g. GM Volt


The Specifics

Conversely high political sensitivity to consumer’s concerns

Recent rises due on fuel duties in 2008 and 2009 were stopped due to high oil prices but two rises in 2010

This is the issue with environmental taxes throughout Europe

Significant consumer resistance as lack of understanding what the tax is for


The Specifics

One area which might be helpful for the future would be a greater see through (transparency) for environmental taxes – hypothecation

Hence taxpayers could see:

-that a tax on their cars was paying for a CO2 reducing initiative or

-the tax paid for more hospitals but overall tax levels were maintained as Income Tax levels were reduced – Tax Shift

Broadly environmental taxes acting as a substitution is probably acceptable to most European tax payers but not a way of augmenting them

Thus perhaps the implementation strategy needs to be considered


Carbon Reduction Commitment (CRC)

UK was to introduce a scheme in 2012 where highest polluting businesses and public sector pay in to a fund

Fund distributed to least polluters

But now fund will be pocketed by Government

Nothing to dispel cynicism of environmental taxes


Emissions Trading

A part of the EU strategy in this area involves what is called emissions trading

Broadly this is how it works

2008 EU member states allocated and sold emissions credits to CO2 emitters via an approved purchaser known in the UK as a “primary purchaser”

The UK is currently in phase 2 i.e. most emissions credits issued free but up to 7% auctioned

Auction for first time was on 19th November 2008


Emissions Trading

Phase 2 from 2008 - 2012

2012 onwards around 100% of credits will be auctioned

There can then be additional buying and selling among holders of the credits thus creating a full market

Year by year the level of credits hence CO2 emissions will reduce therefore reducing EU emissions

Problem in down turn prices dropped through the floor


Emissions Trading

Tax effects are meant to be benign

Full VAT (GST) recovery where appropriate

May also be out side the scope in certain cases therefore not creating partial exemption of itself

Companies my elect

But has been the subject of missing trader fraud very significant tax losses and created yet another fraud opportunity


Emissions Trading

Direct tax perspective

Tax profits from sales

Deduct from profits costs

Therefore see-through and transparent


EU Level

The commission is also looking at tax in this area

They are in favour of market based instruments (MBIs) – as now happens in member states

But also looking to minimum tax levels for energy producing products i.e. gas, coal etc.

The commission will look much more to promoting the use of MBIs in the areas of transport, trying to extend these to shipping and aviation

The commission recognises that the distributional impacts i.e. less well off impacted more would need to be addressed perhaps through targeted measures

For instance UK offers free transport for pensioners


The Future – Concluding Comments

The global recession has probably delayed or deferred a greater switch to environmental taxes

But even with a new administration in the US there is no clear global consensus

The great hopes where the US might lead plans for CO2 emissions reductions have been disappointed

Environment taxes only seem to have fair weather friends clear disappointing to see a move to tax shift put on hold or reversed

The US mid-term elections if anything indicate an environmental backlash. Many of the now majority party in the House of Representatives question the science behind Global Warming

Should we look to Regulation rather than tax


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