Environmental Tax Reform: Potential and Experience in Europe

1. Environmental Tax Reform: Potential and Experience in Europe By Professor Paul Ekins Member of UNEP’s International Resources Panel Professor of Resources and Environmental Policy and Director UCL Institute for Sustainable Resources, University College London A presentation to the Corporate Leaders Group on Climate Change-CLG Chile Santiago, Chile May 29th, 2014

2. The potential of ETR/GFR:ETR/GFR is the shifting of taxation from ‘goods’ (like income, profits) to ‘bads’ (like resource use and pollution)

3. Relevant projects on environmental tax reform (ETR) or green fiscal reform (GFR) • COMETR: Competitiveness effects of environmental tax reforms, 2007. http://www2.dmu.dk/cometr/ See Andersen, M.S. & Ekins, P. (Eds.) Carbon Taxation: Lessons from Europe, Oxford University Press, Oxford/New York, 2009 • petrE: ‘Resource productivity, environmental tax reform (ETR) and sustainable growth in Europe’.One of four final projects of the Anglo-German Foundation under the collective title ‘Creating Sustainable Growth in Europe’. Final report published October/November 2009, London/Berlin. www.petre.org.uk See Ekins, P. & Speck S. Eds. 2011 Environmental Tax Reform: A Policy for Green Growth, Oxford University Press, Oxford • UK Green Fiscal Commission. Final report published October 2009, London. www.greenfiscalcommission.org.uk

4. What is the experience to date of ETR in Europe? • Six EU countries have implemented ETRs: Denmark, Finland, Germany, Netherlands, Sweden, UK • The outcomes – environmental and economic – have been broadly positive: energy demand and emissions are reduced; employment is increased; effects on GDP are very small • Effects on industrial competitiveness have been minimal • See Andersen, M.S. & Ekins, P. (Eds.) Carbon Taxation: Lessons from Europe, Oxford University Press, Oxford/New York, 2009

5. Environmental and economic impacts of ETR, from COMETR study, 2007

7. Insights from PETRE (Resource productivity and ETR in Europe) • What opportunities are presented by ETR in Europe? • What might a large-scale ETR in Europe look like and what would be its implications for the rest of the world? • What are the obstacles to ETR in Europe? • What might be a way forward for ETR in Europe? • How can single European countries like Germany seek to implement their own ETRs? • What are the implications of ETR for ‘sustainable growth’ in Europe? See Ekins, P. & Speck S. Eds. 2011 Environmental Tax Reform: A Policy for Green Growth, Oxford University Press, Oxford

8. What might a large-scale ETR in Europe look like.....? (1) • Two European macro-econometric models: E3ME, GINFORS. • Models deliver insights, not forecasts or ‘truth’ • Six scenarios: • Baseline with low energy price (LEP) • Baseline sensitivity with high energy price (HEP, reference case) • Scenario 1: ETR with revenue recycling designed to meet 20% EU 2020 GHG target (S1 – scenario compared with LEP Baseline) • Scenario 2: ETR with revenue recycling designed to meet 20% EU 2020 GHG target (S2 – scenario compared with HEP Baseline) • Scenario 3: ETR with revenue recycling designed to meet 20% EU 2020 GHG target (S3 – scenario compared with HEP Baseline) • proportion of revenues spent on eco-innovation measures • Scenario 4: ETR with revenue recycling designed to meet 30% ‘international cooperation’ EU 2020 GHG target (S4 – scenario compared with Baseline with HEP)

9. What might a large-scale ETR in Europe look like.....? (2)

10. ... and what would be its implications for the rest of the world? CO2 emissions- GINFORS

11. What might be a way forward for ETR in Europe (in a time of financial crisis)? • Need for substantial new sources of tax revenue (tax pollution) • Need for substantial new sources of employment (make employment cheaper) • Carbon tax very similar to permit auction • Energy Tax Directive in place – proposal to split between energy and carbon • Carbon tax would put floor on permit price • EU-wide carbon tax would dilute concerns about competitiveness (cf China)

12. UK Green Fiscal Commission • Formed May 2007 • Running to October 2009 • Independent of government (funded by Esmée Fairbairn Foundation and Ashden Trust) • 22 Commissioners – to review and advise on work • 4 MPs, 3 Lords – politically balanced, senior political representation, shadow ministers • business, academic, NGOs (social and environmental) • FSA, MPC members • government observers – Defra and Treasury • Paul Ekins, Director and Secretariat provided by PSI

13. Green Fiscal Commission - objectives • To break the political logjam on environmental tax reform • To prepare the ground for a significant programme of green fiscal reform in the UK • Creation of evidence • Raising awareness of evidence – communications and engagement • To understand the social, environmental and economic implications of a major programme of environmental tax reform

14. Green Fiscal Commission – starting point • Working assumption - environmental tax reform is a good idea in principle • Considering: • a substantial tax shift – approx 20 per cent of tax revenues from green taxes by 2020 – quite a challenge • Use of proportion of tax revenues to amplify environmental benefits – technology and behaviour – revenue neutrality? • Should not have a disproportionate impact on already disadvantaged groups • Will take account of and seek to mitigate negative effects on business, and foster new sources of comparative advantage as the basis for new businesses • No view on appropriate level of overall taxation – a shift in the basis of taxation, not an increase.

15. Green Fiscal Commission - research New research and review/collation of existing work on (see Briefing Papers on website): • Public opinion (including deliberative days) • Modelling of economic, environmental and social implications of a major tax shift - CE • Distributional issues • Experience of UK fuel duty escalator/income tax reduction • International comparisons on the effectiveness of economic instruments • ETR and innovation • ETR and competitiveness • Border tax adjustments • ETR and transport • Revenue stability

16. Engagement and communications Engagement • Meetings with, and presentations, to target audiences • Stakeholder engagement meetings – business, groups with distributional concerns • Meetings of Commission Communications • Parliamentary Launch • Blog – ETR news and commentary • Website • Summary briefings/supporting papers/book • Press work • Events at political party conferences The politics is difficult, so need to develop a compelling narrative: see Briefing Paper No.4

17. Green Fiscal Commission - scenarios • Three Baselines, with different assumed fossil fuel prices – medium (B1), low (B2) and high (B3) • Two GFR scenarios (S1, S2) were compared against these Baselines. Range of carbon/energy and environmental taxes; reductions in income tax (households) and social security contributions (business) [B3 same end-user prices as S1, S2] • Two ‘Eco-innovation’ scenarios: 10% of extra green tax revenues invested in household energy efficiency, fuel-efficient cars and renewable energy sources.

18. Green Fiscal Commission – oil prices

19. Green Fiscal Commission – revenues

20. Green Fiscal Commission – GHGs

21. Green Fiscal Commission – GDP/GHGs

22. Green Fiscal Commission – Summary of Findings • Environmental taxes work: they reduce environmental impacts  • Environmental taxes are efficient: they improve the environment at least cost • Environmental taxes can raise stable revenues • The public can be won round to Green Fiscal Reform (GFR) • The UK’s 2020 greenhouse gas targets could be met through GFR: small effects on output; positive effects on employment (450k in 2020)  • GFR would stimulate investment in the low-carbon industries of the future • GFR can mitigate the impact of high world energy prices: unlike GFR, high world energy prices are bad for the UK economy  • The impacts of GFR on competitiveness can be mitigated: concerns of relatively few economic sectors can be addressed.  • Low-income households would need special arrangements • GFR emerges as a crucial policy to get the UK on a low-carbon trajectory; help develop the new industries that will both keep it there and provide competitive advantage for the UK in the future; and contribute to restoring UK fiscal stability after the recession. It is a key to future environmental sustainability and low-carbon prosperity.

23. How could single countries implement ETR? • ETR has a minimal effect on national competitiveness and economic growth • ETR will stimulate resource-efficient innovation – need to support this with complementary policies • Germany has demonstrated this (low-carbon vehicles, energy-efficient houses, renewable energy, waste management technologies) • If all countries were committed to low-resource development, the leading countries would be those with strongly developed resource-efficient technologies and industries

24. Will ETR lead to ‘sustainable growth’? • ‘Sustainable’ growth will be resource-efficient and may in time turn out to be slower growth, with higher employment (lower productivity and incomes); depends on innovation - ETR would stimulate such innovation, supported by other policies • Relatively high-growth countries in a sustainable future will be those that have developed, and can export, resource-efficient technologies and industries • ETR is a key policy for fostering sustainable growth • There is no evidence that ETR or other policies for environmental sustainability would choke off economic growth altogether • ‘Unsustainable’ growth will not last beyond this century, and could lead to environmental collapse well before 2100 (“there is no low-cost, high-carbon future”) • The choice is clear from a cost-benefit angle at any but the highest discount rates (cf Stern Report). • That will not make implementing the choice politically easy

25. Thank you EMAIL@ucl.ac.uk • www.bartlett.ucl.ac.uk/sustainable