1 Taxation, Innovation and the Environment Presentation of a new OECD publication at the 11 th Global Conference on Environmental Taxation Bangkok, Thailand 3-5 November 2010 Nils Axel Braathen OECD, Environment Directorate Jens Lundsgaard OECD’s Centre for Tax Policy & Administration

2 Introduction In October 2010, OECD published the book Taxation, Innovation and the Environment … …. to a large extent built on a number of ex post studies of the innovation impacts of selected environmental policies … … but also includes an updated overview of the use of environmentally related taxes in OECD countries... … and a ‘user’s guide’ for policy makers on how to implement such taxes. This presentation will highlight some main points … … and will be followed by some invited comments and general discussion.

3 Definition of environmentally related taxes OECD’s definition (in co-operation with the EU commission, and IEA): –Any tax levied on a tax-base of particular environmental importance. This includes taxes on energy, motor vehicles, measured or estimated emissions to air and water, waste management, noise, hazardous chemicals, natural resources, etc. We do not take the name, or the stated purpose, of a tax into account when judging whether it is “environmentally related” or not.

4 Revenues from environmentally related taxes in per cent of GDP

5 Revenues from environmentally related taxes in per cent of GDP, by tax-base

6 Revenues from environmentally related taxes in per cent of total tax revenues

7 Revenues from environmentally related taxes in per cent of GDP, by tax-base

8 Why have revenues decreased in per cent of GDP in recent years? This is closely linked to the increase in world crude oil prices since year This price increase has contributed to people substituting away from motor fuel use, towards other goods and services. In short: Price signals work! As motor fuels often are (much) more taxed than other goods and services, revenues from environmentally related taxes decrease in per cent of GDP. The high motor fuel prices may also have made it politically difficult for countries to increase nominal tax rates in line with inflation. Hence, for example, the real tax rate on petrol decreased 8% between 2000 and 2010.

9 Tax rates on petrol and diesel

10 Tax rates on light fuel oil

11 Taxes on NO x emissions to air

12 Tax rates on landfilling of waste

13 Findings from new OECD study: Taxation, Innovation and the Environment Swedish NOx tax –Patents increased; emission intensities declined; Marginal Abatement Costs fell Swiss VOC tax –Firms were quite innovative and found many practical solutions beyond patenting UK Climate Change Levy –Firms subject to 80% tax reduction innovated less

14 Findings from new OECD study: Taxation, Innovation and the Environment Predictability of rates –Japanese SOx charges were unpredictable, weakening investment in R&D and innovation Individual vs. collective innovation incentives –Swedish NOx charge and Japanese SOx charge Lead-in time for taxes provide incentives for abatement and innovation before cost burden Tax rates Related patents

15 A Guide to Environmentally Related Taxation for Policy Makers This chapter of the book provides a broad overview to policy makers about the considerations surrounding environmentally related taxation. Taxes are assessed against other potential policy instruments before turning to fundamental tax design considerations. The chapter also addresses the political economy considerations present during implementation.

16 Competitiveness concerns By seeking to protect the environment, environmentally related taxation is by definition intended to affect production decisions and have a disproportionate impact on polluters. The most effective method to minimise potential carbon leakage is to co- ordinate environmental policies across countries. Another possibility is to provide some lead-in time for affected firms to undertake mitigation measures. Where revenues from environmentally related taxes are recycled to the affected firms, the marginal abatement incentive is generally maintained. However, the polluter pays principle is violated via such a mechanism – the price to consumers of pollution-intensive products is not increased. Rate reductions and exemptions shift some of the abatement burden to others – or result in an inferior environmental outcome.

17 Income distribution concerns Increased taxes on combustion-related emissions can have significant impacts on low-income households. Much the same is true of water use. Governments should not ignore such impacts. Policy makers should be concerned not necessarily with the distributional impacts of specific policies and taxes, but with the redistributive aspects of overall governmental policy. Distributive impacts could be better addressed through broader means, such as lowering personal income taxes, supplementing low-income supports – rather than through exemptions in environmentally related taxes.

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