“Implementing the Environmental Fiscal Reform – Greening the State Budget in the Visegrad countries and Europe”. The workshop is organized by the Society for Sustainable Living, Prague (SSL), the Clean Air Action Group, Hungary (CAAG), the Institute for Sustainable Development, Warsaw (ISD), and the Danish Ecological Council (DEC). November 20, 2003 Prague, Czech Republic Environmental Fiscal Reform in Poland as a Tool of Greening the State Budget

Environmental Fiscal Reform The Environmental Fiscal Reform consists in shifting tax burdens from labour resources to the natural resources used. Its aim is to gain the environmental effect, along with the social effect, which is to encourage entrepreneurs to expand their economic activities and thereby to increase the employment in their companies.

Environmental Fiscal Reform may play a stabilising role for the medium- and long-term objectives of economic growth and employment and contribute to the preservation of a good state of the environment may be an effective instrument for restructuring the public finance system in line with the criteria for achieving the goals of sustainable development

The Environmental Fiscal Reform: Some interest and no implementation The Environmental Fiscal Reform has not yet been applied in practice in Poland. Still, research centres and, recently, non-governmental organisations became interested in it.

Economic recession · a fall in its economic growth rate ·a fall in the investment activity of enterprises ·a decrease in the flux of foreign direct investment ·a slower rate of the restructuring and privatisation ·a halt to the establishment of new enterprises in the private sector particularly in the SME sector

Growing unemployment  the unemployment rate grew 18.1% at the end of 2002  the scale and extent of poverty expanded with about 8.1% of the population  the geographical and sectoral differentiation in household incomes grew, e.g. in relation to the availability of work

Worsening of the state of the environment  a lower share of environmental expenditures in GDP  a reduced number of municipal environmental infrastructure facilities  enhanced geographical divergence in the local provision of environmental infrastructure and its use by the population

 a reduced rate of the improvement in the main indicators for the state of the environment and the consumption of its resources  the maintenance of a relatively high share of fossil fuels in the national energy balance

Growing indebtness of the public finance An increase in the debt of the public finance system was one of the effects of the recession in The process of growing indebtedness of Government and local government institutions as commenced in persists and will continue in This means that the unfavourable conditions for the budget financing of development and environmental objectives will continue

The concept of the EFR should take into account the following  the current economic, employment and environmental situation in place  the strategic goals and priorities of the national macroeconomic policy in relation to the accession to EMU;  the goals and priorities of the national environmental policy

 the need to restructure the public finance sector in relation to development and employment generating policies  the specific conditions in the particular sectors of industry  the public consent and the political consent of the major political parties

Gaining the political consent to the implementation of EFR requires fulfilling a number of criteria  the criterion of maintaining the competitiveness of Polish enterprises on the international markets  the criterion of neutrality for the budget revenues  the criterion of equitable distribution of fiscal burdens the need to meet the  accession-related financial and environmental commitments

The excise tax and EFR in Poland The significance of the excise tax in the State budget revenues is essential for the possibility of implementing ERF in Poland

Estimated incomes form taxes on major excisable motor fuel groups Incomes from excise tax on motor fuels in 2002, of which: Leaded petrol Unleaded petrol Diesel oilLiquid gas ,929,18 103,25 413,8275,8 100%0,2%58,6%39,2%2,0%

Incomes from excise taxes on major excisable commodity groups Specification2002 performed2003 planned*2004 forecast** Excise tax31 489, , ,7 of which - motor fuels13 821, , ,1 - spirits3 876,03 429,74 018,2 - tobacco products7 927,28 283,68 780,0 - beer2 104,52 181,02 309,1 - wine635,6649,2758,9 - cars670,8764,8571,1 - electric energy1 557,42 543,82628,5 - other excise taxed products 896,4829,9487,7

SpecificationUnitExcise tax rate Petrol motor fuels and basic petrols, of which:1000 l1 634 (Ethyl) gasoline 94, 98 and their basic petrol1000 l1 629 Unleaded petrol1000 l1 464 Aircraft fuels1000 l1 704 Motor oil, of which those with sulphur content:1000 l1 104 more than 0,05% up to 0,2%1000 l1 090 more than 0,005% up to 0,05%1000 l1 027 up to 0,005%1000 l980 Aircraft fuels for jet turbine engines1000 l1 003 Motor oils* 20% Heating oils (60% or more undergoes distillation by volume at 350 degrees Centigrade) 1000 limported 25% Kerosene1000 l160 LPG for cars1000 kg1 704 Electric energykWh390 Excise tax rates on energy carriers valid in Poland in 2002

Excisable tax commodity groups Minimum excise tax rates in the EU (EURO) Excise tax rates in Poland (EURO*) Spirits550,0 EURO / hl of 100% alcohol 1075,4 EURO/hl of 100% alcohol Leaded petrol337,0 EURO / 1000 l.408,65 EURO / 1000 l. Unleaded petrol287,0 EURO / 1000 l.366,12 EURO / 1000 l. Diesel oil245,0 EURO / 1000 l.256,8 EURO / 1000 l. LPG100,0 EURO / 1000 kg109,98 EURO / 1000 kg Excise tax rates in Poland and the minimum excise tax rates in the European Union

The concept of the Environmental Fiscal Reform (the Cracow University of Economics, Cracow, February 2003) The core items of the budget adjustment proposed over four years of the ETR include:  the gradual introduction of taxes on energy carriers  the reduction of contributions to social security insurance  operations neutral for the budget revenues

Basic scenario Excise taxes on hard coal, electrical energy and motor fuels imposed on corporate sector and households Fuels1 year of ETR2 year of ETR3 year of ETR4 year of ETR and electric energy Incea se in rate New rate Incre ase in rate New rate Incre ase in rate New rate Incre ase in rate New rate Hard coal 0,0 0,005 0,0020,007 Electric energy 0,0 0,007 0,00,0070,0030,010 Petrol0,065 0,00,0650,0100,0750,00,075 Diesel oil0,055 0,00,0550,0100,0650,00,065 Heating oil 0,030 0,00,0300,00,0300,00,030

Alternative scenario Excise taxes on hard coal and electrical energy imposed only on households Fuels1 year of ETR2 year of ETR3 year of ETR4 year of ETR and electric energy Incre ase in rate New rate Incre ase in rate New rate Incre ase in rate New rate Incre ase in rate New rate Hard coal 0,0 0,015 0,0050,0200,00,020 Electric energy. 0,0 0,020 0,0100,0300,00,030 Petrol0,065 0,0200,0850,0500,1350,0500,185 Diesel oil0,055 0,0200,0750,0500,1250,0500,175 Heating oil 0,030 0,00,0300,00,0300,0500,080

Additional incomes of the State budget and deficits in incomes from social security contribution funds (basic year 2001) Specifica- tion Basic scenarioAlternative scenario Additional tax incomes Deficits in incomes of social contribution Additional tax incomes Deficits in incomes of social contribution 1 year of ETR 780,7792,4780,7792,4 2 year of ETR 1 653,51 584,81 567,71 584,8 3 year of ETR 2 488,02 377,32 355,22 377,3 4 year of ETR 3 144,23 169,73 140,93 169,7

Comparison of retail prices of energy and motor fuels in 2001 (basic year) with prices under the basic and alternative ETR scenarios SpecificationBasic scenarioAlternative scenario Energy and motor fuels Price in PLN/kg (kWh) Excise tax rate PLN/ kg (kWh) Share of excise tax in price in % Excise tax rate PLN / kg (kWh) Share of excise tax in price in % Hard coal0,450,0071,60,0204,4 Electric energy. 0,370,0102,70,0308,1 Petrol3,100,0752,40,1856,0 Diesel oil2,600,0652,50,1756,7 Heating oil 1,600,0301,90,0805,0

The concept of the Environmental Tax Reform (Institute for Sustainable Development, Warsaw, October 2003)  The financial effects of ETR were given under the conditions of  The average employment in the national economy in 2003 as 8,643,000 persons.  The average salary in the national economy in 2003 as PLN 2,021 (gross).

Financial effects of reductions in social contribution rates Reduction in payments to social security funds (together) - 2,3 Increase in incomes from Personal Income Tax + 0,2 Together- 2,1

Financial effects of the additional employment on the sector of public finance Financial effect Scenario I Scenario II Additional incomes from pension insurance contributions 0,10,2 Disability insurance 0,050,1 Health insurance, accident insurance, Labour and Guaranteed Social Benefits Fund 0,030,06 Additional incomes from PIT (together with contributions to National Health Fund)* 0,060,12 Additional incomes from Corporate Income Tax 0,10 Additional incomes total 0,250,5 Total financial effect on the public finance sector (after addressing shortages resulting from decreases in social insurance contribution rates) - 1,8-1,6

Mean annual increases in excise tax rates Specification Scenario IScenario II Alternative IMotor fuels12,7%11% or Electric energy 75,4%65% Alternative IIMotor fuels4,3%2,6% Electric energy 1 grosz (0,01 PLN) / kWh

Recommendations for the adjustment of the State budget in Poland in 2003 and 2004  The State budget could be “greened” to a meaningful extent only by the implementation of the Environmental Fiscal Reform  The financial base for the Environmental Fiscal Reform should be taxes levied on selected fuels and energy carriers  The most favourable EFR option is widening of tax burdens on greater range of taxpayers, including both the sector of enterprises, the budget-supported sphere and households

 The timeframe of EFR should be subject to negotiations between the Government and social partners  The Environmental Fiscal Reform should be strictly co-ordinated with the comprehensive reform of public finance, the assumptions of which still continue to be discussed in Poland.  Suggestions for greening the State budget for 2005 and 2006 may base on the estimates made for 2003 and 2004  In designing the structure of EFR as an instrument to green the State budget in the successive years, each time consideration should be given to the course of the reforms of social insurance systems and mechanisms now debated in Poland and the other European Union countries

Investment outlays on environmental protection and water management according to financial sources Specificatio n Environmental protection total (PLN millions), of which: 6 570,36 168,95 027,1 Own financial means53,451,846,7 Means: of the State budget2,22,01,8 voivodships1,61,01,7 poviats0,20,30,4 gminas1,40,80,9 Foreign financial means3,93,24,2 Environmental funds (loans, credits, grants)20,023,726,1 Loans and credits inland, of which from banks11,712,112,3 Other financial means5,65,16,0

Investment outlays on environmental protection and water management according to the shares of investors Specificatio n Environmental protection total (PLN millions), of which: 6 570,36 168,95 027,1 Enterprises52,351,549,3 Gminas44,446,647,8 Budgetary entities3,31,93,0 Water management total (PLN millions), of which: 1 652,71 315,11 440,1 Enterprises23,725,127,0 Gminas39,441,238,0 Budgetary entities36,833,735,0

Some tangible effects of investments in environmental protection and water management in the year SpecificationUnit Environmental protection Waste water treatment plants (facilities), of which: X  biological X  with enhanced nutrient removal X capacities of treatment plants totaldam 3 /24h  biological dam 3 /24h  with enhanced nutrient removal dam 3 /24h Ability of commissioned system to  reduce particulate pollutants thous. ton/a ,517,1  reduce gaseous pollutants thous. ton/a.176,364,39,0