1. Environmental Fiscal Reform (EFR) Sylvain Chevassus European Environmental Bureau Two perceived fears about ETR: competitiveness and income distribution. How to overcome these fears.

2. Environmental Fiscal Reform (EFR) CAMPAIGN OBJECTIVES  Implementation of ambitious and effective Environmental Fiscal Reform throughout Europe  Changing consumption and production patterns towards greater sustainability  Raising awareness about EFR among the public as well as among governments and private sector players  Improving the quality of the political discourse on EFR and overcoming resistance

3. Environmental Fiscal Reform (EFR) CAMPAIGN DEMANDS  An additional 10% shift in total tax revenue from labour to environmental use by 2010, at EU and national level  Removal or reform of all environmentally adverse subsidies by 2005  Measures to address any potential social impact  Energy saving and efficiency policies  Fiscal incentives for environment protection

4. Environmental Fiscal Reform (EFR) EFR and development  EFR is an economic instrument. By internalising environmental costs it helps  sustainable development and,  pollution reduction  As a result of fiscally neutral EFR  The economy will gain, through greater resource use efficiency and the growth of green industries  Employment will benefit from lower labour taxation as well as new (green) industries

5. Environmental Fiscal Reform (EFR) COMPETITIVENESS (1)  EFR can actually lead to increased competitiveness for the reasons outlined in the previous slide  OECD (2001): “To date, environmentally related taxes imposed by OECD countries have not been identified as causing significant reductions in the competitiveness of any sector”

6. Environmental Fiscal Reform (EFR) COMPETITIVENESS (2)  FISCAL NEUTRALITY = lower labour taxes  Ecotaxes are recycled towards reduced labour taxes  EU countries with the most advanced EFRs (S, DK, NL, DE) have respected this principle, facilitating acceptability of the reform and helping employment

7. Environmental Fiscal Reform (EFR) COMPETITIVENESS (3)  DOUBLE DIVIDEND  According to research 84% of all EU taxes are levied on human effort (35 % from labour taxes) and only 8% are ecotaxes. The proposed 10% shift from the first to the second category will a.reduce resource waste and pollution and, b.reduce labour costs in the overwhelming majority of European business (services) (in Germany we had 1,9% reduction of social insurance contributions in the first phase only)

8. Environmental Fiscal Reform (EFR) COMPETITIVENESS (4)  EFR is business-friendly and can boost employment:  many sectors (labour intensive) will actually gain from EFR  studies clearly show significant net savings for service industries (SEED- Scott 1997, Danish Finance Ministry 1999, DIW 2001)  250 000 job creation potential in Germany (DIW study) only from effect of lower labour taxes  many new “green” jobs from the innovation effect  savings in public services can also help improving quality or saving on public spending

9. Environmental Fiscal Reform (EFR) COMPETITIVENESS (5)  Ecotaxes may lead to some product and process substitution (usually within the same industry)  Polluter pays principle  Only negative short-term impact is on heavy energy-users  I.e. fossil fuel electricity, cement and steel-making. BUT energy intensive industries already enjoy low energy prices, still falling with the energy market liberalisation. Mitigation measures are available.

10. Environmental Fiscal Reform (EFR) Mitigation measures for energy intensive industries  Gradual introduction, yearly increases  Transitional tax rebates for few industries against firm commitment to cut energy use and pollution  Regional aid and restructuring programmes, energy efficiency subsidies  European harmonisation and  (if possible) International co-ordination

11. Environmental Fiscal Reform (EFR) INCOME DISTRIBUTION (1)  The tax shift alone can have some regressive effect on purchasing power of low income groups  because low income households pay a higher proportion of their wages on basic needs (energy, water etc.)  because non-wage households (unemployed, pensioners, students etc.) do not benefit from the cuts in social security contributions  because of the increase in indirect taxation, that is regressive

12. Environmental Fiscal Reform (EFR) INCOME DISTRIBUTION (2)  This is why we call for a broad Environmental Fiscal Reform, which takes in the tax shift, but also accompanying social measures  Study on German EFR (DIW / Osnabrück and Oldenburg universities) : tax shift alone is regressive, comprehensive Fiscal Reform is not

13. Environmental Fiscal Reform (EFR) INCOME DISTRIBUTION (3) For wage-households, we recommend:  A fair split of social contributions cuts between employees and employers. E.g. a 50/50 formula (compensates employees and business, helps boosting employment)  Concentrate social contributions cuts on lower wages  Changes in income tax brackets

14. Environmental Fiscal Reform (EFR) INCOME DISTRIBUTION (4) Mitigating options for non-wage households:  Increases of some social allowances: unemployment benefit, housing benefit, income support, state pensions, student grants, child allowances etc.  Must be designed in a way that they maintain a strong incentive for energy saving and efficiency. I.e. taxes remain, and link between benefit increases and EFR made explicit.

15. Environmental Fiscal Reform (EFR) INCOME DISTRIBUTION (5) For all households:  Yearly “fine-tuning” of income distribution, adjusting income tax and social benefits to new policies and taxes, as done in the Netherlands  Non- wastable tax credits is a good option so that households who do not pay income tax benefit as well and incentive to save remains

16. Environmental Fiscal Reform (EFR) INCOME DISTRIBUTION (6)  Housing benefit increase is another good option: - targets all low income households, especially non-wage. Housing administration has information on low income households and can make link with EFR  Home energy efficiency programmes - directly helps households saving on tax and energy bills - accelerates environmental results - helps fighting fuel poverty

17. Environmental Fiscal Reform (EFR) FUEL POVERTY  A real problem in some countries, must be taken into account  However, not to be used as an excuse not to act on energy taxation and efficiency  Fuel poverty can be avoided: - funds can go towards housing improvements - low income households exempted from tax while their housing is improved - then tax exemptions gradually lifted

18. Environmental Fiscal Reform (EFR) Conclusions  EFR experiences in Europe have been good first steps, but too timid, with many exemptions, and no EU minimum harmonisation  Significant tax shifts and a good design are indispensable for an appreciable impact on the environment and employment  we call for an important tax shift (10% in total tax revenue) to deliver the double dividend

19. Environmental Fiscal Reform (EFR) Conclusions (continued)  The EU is suffering from pollution, overuse of natural resources and unemployment  at the same time it is a leader in the environmental effort, and must honour its Kyoto commitments  EFR is the right instrument please join our campaign! 