1. Ort, Datum Autor Economic and Environmental Effects of the EU Directive on Energy Tax Harmonization Katja Schumacher Presented at: International Energy Workshop Paris 22-24 June 2004

2. Authors German Institut for Economic Research, Berlin Jochen Diekmann Michael Kohlhaas Dieter Schumacher Katja Schumacher Institute for Applied Ecology, Berlin Martin Cames

3. Goal and Scope of Paper –Analyze the effects of the EU Directive on Energy Tax Harmonization on energy consumption and emissions on economic growth and sectoral development on international trade –Focus on new EU Member Countries –Use CGE model: GTAP-E

4. Background –EU Directive on Energy Tax Harmonization passed in October 2003 and entered into force in January 2004 –Directive aims at reducing distortions between Member States and between energy products increasing the incentive to reduce energy consumption and carbon dioxide emissions establishing coherence of energy, transport and environmental policies in Europe –Directive covers EU15 Member Countries plus 10 Accession Countries

5. History of EU Energy Taxation –1992 Directive for the taxation of mineral oils: Harmonization of the structure and the rates of excise duties  Many exemptions and special provisions –1995 Political blockade of a proposal for CO 2 /energy taxation  Several countries felt at comparative disadvantage –1997 Proposal by EU Commission for a taxation framework of energy products and electricity  Provides base for the finally adopted, but much less stringent Directive of October 2004

6. EU Directive on Energy Tax Harmonization –sets minimum tax rates for energy products –widens the scope of energy products covered to mineral oils, coal, natural gas, electricity –includes general and country specific transitional exemptions and reduced minimum rates

7. Comparison of minimum and actual taxation (EU-15)

8. Comparison of minimum and actual taxation (EU-accession countries)

9. Minimum and actual taxes on gas oil Data for 2002, Germany 2003

10. Modeling Framework and Data –CGE model: GTAP-E (Burniaux, Truong 2002) static version nested CES production functions perfect competition, constant returns to scale Armington assumption ‚regional household‘ –GTAP 5.4 data set (incl. CEE countries) aggregation: 12 regions, 13 sectors

11. GTAP-E Production and Capital- Energy Composite Structure

12. Regional aggregation

13. Sectoral aggregation

14. Policy Scenarios –Minimum Tax Harmonization (MTH): Member States fulfill minimum tax as set by Directive, but will not reduce existing taxes –Full Tax Harmonization (FTH): As MTH, but Member States with higher tax rates lower their taxes to the minimum level –Min. Tax Harmonization 1997 levels (MTH97): As MTH, but Member States fulfill minimum taxation according to the Commission’s tax proposal in 1997

15. Price changes (%) - Scenario FTH

16. Price changes (%) - Scenario FTH97

17. Results 1. Effects on Energy Demand and CO 2 Emissions 2. Macroeconomic Effects 3. Structural Effects 4. International Trade Effects

18. Results 1. Effects on Energy Demand and CO 2 Emissions 2. Macroeconomic Effects 3. International Trade Effects

19. Change of total demand of energy goods – MTH scenario EU-15: –Small changes in demand (<1%) except for gas demand in FRA, GBR and EUS due to an increase in gas taxes Accession countries: -Effects are most pronounced for p_c and gas -Increase in electricity demand due to higher tax rates on fossil fuels than on electricity (subst. effect)

20. Change of total demand of energy goods – FTH scenario EU-15: –Four largest countries lower tax rates –High increase in energy demand –Only minor effects in Southern Europe Accession countries: -Effects similar to MTH scenario -Higher increase in demand for p_c due to higher world market prices

21. Change of total demand of energy goods – MTH97 scenario –All member states increase energy taxes –Changes in energy demand would be more balanced between EU-15 and accession countries

22. Change of CO 2 emissions by region (%)

23. Macroeconomic Effects: Real GDP MTH/MTH97: –Positive effects are very small –GDP-decrease for accession countries FTH: -GDP-increase between 0.5-1% for countries with tax reduction -GDP-decrease for countries with tax increases is higher than in MTH-scenario

24. Macroeconomic Effects: Terms of Trade Almost no changes in MTH Strong influence of world energy prices FTH: Deterioration of terms of trade for all countries, except for UK which is an oil exporter and ROW which includes oil-exporting countries

25. Revealed Comparative Advantage – MTH/MTH97 scenario In Accession Countries: –Manufacturing: Shifts from energy-intensive to non energy-intensive sectors due to lower imports –Transportation: Deterioration –Service: Improvement Opposite effects in EU-15: –Improvements in energy-intensive sectors –Deterioration in non energy-intensive sectors Non-EU countries: –Shift from energy industry to manufacturing industries

26. Revealed Comparative Advantage – FTH scenario Results from MTH/MTH97 scenarios are more pronounced EU-15: Improvement in labor-intensive non energy intensive sector (TCL) Non-EU countries: Shift from manufacturing industries to energy industry

27. Summary and Conclusions Partial Harmonization MTH reduces energy demand and CO 2 emissions slightly MTH implies GDP losses for new Member Countries, positive effects for old Member Countries MTH97 same as MTH but larger effects  Stricter tax rates (as in MTH97) needed in order to meet EU‘s energy efficiency and environmental goal  Negligible or positive economic effects for old EU members, negative effects for new Member States (but possible welfare gains from EU membership)

28. Summary and Conclusions (2) Full Harmonization leads to increasing energy demand and CO 2 emissions if no tax differentials were implemented old Member Countries increase their GDP at the expense of new member countries  Higher minimum tax rates needed if full harmonization is to pursue double objective of reducing distortions and reducing energy use and related emissions