Presentation on theme: "Environmental Taxation"— Presentation transcript:
1 Environmental Taxation Don Fullerton (Texas)Andrew Leicester (IFS)Stephen Smith (UCL)
2 Introduction Key part of policy agenda across OECD New UK taxes on landfill, business energy, aggregates extractionHow to minimise cost of meeting major environmental goals?Can environmental tax revenues substitute for other sources of revenue?
3 Approximate UK taxes, 2005 Landfill ~ £18/tonne (£733m) Climate Levy ~ 0.43p/kWh (£744m)Aggregates Levy ~ £1.60/tonne (£326m)Motor fuel ~ 47p/litre (£24b, 5% of tot.rev.)Motor vehicles ~ up to £200/yrLondon Congestion ~ £8/day (£122m)
4 Outline and key issuesWhy use market mechanisms in environmental policy?Environmental tax bases in practiceRevenues and the ‘double dividend’Applications:Road transportEnergyHousehold waste
5 Principles: Choice of instrument Market instrument or regulation?Advantages of taxes:Static efficiency gainsReallocation of abatement to those with low costPerformance incentives: using technology properlyDynamic incentives: innovationLow risk of regulatory captureCost-limitingTax rate as upper limit on per-unit emission cost
6 Principles: Choice of Instrument Limitations of taxes:Uncertain environmental impactPrefer regulation if ‘threshold’ effect?Incompatible with firm decision-making?Still little direct experience for evaluationHard to target emissions directlyGeographical variations in damageCostly evasion activitiesPolitical economy & distributional effectsLegitimisation of polluting behaviour?
7 Principles: Choice of Instrument Balance of those costs and benefits in selecting instrumentTaxes valuable when need to change behaviour across many different production / consumption activitiesBut danger of overly complex tax structureSmall taxes may not have much impact
8 Environmental tax design 1. Tax on measured emissionsDirect incentives for abatementTax needs to absorb measurement costScale of costs, need to consider:Type of emission (flow, stock) and available measurement technologyNumber of sources (point-source easier)Integrate measurement with market activities?Trade-off between incentive targeting (“linkage”) and administration costDo we know the right tax rate for each emission?
9 Environmental tax design 2. Tax on a proxy (emission-related input)Piggy-back incentives onto existing taxCan apply to market transactionsSaves administration costs and complexityHow closely is it linked to emissions?Does higher tax lead to some other tax-avoidance?ExamplesAdvanced disposal fee (paid at the store)Tax on carbon content of fuelTax on petrol
10 Environmental tax design 3. Multi-Part InstrumentCombine indirect taxes on transactions, to better approximate the ideal emissions taxImproves the “linkage” to emissionsGeneralizes the Deposit-Refund SystemA DRS combines a tax on output and a subsidy to recycling, leaving tax only on units not recycledTax on carbon content of fuels, plus a subsidy for research into carbon scrubbing technologyCombine a tax on petrol, subsidy for pollution control equipment, tax on big cars, subsidy for new cars …
11 Environmental Tax Revenue Revenues depend on elasticities of demand and supply“Effective” incentive tax may therefore see revenues erode over timeRevenue effects are hard to anticipate – impact of economic climate?e.g. energy tax: low price elasticity, high income elasticity – need to increase tax rate just to “stand still” if economy grows
12 Double DividendOft-argued as reason to favour “tax swap” (new green tax revenue to cut other tax)Efficient tax system has equal marginal excess burden from each revenue sourceSuppose EB is defined to exclude gain from environmental protectionRaise environmental tax rate to the point where its marginal EB equals that of other sources – or higher?
13 Double Dividend ‘Weak double dividend’ (Goulder, 1995) Welfare gain from using green tax revenues to reduce existing distortionary taxes exceeds welfare gain from lump-sum redistribution of revenuePollution restriction can create scarcity rents, and welfare is higher if gov’t can capture those rents via taxes or auctioned permits, to reduce other taxes‘Strong double dividend’Welfare gain from green tax plus reduction in distortionary tax is positive, even excluding environmental benefitsNo regrets policy
14 Double Dividend Environmental taxes themselves distortionary e.g. energy tax raises consumer prices, reduces the real net wage, and affects labour supplyNeed to evaluate each reform, case-by-case, in context of existing taxes and enviro policyMust consider proposed use of revenueIf a small CAC mandate does not create scarcity rents, it can cut pollution without exacerbating labour supply distortions, equivalent to tax swapThus, focus on revenues misplaced; key is not to create scarcity rents without capturing them
15 Applications: Road Transport Vehicle standards guarantee emissions reduction but are inflexible, same for allIdeal tax on vehicle emissions would allow choice of cheapest ways to abate (list)Technologically complex at the momentTo what extent can existing taxes be used to mimic the ideal?
16 Road TransportIn a GE model where heterogeneous agents make different fuel and car choices:Tax on car type that depends on distance achieves the same outcome as the ideal emissions taxOr a tax on petrol that depends on the car, but needs chip to identify car type (Fullerton and West, 2002)Uniform rate on petrol and rates on car types cannotIn a computational model, using data on different cars with utility-maximising owners:Second best set of taxes on petrol, engine size, and vehicle age; obtains 71% of welfare gain of ideal taxPetrol tax alone can generate 62% of maximum welfare gain (Fullerton and West, 2000)
17 Road TransportPetrol taxes regressive: income elasticity typically low (West, 2004: 0.23)Price elasticity also typically small (-0.67)Regressivity offset by lower rates of car ownership amongst poorest householdsUse rest of tax/benefit system to compensate low-income motorists?Exemptions for poor reduce effectiveness
18 Applications: Energy Use Ideal tax is on all CO2 emissions at the household/firm levelDirect measurement of individual emissions is not practical“Carbon tax” on carbon content of fuel – indirect input tax, but good proxyCould tax at time of extraction or time of purchase for final use“primary” tax is on fewer numbers, lower admin costsfinal use tax omits emissions during extraction
19 Setting a carbon tax rate Rate should equate marginal external damage cost of each fuelBut damage from CO2 depends on stock of emissions – multi-period problemTaxing non-renewable energy sources at constant ad valorem rate has no effect on time profile of resource useBut increasing rate over time might lead to higher energy use and emissions todayReducing current emissions requires falling rateOptimal time profile of rate is complex
20 Other issues in carbon tax design How do CO2 taxes interact with the rest of the tax system?How should they be co-ordinated internationally?CO2 damage is a global issueIs it better to set international targets only, or also to agree on policy (easier to monitor policy implementation?)Can we learn from variation in oil prices about behavioural responses?Variation in carbon tax rates across energy sources is not the same as impact of oil pricesHow to isolate from macroeconomic situation the accompanying high oil prices?
21 Other carbon tax considerations Adjustment costsHigher if market failure prevents optimal energy use adjustment (e.g. credit market fails w.r.t. energy efficiency measures in homes)CompetitivenessReturn revenues to business?Exempt energy-intensive sectors? (Reduces impact!)Tariffs on imports from countries with no carbon tax?DistributionalDomestic energy is necessity, carbon tax regressiveUse revenue to transfer to poorer agents?Are market failures greater for poorer households?
22 Waste managementUK 2004/5: around 65% of municipal waste landfilled, 10% incinerated, and 25% recycledEach generates externalities (e.g. methane gas)Domestic waste disposal typically funded by local taxes, not per unit excess waste generatedMarginal cost pricing may lead to costly avoidance behaviour (e.g. flytipping)Consider possible welfare gains vs. administrative cost of marginal cost pricingIdeal would be different tax on each type of waste – but higher cost to collect and enforceAlmost all studies suggest behavioural response to higher price (reduction in waste generated) very small.
23 External costs of landfill CSERGE (1993) estimates externality at around £7/tonne for active waste and £2/tonne for inert waste, including disamenity cost of landfill sitesEstimates used to set initial Landfill Tax rate in 1996EU Landfill Directive: UK to reduce biodegradable municipal waste to 1/3 of 1995 level by 2020Landfill Tax rates increased year-on-year since 1999 as a way to help hit that targetMedium term objective: £35/tonne for active waste – far above estimated external costMiranda & Hale (1999) estimate external cost at $7.5 - $73.4 / tonne – lower cost if methane flaring, and large uncertainties over quantity and effect of gases produced