１Environmental taxation and EU
environmental policies: energy,water and resources
Ryukoku University, Kyoto City, Japan
13 May 2017
Stefan Speck

Content• Environmental taxation and environmental fiscal/taxreform• European situation– Environmental taxes implemented– Trend in environmental tax revenues• European environmental policies and policy targets• Energy/CO2 taxes – their future role
• A broader approach towards environmental taxation• Reflections
The views expressed are those of the author and may not in any circumstances be regarded as stating an official positionof the European Environment Agency or its Management Board.

Environmental taxation - motivation• The primary objectives and benefits of environmental taxes are toreduce pollution and resource use; changing behaviour andinternalising externalities / external costs, i.e. to correct aninefficient market outcome  rationale for governmentalintervention (polluter pays principle)• Several secondary benefits to be considered too: lower healthrelated costs, trigger eco-innovations that generate wealth andjobs• A further benefit of environmental taxes is their fiscal function, i.e.
generating budgetary sources• More cost effective than regulation; more effective than voluntaryagreements and information

Environmental taxation - motivation
Main concerns hampering the widespread application ofenergy/CO2 taxes:• Competitiveness issues (regularly addressed by the provisionof tax exemptions / reductions for energy-intensive industries)• Distributional implications (impact on low-income households)• Unstable/shrinking tax base and revenue stability over time(less discussed in the literature)Environmental tax/fiscal reform
Environmental /ecological/ green tax /fiscal reform:•Environmental tax reform (ETR) is a reform of the national tax system
where there is a shift of the burden of taxation from conventional taxes,
for example on labour, to environmentally damaging activities, such as
resource use or pollution. The burden of taxes should fall more on 'bads'
than 'goods' so that appropriate signals are given to consumers andproducers and the tax burdens across the economy are better distributed
from a sustainable development perspective (EEA, 2005)

Design and the selection of instruments varies and depends on prevailing
economic, social, institutional and political conditions of the countries.
ETR/EFR – a tool for governments, implemented along side other policy measures,
aiming of achieving multiple objectives (environment/economy) simultaneously.

European experience with ETR/EFR
Competitiveness Effects of Environmental Tax Reform (COMETR)
Analysis of Environmental Tax Reform (ETRs) implemented in Europe (ex-postanalysis): Denmark, Finland, Germany, Netherlands, Sweden, UK and Slovenia:•Large differences in the design of ETRs implemented in EU member states
regarding (1) sectors affected; (2) energy/CO2 taxes; (3) recycling mechanism.
•Outcomes (modelling results) – environmental and economic – have beenbroadly positive: energy demand and emissions are reduced; employment isincreased; effects on GDP are very small.
For more information:
Andersen, M.S. and Ekins, P. (eds.), 2009, Carbon Taxation: Lessons from Europe, Oxford University Press,Oxford.
Ekins, P. and Speck, S. (eds.), 2011, Environmental Tax Reform: A Policy for Green Growth, Oxford University
Press, Oxford.
Mori, A., Ekins, P., Lee, S., Speck, S., and Ueta, K. (eds.), 2013, The Green Fiscal Mechanism and Reform for
Low Carbon Development, Routledge, London/New York.

Environmental tax reform and EC policies

On the revenue side, it is important to ensure an efficient andgrowth-friendly tax system. Employment and growth can be
stimulated by shifting the tax burden away from labour
towards other types of taxes which are less detrimental togrowth, such as recurrent property, environment andconsumption taxes, taking into account the potential
distributional impact of such a shift.
Source: European Commission (EC), 2015, Annual Growth Survey. COM(2014)902final, Brussels

 promotion of tax-shifting programme (also by OECD, IMF, …)

Environmental taxes – classification
Classification of environmental taxes and revenue share in EU-28 (2014; Eurostat)•Energy / CO2 taxes (includes revenues from auctioning of emission tradingschemes)– EU-28: average 77% of total environmental tax revenues; Belgium 60%;
Lithuania 94%•Transport taxes– EU-28: average 20%; Estonia 2% and Lithuania 4%; Malta 41% and Austria
36%•Pollution and resource taxes– EU-28: average 4%; Czech Republic 1% and Germany 0%; Netherlands
14%

Environmental tax revenues – OECD

Source: OECD https://www.oecd.org/tax/tax-policy/environmental-tax-profile-japan.pdf

Environmental taxation in Europe (source: EEA, 2016)

Environmental taxation in Europe (cont’d)Environmental taxation in Europe (cont’d)Trends in environmental tax revenue in the EU
Environmental tax revenue - EU 28
100%

Development of environmental tax revenues (in %of GDP): 1995-2015

80%
60%
40%
6.00

20%
0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
energy/CO2transport

5.00

resource/pollution

Labour and environmental tax revenue in 2014
(as % of total tax revenue)

4.00

3.0070.0
60.0
50.0

2.00

40.0
30.0

1.00

20.0
10.0

0.00

0.0

Denmarklabourenvironmental

Germany

GreeceFrance

Italy

United Kingdom

Source: Eurostat and OECD(Japan)

Trends in tax revenue, GDP and employment
EU-28

Germany

125

140

120

130

115

GDP

Tax on labour

Employment

Total revenue

Environmental tax

120

150

110

140

Employment

Total revenue

2014

2013

2012

2011

2010

2009

2008

2007

2006

Tax on labour

Environmental tax

Italy

130160

2005

GDP

140

Netherlands

2004

2003

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2002

90

2001

80

2000

95

1999

90

1998

100

1997

100

1995

110

105

1996

1201102014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

1995

90

2000

80

100

1999

110

1998

90

1997

120

1996

100

130

80

GDP

Tax on labour

Environmental tax

Employment

Total revenue

GDPTax on labour

Employment

Total revenue

Environmental tax

Source: Eurostat

EU policies – setting of environmental policy
targets
EU environmental policies address a range of environmental and resource use challenge.
Overall, there are currently 82 binding targets and 84 non-binding objectives for 2013-2050(source: EEA, 2016)
Targets are binding when established by EU legislation (regulations, directives, and decisions), European
Council Presidency conclusions, and international legislation to that Member States and the EU arecommitted to implement.

MBIs in EU environmental legislation•Achieving policy targets cost-effectively can require the use of market-based
instruments (MBIs) – also in tandem with regulations. We identified 18 binding
and 24 non-binding MBIs based on current EU environmental legislation.
Binding MBIs: required by legislative provisions
to adopt and implement - all others are nonbinding.
When MBIs are set out in very generic terms (forexample, ‘Member States shall apply the“polluter pays principle“ to waste management’),
when they are only one of a number of possible
measures that Member States are required toimplement, or when Member States ‘shall
facilitate’ or ‘encourage’ their adoption, theprovisions are non-binding.

GHG emissions projections / objectives up tp 2050
EC reference 2013 (2016)
scenario: with existing policies 32(35)% reduction in 2030 and 44(48)% reduction in 2050 EC, 2013 and2016

EU goal: reduction in GHG
reduction by at least 80 %compared to the 1990 level in2050 EC, 2011 (2030 – 40%reduction)

Sectoral GHG emission changes – EU level

Source: EEA, 2014

The transport sector illustrates the challenge
Transport GHG emissions
fell between 2008 and2013, but rose in 2014.
They will have to fall by
67% by 2050 to meet theEU’s 60% target.
But current projections
based on existing policy
measures point to anincrease in coming years

Source: EEA, 2016

Policy target – transport fuels EUEC Transport White Paper (2011) – aiming for a 70% reduction of transport oil consumption
from 2008 levels by 2050 (EEA, 2014):
Implication: reduction in tax base of 2.8% p.a. (tax base erosion?)Keeping transport fuel tax revenues constant would require annual average increase by
more than 4% of tax(in real terms) assuming GDP increase of about 78%
Increase in numbers of electric vehicles has also fiscal implications (i.e. electricity tax
versus petrol/diesel taxation; average 8 and 5 times higher than electric-driven vehicles –based on German energy tax rates)
Programmes of a ban of sales of internal combustion engine (ICE) / phasing out fuel-poweredtransportation (for example, Norway 2025) what will be the fiscal implications?

Trends in EU15 petrol tax rates 19952015
Japan– tax rate on unleaded petrol: 48 600 JPY per 1,000 litres (approx. € 395) (source: OECD) --- €1 –123 JPY

Trends in EU15 diesel tax rates 19952015
Japan – tax rate diesel: 32 100 JPY per 1,000 litres (source: OECD) (approx. € 261)

Reflections: Environmental taxation
Co-benefits of carbon pricing / environmental taxation:•Unlike previous research on fiscal consolidation, our findings [IMF] show thatraising tax revenue is key to successful debt reduction in countries with large fiscal
adjustment needs …. carbon taxation may help the budget while at the same time
addressing efficiency concerns (Baldacci et al., 2010)•Environmental taxes: have mostly positive effect on growth as compared to othertaxes (direct and indirect): energy taxes would cause less economic harm per unitof revenue than direct (i.e. income) or indirect taxes, while also producing otherbenefits (Vivid Economics, 2012)  less-detrimental to growth!
Environmental taxation is a key policy for fostering sustainable growth,should also promote innovation supported by complementary policies.
Carbon pricing (emission trading or carbon taxation) – a prerequisite for
effective climate change and essential for the transition to a low-carbon,
resource efficient economy!

Carbon/energy taxation in the future
It is regularly stated that tax base erosion of energy/CO2 dimension (relevance oftransport fuels) is not an issue because•no substitution possibilities;•price elasticities are low and long-run demand for fuels is inelastic;•income elasticity less than one.
Situation will change in the long-run as reduction targets were so far not leading
to a major reduction in energy consumption – and reduction targets are established
Denmark - goal for 2050 is that all energy consumption, including the transport
sector, will be based on renewable; Norway – climate neutral 2030; Sweden – 2045
climate neutral; EU low carbon roadmap – 80% GHG reduction; German Climate
Action Plan 2050 – transport GHG emission reduction target corresponds to annual
reduction by about 3% (2014-2030)

Carbon/energy taxation in the future
It is regularly argued that an increase in CO2 prices offset decrease in energy use
IEA/IRENA, 2017, Perspectives for the Energy Transition Investment needs for a low-carbon energy(scenario: to limit the rise in global average temperature to well below 2°C from pre-industrial levels)% annual increase:
7.8% - 9.9% - 9.7% (2020-2050) and19.6% - 24.6 % - 19.6% (2020-2030)

Rockstroem et al. (2017; Science 255): $400 by mid-century (carbon law: halving GHG
emission every decade) Social cost of carbon (SCC) as a proxy for carbon pricing (taxation) policy: this discussion
seems to be obsolete as rate is put at $(2007) 36 per ton of CO2 in 2015 – increasing to $ 69 in
2050 (based on US Interagency Working Group (IAWG) on SCC – but now withdrawn; importance for cost-benefit analysis)
As regards valuing carbon damages, the standard approach in the economics literature would be use thesocial cost of carbon … In light of the 2015 Paris Agreement, countries may instead prefer to use CO2values in line with their mitigation pledges (Coady et al., 2017).

Ageing population
The age structure will have major implications as Europe is turning increasingly grey(EC, 2015) and the budgetary implications as public age-related expenditure (pension,health care, long-term care and education) are projected to increase by about 2 pp ofGDP in 2050.
Shrinking labour force with implications  erosion of labour tax base; impact on
growth (GDP, jobs – labour productivity, etc.) and environment
Expenditure patterns will differ because of demographic changes – reduction in VAT
and income tax revenues (?)
Current state of low growth rates and low investment (‘secular stagnation’); low

growth rates leads to low increase in tax revenues / employment / investment(productivity change)

Shrinking populations pose a formidable fiscal challenge. …. In particular, a declining

Population projection
Projection:•Total population•

Elderly population(65 years and over)•Labour force (agebetween 15 and 64years)

 Large differences
between EU Member

States; similar
projection for Japan andGermany!

Source: EC, 2015 Ageing Report and UN data https://esa.un.org/unpd/wpp/Download/Probabilistic/Population/data(Japan)

Challenges of fiscal policy – demography andenvironment
 Environmental tax revenues – policy targets; reduction in primary energy
consumption / CO2 emissions
 Income / consumption by age cohort  income tax revenues and VAT; agranular representation of the age structure as compared to intertemporalconsumption
 Increase in age-related expenditures
 Future employment and the ‘gig’ economy / digitalisation / robotics / industry
4.0: (different taxation rules and social security contribution – income level‘precariat’; inequality)  new business model as one of the critical factors in
the circular economy discussion as well as in the ‘evolving society’ (a large
variety of studies is available with different results regarding the number of
job losses (?) as a consequence of robots)
 Fiscal policy – effects of demographic change, environmental and labour ‘tax
base erosion’ and fiscal sustainability!

Fiscal/tax stem in the futureys

A tax base should reflect an economy’s capacity to fund public

expenditures, meaning that as the economy grows, the tax
base should grow with it. Otherwise, it will be necessary toraise tax rates and, in doing so, worsen economic distortions
Source: Auerbach A.J., 2010, California’s Future Tax System, The California Journal of Politics & Policy, Vol 2:3, pp120

Ageing population: challenge or opportunity?

New research project
started at the EEA – seeschematic representation (agraphical attempt):
Assessing demographic
change, fiscal/finance,environmental policy andtechnological development
in a systemic way

Reflections
Task: to establish a resilient, long-term fiscal system in the face ofsystemic challenges•the challenge is to combine economic, environmental and social policies – offset
rather complex policies and country specific conditions in the EU•environmental / energy taxation including EU ETS - stable revenues guaranteedin the long-run versus reduction targets of climate and energy policies (tax baseerosion)•ageing population with reduction in labour force (tax base erosion)•income /wealth inequality increase•ETR / tax-shifting programme: a policy tool for the short- and medium term butquestion remains – the role for ETR in the longer-term?

Thank you for your attention
ご清聴ありがとうございました•

stefan.speck@eea.europa.eu•

To know more about the EEA:
eea.europa.eu•

Sign up to receive EEA information and reports:eea-subscriptions.eu/subscribe• Additional slides

Fiscal – demographic changes and the environment
UK – annual mean income (UK£) and tax by age range,
2014-15(source: ONS)
50,00025.0%

40,00020.0%

30,00015.0%

20,00010.0%

10,000

5.0%

00.0%
under 20

20-24

25-29

30-34

35-39

40-44

45-49

mean income before tax

50-54

mean tax

55-59

60-64

65-69

70-74

75 andovertax in % of income‘est/cal’ income tax revenue per age cohort
140,000,000

14.0%

120,000,000

12.0%

100,000,000

10.0%

80,000,000

8.0%

60,000,000

6.0%

40,000,000

4.0%

20,000,000

2.0%

00.0%
under
20

20-24

25-29

30-34

35-39

40-44

45-49

est' income tax

50-54

share

55-59

60-64

65-69

70-74

75 andoverFiscal - demographic changes and theenvironment

Consumption expenditure by age cohort (Eurostat http://ec.europa.eu/eurostat/web/household-budgetsurveys/database)Private consumption expenditure per household Germany - 2015 (monthly data)(in Euro spent per household/age cohort) Source: Statistisches Bundesamt
1200

1000

800

600

400

200018-25

25-35
food, etc.

35-45
clothing

home - rent

45-55
home - energy

55-65

65-70
health70-80transport - energy

80 and older
othersFiscal – demographic changes and theenvironment
Consumption expenditure by age cohort(Eurostat http://ec.europa.eu/eurostat/web/household-budget-

surveys/database)private consumption expenditure (Euro) per household in age cohort forcommodities – 2015 (monthly data)
450

400

350

300

250

200

150

100

50

0

18-25

25-35

35-45
food, etc.

45-55
home - energy

55-65

65-70

transport - energy

70-80

80 and older