19 March 2007 - By Mikael
Skou Andersen - When taxes are introduced
on energy and CO2 emissions, and the income
is used to reduce other taxes, a positive
effect is achieved both for the environment
and for the economy. Economists from Cambridge
Econometrics have, in an EU research project
coordinated by the National Environmental
Research Institute, University of Aarhus,
shown that the ’double dividend’ theory
can no longer be rejected in practice. In
five EU countries, CO2 and energy taxation
over the last 17 years has made a small
but positive contribution to economic growth
of up to 0.5 per cent, at the same time
as CO2 emissions have been reduced.
Taxes on energy and CO2 emissions from
fossil fuels can be an effective tool in
addressing the climate problem, and without
negative effects for a country’s competitiveness
– that is so long as the taxes do not simply
go into the public purse, but are used to
reduce other distortionary taxes and charges.
This is the conclusion of the largest to
date international study of the effects
of CO2 and energy taxation in European economies.
The results of the study are being presented
at a workshop for specialists following
the Sustainable Taxation conference in the
EU Commission’s headquarters in Brussels
, 19-20 March.
EUR 25 billion a year
The theory that a ’double dividend’, meaning
a positive effect both for the environment
and for the economy, can arise from environmental
taxation was put forward by the late professor
in environmental economics, David Pearce,
London, in 11000[1].
17 years ago, Finland was the first country
to introduce taxes on CO2. Later, Sweden
, Denmark , Holland , Germany and UK followed
suit with tax reforms that shifted taxation
from labour to pollution. Over the years,
CO2 and energy taxes have gradually been
raised, so that taxes of more than EUR 25
billion a year have been shifted.
Where economic models are usually used
to produce forecasts and projections, in
this research project the economists have
been able to work with historic data. The
research team consists of partners from
five countries and is coordinated by the
National Environmental Institute (NERI),
University of Aarhus . We have spent two
years collecting and processing detailed
data for energy use, tax payments, energy
prices, fuel choice and CO2 emissions. The
large amount of data has been processed
in the empirical time-series estimated,
disaggregated econometric Energy-Environment-Economy
model for Europe (E3ME), developed by Cambridge
Econometrics. It is one of the most detailed
and realistic in the world when it comes
to the analysis of the energy sector and
trade between EU Member States. Using advanced
econometric techniques, the effects of CO2
and energy taxation have been separated
out from the underlying trends.
Replacing taxation on labour with that
on carbon-energy has resulted in economic
growth
The analysis shows that, even though the
taxes implemented have been relatively modest,
they have, in the countries examined, contributed
to a reduction in the emissions of greenhouse
gases of between 1.5 and 6 per cent, in
2004. In 2012, at which point Kyoto targets
should be met, the effect will comprise
a contribution to the reduction of up to
7 per cent below the outcome without the
tax reform. From an economic perspective,
the tax reform has on the whole produced
a modest but significant, positive effect
on economic growth. There are sectors which
lose under the reform, but there are also
others which gain, and overall there has
been an economic advantage for five of the
six countries studied. In UK the reform
has been neutral, but here the scale of
the tax rates levied has been modest and
it is also the most recent environmental
tax reform.
The effect of green tax reform (ETR) on
economic growth. The effect is measured
as the difference between the baseline and
the reference case. Slovenia has not introduced
green tax reform, but has adjusted energy
taxes in the industrial sector according
to CO2-content. Source: Cambridge Econometrics.
The positive contribution to economic growth
arises because carbon-energy taxation leads
to more efficient use of energy while at
the same time wage costs are lowered. It
also leads to improved competitiveness for
energy-efficient businesses and for the
development of new products which also can
be exported. Taxation of petrol shifts demand
to other products and products of a more
domestic nature.
The analyses point, moreover, to a difference
in outcomes according to whether it is the
energy price which is increased or the energy
tax. First and foremost this is due to the
fact that the revenue from a tax remains
in the public purse and can be used to lower
other taxes. Furthermore domestic taxes
do not affect the prices of imported raw
materials and intermediate goods. This is
an important result for the discussion amongst
policy makers on how use of taxes as an
instrument in climate policy can be combined
without adverse effects on competitiveness.
Taxes both in the transport sector and
industry contribute to the positive result.
However, in industry the tax burden continues
to be modest. (Energy costs in the UK (upper)
and Denmark (lower graph) as a share of
the value of production in six energy-intensive
sectors showing the share relating to the
CO2 tax – before revenue recycling).
Special arrangements are not emphasised
Simply obtaining an overview of the actual
tax rates and the many exemptions for energy-intensive
industries has presented a difficult task.
Countries do not make a point of emphasising
the special arrangements which are to be
found. Also energy prices normally differ
for large users in relation to those for
small companies. With a database which contains
sector-specific energy prices and taxes,
we have created an improved basis for future
analyses. The Energy Tax Directive will
be reviewed in 2007. Not least in light
of expected climate changes and the EU’s
ambition, as expressed at the March 2007
Summit , to reduce the emissions of greenhouse
gases by 20-30 per cent by 2020, greater
attention is expected to be focused on energy
taxation.
The research is part of an EU research
project under the ‘Scientific Support to
Policies’ initiative of the EU’s 6th Framework.
Terry Barker and Sudhir Junankar, Cambridge
Econometrics
Programme for the EU Commission’s conference
‘Sustainable Taxation’
Report and project website: www.dmu.dk/COMETR
[1] PEARCE, D.W. 1991. The role of carbon
taxes in adjusting to global warming. Economic
Journal, 101,938-948
