Shardul AgrawalaHead of Environment and Economy Integration Division Environment Directorate

Bocconi University, MilanMay 18 2015

TRANSFORMATION OF THE ECONOMIC SYSTEM,

GREEN FISCAL REFORM AND GREEN GROWTH:

Some Observations from recent OECD work

2

Outline

The green transformation challenge (focus on climate)

Misalignments in tax structures for a low carbon transformation

Concerns about equity, competitiveness and growth

3

1. The transformation challenge on climate

IPCC Working Group III Fifth Assessment report (2014)

Clear, credible, stringent and economy wide GHG mitigationtargets

Covering all major emission sources, sectors, countries would lower costs andcompetitiveness concerns

Putting a visible and credible price on CO2 and other GHGs

Foster innovation and support for clean technologies

Targeted government support for R&D

Policies to reduce financial risks for investing and deploying low carbontechnologies

Complement carbon pricing with well designed regulations (e.g.fuel, vehicle and building efficiency standards)

Strong climate policy signals clearly needed

But … climate policy comes on top of existing goals and instruments, developed for a fossil-fuel based economy

ECONOMIC

TRADE

COMPETITIONFISCAL

DEVELOPMENTCOOPERATION

SOCIAL

INVESTMENT

CLIMATE

2. Misalignments between fiscal structures and green transformation

Most tax systems were set up when environmental damage and scarcity were low on the policy agenda

The primary motivation of many green taxes was often revenue raising than environmental protection

Increasing number of countries are making progress on environmental tax reforms

But a number of misalignments persist between tax structures and incentives needed for green transformation

Source: Taxing Energy Use in the OECD & Key Partner & Associate Countries (OECD, 2015, forthcoming)7

2.2 Energy taxes lack a consistent carbon price signal

Weighted average effective tax rates Transport Heating & process Electricity All fuels

EnergyEUR/GJ 5.0 0.3 0.3 1.1

Carbon emissionsEUR/tonne CO2

70.1 3.1 3.4 14.8

Effective tax rates on energy and carbon in OECD 34 and 7 Partner countries

EXAMPLE – ENERGY MAP FOR THE UK

• Source | OECD | Taxing Energy Use | 2013

Source: Taxing Energy Use in the OECD & Key Partner & Associate Countries (OECD, 2015, forthcoming)

DEU

CHE

POL

INDBRA

ZAF

0

25

50

75

100

100 300 500 700 900

Economy-wide effective tax rate on carbon emissions from energy (EUR per tonne CO2)

Carbon emissions per unit of PPP-adjusted GDP (tonnes CO2 per million USD)

AUS

AUT

BEL

CAN

CHL

CZE

DNK

EST

FINFRA DEU

GRC

HUN

ISLIRL

ITAISR

JPN

KOR

LUX

MEX

NLD

NZL

NOR

POL

PRT

SVK

ESP

SVN

SWE

CHE

TUR

GBR

USA

ARG

BRA CHNIND

IDN RUS

ZAF

0

25

50

75

100

100 300 500 700 900

Economy-wide effective tax rate on carbon emissions from energy (EUR per tonne CO2)

Carbon emissions per unit of PPP-adjusted GDP (tonnes CO2 per million USD)

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2.3 Economy-wide effective tax rates on carbon vary widely … and correlate with with carbon intensity of GDP

2.4 Diesel is consistently taxed much lower than gasoline

0

10

20

30

TUR

NLD

NO

RIT

AG

BR

GR

CD

EU

FIN

SW

EB

EL

FRA

CH

EIR

LD

NK

ISR

PR

TJP

NA

UT

SV

KC

ZEK

OR

SV

NE

SP

=>A

RG

LUX

ES

TIS

LH

UN

PO

LN

ZLC

HL

=>ZA

FA

US

=> IN

D=>

CH

NC

AN

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AM

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=>R

US

=> ID

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BR

A

Gasoline (road use) Diesel (road use)

Tax rate (EUR per GJ)

Source: OECD calculations10

Company car support

Under-pricing mobility

Preferential treatment of home ownership

Corporate income tax – investment incentives?

11

2.5 some other misalignments in taxation

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III. Concerns about equity, competitiveness and growth

Many misalignments at least partly motivated by real orperceived concerns about social equity, competitiveness andeconomic growth

Work by OECD on these aspects has involved a number oftechniques including meta-analysis, micro-simulation andCGE models, and ex post empirical studies.

Some highlights from recent work follow

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III a. Income distribution concerns: OECD experiences

Environmental taxes can have significant effects on low incomehouseholds.

Distributional effects depend upon the tax (Flues et al. 2014).

Transport fuel taxes not regressive

Heating fuel taxes slightly regressive

Electricity taxes more regressive than

heating fuel taxes

Some empirical evidence (1990-2011) that environmentally relatedtaxes in OECD countries associated with slight increase ininequality in income sources (Oueslati et al. 2015)

However this effect is fully offset if revenue recycling was part of the reform

-6-4-202468

101214

1 11 21 31 41 51 61 71 81 91Income centile groups

Real income variation in 2020 (% baseline)Cash transfersLabour supportFood subsidiesCommodity price effect

Source: ENV-Linkages

Total effect

An Emerging Economy case: Modelling distributional effects of fossil fuel subsidy phase out by 2020 in Indonesia

Durand Lasserve et al. 2015

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III b. Competitiveness concerns

Environmentally related taxes are intended to affect productiondecisions and will have a disproportionate impact on large polluters

Possible competitiveness impacts, however, are often overstated

German electricity tax: no robust impact of the reduced marginal tax rateon firm’s turnover, investments, value-added, turnover abroad andemployment (Flues and Lutz, 2015)

UK Climate Change Levy: reductions in energy intensity and electricity use,without discernible impact on employment, gross output or productivity(Martin et al., 2011)

Carbon tax in British Columbia: no competitive disadvantage for trade inthe agricultural sector (Rivers and Schaufele, 2014

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III b. Competitiveness concerns

Lead-in time for affected firms to undertake mitigationmeasures can alleviate some competitiveness concerns

… As can recycling revenues from environmental taxesback to affected firms (while maintaining the marginalabatement incentive)

However rate reductions and exemptions, for example forheavy industry, shift some of the abatement burden toothers, or result in an inferior environmental outcome

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6

8

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12

14

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Leak

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s, % 2050

Source: OECD (2009), The Economics of Climate Change Mitigation; Lanzi et al. 2014

The most effective response to competitiveness and leakage concerns is coordinated action across countries

Environmental policies aim primarily at environmental outcomes.

But, will also affect economic outcomes:

e.g. they change relative prices and incentives to innovate andinvest.

e.g. they can distort competition.

Empirical study across 24 OECD countries to examine:

What is the effect of more stringent environmental policies on productivity growth ?

What is the relationship between environmental policy stringency and theadministrative and other burdens it might impose ?

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IIIc. Concerns about productivity growth

Environmental policy stringency and burdens vary considerably across countries (and over time)

B. Environmental policy stringency proxy (OECD, de jure)

AUS

AUT

BELCAN

CHEDEU

DNK

ESP

GBR

GRCHUN ITA

JPN

NLD

NOR

POL

PRT

SVK

SWE

USA

IRL

KORFRA

1

2

3

4

5

0,5 1 1,5 2 2,5 3 3,5 4 4,5

Total BEEP indicator

OECD EPS(de jure, 2012)

Mor

e st

ringe

nt e

nviro

nmen

talp

olic

ies

Policies more burdensome to entry and competition

Negative anticipation

effect

Positive rebound effect

Increasing Environmental Policy Stringency does not harm productivity growth

Stringent environmental policies can be designed without imposing burdens to entry and competition

Some insights on environmental policies and economic outcomes

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Thank you

shardul.agrawala@oecd.org