Unilaterally removing indirect subsidies for …...Unilaterally Removing Indirect Subsidies for...
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Unilaterally Removing Indirect Subsidies for Maritime Fuel
University of Hamburg
University of Duisburg-Essen
Erasmus University Rotterdam
15th GCET – Copenhagen, 24-26 September 2014
Dirk Heine
Susanne Gäde
Goran Dominioni
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Agenda
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1 Problem
2 Elasticities and the tax base
3 Mechanism for taxation
4 Legal issues
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Tax subsidies for maritime fuel are unjustified
• USD 36bn (US), 89bn (UK) and 103bn (DE)
Fiscal cost estimates
• 3.3% of emissions, total amount to double/triple by 2050 (IMO 2009)
Climate damage
Local pollution
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Reduction potential for carbon emissions: Up to 60% per t-km by 2050 according to IPCC (2014)
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Perceived unanimity requirements block action
Ramsey/tax competition
considerations:
Elastic tax base
Empirics:
Tax base erosion in California
Cautious view prevalent:
“Extensive cooperation in designing and implementing international transportation fuel charges would be needed
– especially for shipping – to avoid revenue erosion and distortions”
IMF and World Bank (2010)
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We suggest a feasable unilateral mechanism
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Problem
• The absence both of a unanimous agreement and of unilateral options leads to a gridlock in international climate negotiations
Motiva- tion
• Finding a unilateral mechanism that safeguards some net benefits of reform for early implementers
Solution
• By introducing a credible unilateral tax scheme for internalising cost from maritime fuel emissions, the threat value in negotiations will be raised, making a unanimous agreement possible
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Maritime fuel elasticities are only low in the absence of arbitrage opportunities
Under an international agreement
Fuel elasticity
-0.05 to -0.1
-0.33 -0.08
Under a regional scheme
Price elasticity of demand is substantially high if tax
evasion is possible
No direct taxation of maritime fuels
Instead indirect taxation of fuel emissions
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IMF & World Bank (2011)
Mazraati (2011)
Keen, Parry & Strand
(2013)
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Advantages of taxing released fuel emissions:
Exploiting the natural link between transport emissions and cargo discharging
Under a regional mechanism, elasticities of port choice are much lower than price elasticities of fuel demand
Thus not fuel, but emissions should be taxed
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Elasticities for transshipment are much higher than for cargo discharging, though
To avoid trade distortions and double taxation, transshipment is excluded from taxation
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There are no alternatives to EU destination ports
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Algeciras
Valencia
Barcelona
Marseille Genoa
Gioia Tauro
Hamburg Bremen
Antwerp
Rotterdam
Le Havre Southhampton
Felixstowe
St. Petersburg
Istanbul
Capacities are too small
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1Necessary data is available from existing systems.
Taxable emissions per container transported =
Container weight * Distance transported * Fuel consumption per t-km (at the average speed travelled, at the weather conditions and capacity usage given)
The calculation of the tax base is simple
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Calculation rule1
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There are several options for the tax rate
• Global damage: Global Shadow Price of Carbon (or SCC)
• EU damage: fraction of above suffered in the EU
Internalisation of climate damage
• Global data on sea-level PM concentrations, dose-response relations available (GBD 2014), population exposure (e.g. LandScan)
• No data yet on intake fractions
Internalisation of local pollution
damage
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Administration costs are low
Tax mechanism is based on existing data sources
Similar processes are applied in customs administration
Customs is the most unified and well-staffed area of EU tax policy
Number of tax subjects is relatively small
Data collection is automatable
Cross-checks of ship manifest data with GPS data and fuel cost reported in balance sheets are possible
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Compliance costs are also low
Generally, the necessary data is already provided to the authorities and thus little extra efforts are to
be expected
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Compliance with WTO law: Art III GATT
– Imported products are not taxed in “exess” of domestic
products
• The tax is applied to domestic and traded products
• The same rate is applied per amount of emissions
• The total tax bill is different due to varying distance, but the difference is proportional to the varying externalitites
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Art III GATT: Equal conditions of competition between imported and
non-imported goods within a market
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Art XX (b) GATT: Establishes an exception for a measure that is “necessary to
protect human, animal or plant life or health”
Compliance with WTO law: Art XX (b) GATT
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– The tax constitutes a material contribution to the protection of the environment:
• The EU already pursues several programmes to reduce GHG emissions
• The mechanism potentially incentivises other jurisdictions to enact similar regulations
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Compliance with WTO law: Art XX (g) GATT
– The tax is applied directly to the emissions, not to some farfetched proxy variable
– This provision might require earmarking revenues or preventing fiscal cushioning through compensating expenditure policies
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Art XX (g) GATT: Requires that a measure “relating to the conservation of
exhaustible natural resources” is “made effective in conjunction with restrictions on domestic production or consumption”,
respecting “certain minimum standards for transparency and procedural fairness"
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Compliance with WTO law: Chapeau Art XX GATT
– Article is interpreted as a Good Faith principle
• The EU promotes international cooperation to prevent climate change
• The tax is applied both to domestic and foreign ships
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Chapeau Art XX GATT: The tax must not constitute unjustifiable or arbitrary
discrimination. The tax shall not constitute a disguised restriction on international trade
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Mechanism is likely to comply with WTO law
Despite the unilateral tax scheme
could be challenged under Art III GATT,
It is likely to be justified under Art XX GATT
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Mechanism is likely to comply with UNCLOS
• Port state jurisdiction has territorial sovereignty over vessels located in ports
• Extraterritoriality – territorial extension
• CJEU Case C-366/10 The Air Transport Association of America and Others [2011] ECR I-13755
• Voluntary presence of ships in an EU port creates a territorial connection
Art 89: Extraterritoriality
• Tax not applied for passage, but for environmental reasons in port waters
Art 17, 26: Right of innocent passage
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Conclusion
A unilateral tax does encounter
problems that an ideal unanimous global agreement
avoids
But in absence of such an agreement (or to create the necessary threat value to bring it about) a unilateral mechanism is possible:
• Reasonably administration and compliance costs
• Can be based on existing data systems
• No insurmountable legal challenges
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