Economic Instruments in Environmental Policies in Europe

Economic Instruments in Environmental Policies in Europe

Hans Vos

European Environment Agency

CAFE/NEBEI Conference

Policy instruments to reduce air pollution

Brussels, 11-12 November 2004

A new report..

• On the use of economic instruments in EU-25, plus other European countries

• Emissions trading, taxes, charges and deposit-refund systems, ETR and EFR, subsidies, subsidy reform and green purchasing, liability

• Focus on main and recent developments; interesting cases, report is meant to give an overview

Earlier EEA reports

• 1996: Report “Environmental Taxes - Implementation and Environmental Effectiveness”

• 1997: Report “Environmental Agreements – Environmental Effectiveness”

• 2000: Report “Environmental taxes - Recent developments in tools for integration“

• Environmental Signals 2002 and 2002, chapters on taxes, tax bases and tax revenues

Why a new report?

– EI at EU level for the first time (EU-ETS)– Energy products tax directive adopted– SD and the Lisbon process– ETAP and role of EI to encourage innovation– Increasing attention for environmentally

harmful subsidies– More realistic prices for energy and water in

new EU member states– Communication on the use of MBI in the

internal market– Kok report: “..progressively including

externalities in prices..”

The process

• Contract with consultants• 1st expert meeting (Dec. 2003)• 1st draft (August 2004)• Reviews by experts + EEA network

(ongoing)• 2nd expert meeting (end 2004)• Final report early 2005

So…

The results in my presentation are not the EEA’s findings (yet)

Database of economic instruments and VA

• (1998) OECD/CEC: Taxes and charges EU + other OECD countries

• (2002) EEA: plus 14 non-OECD countries (REC data under the Sofia Initiative)

• (2003) OECD/EEA*: EI and VA for 42 countries

• (2004+) Improved administration, information and presentation * With support from DG ENV

Emissions trading-what and where?-

• Individual Transferable Quotas in fishery (ICE, NL, DK, P, IT)

• EU-ETS: first economic instrument at EU level

• National CO2 systems in UK and Denmark• NOx trading in Netherlands (2005)• SO2 trading in Slovakia (2002)• More plans for NEC-related systems? • Packaging Recovery Note system (UK)

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

AllocationBalance

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

Balance

Scope

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

BalanceScope

Costs

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

Balance

Scope

Costs

Liquidity

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

Balance

ScopeCosts

Liquidity

Phasing

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

Balance

Scope

Costs

Liquidity

Phasing

Technology

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

Balance

Scope

CostsLiquidity

Phasing

Technology

Equity

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

Balance

Scope

Costs

Liquidity

Phasing

Technology

Equity

Competetiveness

Rating of key aspects of EU-ETS-by the consultants-

012345

Simplicity

Allocation

Balance

Scope

Costs

LiquidityPhasing

Technology

Equity

Competetiveness

Efficieny

Emissions trading- a few key points -

• At the EU level: new policies not to inhibit but accommodate the potential for ET

• At national level: new ET schemes to be “transnational” to profit from wide scope

• “Grandfathering” to be restricted as far as feasible

• Choice of sector caps in NAPs: risk of unfair treatment across boundaries

• Data availability, monitoring, and verification key to smooth running

Tax bases in EEA-17 (1996)Austria Belgium Denmark Finland France Germany Greece Iceland Ireland Italy Lux'burg Holland Norw ay Portugal Spain Sw eden UK

Air/EnergyCO2*SO2NOxFuelsS in fuels

TransportCar sales and useDiff. annual car tax

WaterWater eff luents

WasteWaste-endDangerous w aste

NoiseAviation noise

ProductsTyresBeverage cont.PackagingBagsPesticidesCFCsBatteriesLight bulbsPVC/phtalatesLubrication oilFertilisersPaper, boardSolvents

ResourcesRaw materials

in 1996

Sources, including:EEA (2000) Environmental taxes - Redent developments in tools for integration, CopenhagenOECD/EU database for environmental taxes (http://www1.oecd.org/env/policies/taxes/index.htm)

Tax bases in EEA-17 (2000)Austria Belgium Denmark Finland France Germany Greece Iceland Ireland Italy Lux'burg Holland Norw ay Portugal Spain Sw eden UK

Air/EnergyCO2*SO2NOxFuelsS in fuels

TransportCar sales and useDiff. annual car tax

WaterWater eff luents

WasteWaste-endDangerous w aste

NoiseAviation noise

ProductsTyresBeverage cont.PackagingBagsPesticidesCFCsBatteriesLight bulbsPVC/phtalatesLubrication oilFertilisersPaper, boardSolvents

ResourcesRaw materials

in 1996 new in 2000

Sources, including:EEA (2000) Environmental taxes - Redent developments in tools for integration, CopenhagenOECD/EU database for environmental taxes (http://www1.oecd.org/env/policies/taxes/index.htm)

New tax bases in 2000Austria Belgium Denmark Finland France Germany Greece Iceland Ireland Italy Lux'burg Holland Norw ay Portugal Spain Sw eden UK

Air/EnergyCO2*SO2NOxFuelsS in fuels

TransportCar sales and useDiff. annual car tax

WaterWater eff luents

WasteWaste-endDangerous w aste

NoiseAviation noise

ProductsTyresBeverage cont.PackagingBagsPesticidesCFCsBatteriesLight bulbsPVC/phtalatesLubrication oilFertilisersPaper, boardSolvents

ResourcesRaw materials

new in 2000

Sources, including:EEA (2000) Environmental taxes - Redent developments in tools for integration, CopenhagenOECD/EU database for environmental taxes (http://www1.oecd.org/env/policies/taxes/index.htm)

Tax bases in EEA-17 (2004)Austria Belgium Denmark Finland France Germany Greece Iceland Ireland Italy Lux'burg Holland Norw ay Portugal Spain Sw eden UK

Air/EnergyCO2*SO2NOxFuelsS in fuels

TransportCar sales and useDiff. annual car tax

WaterWater eff luents

WasteWaste-endDangerous w aste

NoiseAviation noise

ProductsTyresBeverage cont.PackagingBagsPesticidesCFCsBatteriesLight bulbsPVC/phtalatesLubrication oilFertilisersPaper, boardSolvents

ResourcesRaw materials

in 1996 new in 2000 new in 2004

Sources, including:EEA (2000) Environmental taxes - Redent developments in tools for integration, CopenhagenOECD/EU database for environmental taxes (http://www1.oecd.org/env/policies/taxes/index.htm)

New tax bases in 2004Austria Belgium Denmark Finland France Germany Greece Iceland Ireland Italy Lux'burg Holland Norw ay Portugal Spain Sw eden UK

Air/EnergyCO2*SO2NOxFuelsS in fuels

TransportCar sales and useDiff. annual car tax

WaterWater eff luents

WasteWaste-endDangerous w aste

NoiseAviation noise

ProductsTyresBeverage cont.PackagingBagsPesticidesCFCsBatteriesLight bulbsPVC/phtalatesLubrication oilFertilisersPaper, boardSolvents

ResourcesRaw materials

new in 2004

Sources, including:EEA (2000) Environmental taxes - Redent developments in tools for integration, CopenhagenOECD/EU database for environmental taxes (http://www1.oecd.org/env/policies/taxes/index.htm)

Tax bases in other European countries (2004)

CY CZ EST H LV LT M PL SLO SK BG RO TR HR MK CS BiH AL

Air/EnergyCO2*SO2NOxOther air pollutantsFuelsS in fuels

TransportCar salesAnnual circuation tax

WaterWater eff luents

WasteWaste taxes

NoiseAviation noise

ProductsTyresBeverage cont.PackagingBagsPesticidesCFCsBatteriesLight bulbsPVC/phtalatesLubrication oilFertilisersPaper, boardSolvents

ResourcesRaw materials

Source: OECD/EEA database for environmental taxes (http://www1.oecd.org/env/policies/taxes/index.htm)

New EU Member States Other countries

Comparing groups of countries on tax basesAIR

CO2

0%

20%

40%

60%

80%

100%

EEA-17 EU-10 Other

SO2/NOx

0%

20%

40%

60%

80%

100%

EEA-17 EU-10 Other

S in fuel

0%10%20%30%40%50%60%70%80%90%

100%

EEA-17 EU-10 Other

Comparing groups of countries on tax basesWATER

Water effluents

0%20%40%60%80%

100%

EEA-17 EU-10 Other

Comparing groups of countries on tax basesWASTE

Waste-end

0%20%40%60%80%

100%

EEA-17 EU-10 Other

Packaging

0%20%40%60%80%

100%

EEA-17 EU-10 Other

Other products

0%

50%

100%

EEA-17 EU-10 Other

Comparing groups of countries on tax basesOTHER

Raw materials

0%

50%

100%

EEA-17 EU-10 Other

Aviation noise

0%20%40%60%80%

100%

EEA-17 EU-10 Other

Environmental taxes and charges

- a few key points -• Tax bases and applications are spreading

steadily over European countries• Very few attempts to base tax rates on

externalities• Tax bases designed more closely to the

environmental problem• Little evidence of damage to competitiveness• Design important: recycling of revenues,

exemptions, cuts in exchange for good performance

• Road pricing: promising at national level

Environmental tax reform?

-4-3-2-10123456

EU

15

Aus

tria

Bel

gium

Den

mar

k

Fra

nce

Fin

land

Ger

man

y

Gre

ece

Irel

and

Italy

Luxe

mbo

urg

Net

herla

nds

Por

tuga

l

Spa

in

Sw

eden U

K

Labour tax/GDP Environmental tax/GDP

Source of data: Eurostat

Evolution of the share of labour taxes to GDP and environmental taxes to GDP in the period 1995-2002 (% change)

Subsidies, subsidy reform- some key points -

• Lack of information and definitions: no reliable overview

• Subsidies important in accelerating the commercialisation of new technologies

• Increasing attention for technological innovation (ETAP) : subsidise new not existing technology

• Growing desire to reduce environmentally harmful subsidies

• Public procurement to include environmental criteria

• Subsidies should be effective, if they can’t be efficient

Economic instruments- some key points -

Effectiveness • Instrument champion• Picking the winners• Simple, understandable and transparent• Realistic structure and rates• Give advanced notice…• …and stick to what was announced• Correct unacceptable trade-offs by flanking policy• Possibility to respond• Indexation, or even escalation

Economic instruments- some more key points -

Competitiveness• No evidence of major impact on sector level• Always victims on firms level possibleInnovation• Very difficult to find evidence• Financial support crucial• Traditional technology too cheapEquity• Flanking policies

Policy mixes

• From optimal instrument to optimal mix

• Many combinations found• “Two birds with one stone”?• Balance of effectiveness and

efficiency/costs -> conditions

Ideal mix?

"….if we had not installed catalytic converters back then [the 1980ies] , we would have to reduce our driving by 90% today to get the same air quality”.

Andreas TrogeChief of German Environment Agency

To conclude….

Whoever thinks a faultless piece to see, Thinks what never was, nor is, nor ever shall be.Good nature and good sense must ever join,To err is human, to forgive divine.

Alexander Pope (1688 – 1744)