EUROWATCH: ECO-TAX THE DANISH WAY

was narrow-fronted blocks with up to three back yards behind. The Prussian police could easily control the workers' districts with a few officers at the gate of each block.

163

"Sweden and Denmark, under the pressure of

high income taxes, did take the first steps to restructure their tax

systems ."

EUROWATCH MICHAEL SKOU ANDERSEN

M i k a e I S ~ ~ centle ~ s o c i a l s c i ~ k s e a ~ m t h e E n v i ~ ( ~ ,

AAusUniversity, kd.

New Economy

Eco-tax the Danish way The Danes are showing that green policies work

nyone who doubts that the principles behind taxation have a tangible effect A on society should take a walk

through Berlin's old workers' districts. In the second half of the 19th century, the Prussian government's tax on real estate encouraged the construction of dense, dark and un- healthy housing. Property owners were lev- ied according to the length of the strip of land adjoining the street, the idea being to encour-

come, few have made levies on energy and natural resources a significant share of the tax base. Thus, tax principles tend to support the under use of labour resources and the result- ing unemployment. The white paper echoed a long-standing desire for a shift of the tax burden that has been advocated by environ- mental economists since the 1980s.

Although many people would agree that more use should be made of economic instru-

en.

1 This tax principle still in- L-1

fluences the lives of thou- sands of Berliners. Not that police officers are still lurking outside their front door, but there is less light and fresh air than there should be.

We might ask what ill effects present tax principles may have. The 1993 Delors white paper, Growth, Competitiveness and Employ- ment pointed out how Europe's labour re- sources are being under used while natural resources are being over used. It linked this imbalance with taxation. Although most countries rely heavily on taxing personal in-

vironmental policy, many are sceptical about the idea of an ecological tax reform. Swe- den and Denmark, under the pressure of high income taxes, some years ago did take the first steps to restruc- ture their tax systems in ac- cordance with these princi- ples (Andersen; Sterner). Yet the idea of an eco-tax reform

seems to be being used as a guide rather than a way of radically transforming tax systems.

Sustainable revenue? Can a stable income for the Treasury be sus- tained through levies on energy and pollu- tion, given that such taxes are expected to reduce pollution and energy use? An effec- tive pollution tax should presumably raise as little revenue as possible. Is there, then, a fundamental conflict in the use of ecological

1070-3S3Sl9SlO30163 + 04 508.0010 0 1995 THE DRYDEN PRESS

164 NEW ECONOMY

taxes to raise revenue for the Treasury and to reduce pollution?

In fact, Denmark's use of taxes on energy in recent years has shown that economic instru- ments can be deployed to pursue more than one goal.

Since the mid 1 9 7 0 ~ ~ Denmark has taxed energy use in households more vigorously than most other EU countries. The electricity tax is hgher than the kilowatt price itself, and coal and oil are taxed according to their en- ergy and pollution (carbon dioxide) content. Today, energy (giga joule) and transport taxes contribute about DKr30 billion (€3.5 billion at the current exchange rate) to the annual state budget, or about 10 per cent of total income.

At the same time, energy use has become remarkedly more efficient. According to Den- marks energy ministry, between the 1973 oil crisis and 1989 household energy use fell 25 per cent in absolute figures, and use per heated square metre was reduced 45 per cent. The Danish experience with energy taxes and savings indicates that it is possible to raise relatively stable revenue at the same time as acheving a more sustainable use of energy.

Optimal level Experience shows that neither energy nor pollution can be taxed out of existence. Some economists would even argue that the pur- pose of pollution taxes is to curb pollution only to a certain desired level - the 'optimal' level. Others argue that it is possible to adjust such taxes in order to produce a relatively constant revenue, despite declining energy use or pollution.

Japan was forced to adjust when its sul- phur dioxide tax introduced in the early 1970s proved overwhelmingly effective. The tax was originally meant to finance pensions for the more than 100,OOO people who became seriously ill as a result of pollution relating to the country's industrialisation in the 1960s. Because of the rapid decline in SO, emissions that ensued, the tax had to be increased sev- eral times in order to raise the revenue neces-

sary to finance pensions. A distinction therefore needs to be drawn

between regulatory and other environmental taxes. Generally, taxes on energy use and waste streams are more suitable for an eco-tax reform than are taxes on particular emissions or harmful substances. Regulatory taxes are used mainly to reduce particular emissions and they are fixed according to a policy objec- tive. For example, Denmark introduced a tax to phase out CFCs; the revenue did go to the Treasury but was earmarked for researching and developing alternatives to the ozone-de- pleting gas.

Other taxes are being imposed with a view to creating a particular revenue. For instance, a national tax on water consumption in households was introduced in Denmark in 1994. Although Denmark has enough water, the tax is justified as an incentive to reduce consumption which, in the larger cities, is about twice as high as may be extracted and supplied on a sustainable basis.

Equity Eco-taxes are based on the 'polluter pays' principle and need to apply to all polluters, regardless of social position. All taxes are subject to concerns about equity, and this applies no less to green taxes. It is often sup- posed that rich and poor consume about the same amount of energy or water, and that ecological taxes thus represent a proportion- ately heavier burden for the less well-off.

This may be true for use of water, but en- ergy use correlates more closely with wealth.

Other wnks r#med to i t1 this article inchidc:

Awkr.w M S (2994) The green tax reform in Denmark journal of Environmental Liability.

S t m T(1994j Environmental Tar Reform: The Swedish Eqeri'ence, Europeati Enriron- molt .

Teufel D ( I 988) dkosteuern als marktwirt- schaftlichcs Instrument im Umweltschutz, U n i d t - und Proposeinstitut, Nr.9, UPI.

EUROWATCH: ECO-TAX THE DANISH WAY ~ 165

Richer people have larger and better-heated houses, and drive (larger) cars. They consume more and generate more waste per capita. For instance, waste per capita is twice as high in the Nordic countries as in Portugal. In relative terms, however, among higher-income groups the share of disposable income used for energy is undoubtedly a few per cent lower than among lower-income groups. Nevertheless we have to set against that the fact that low price levels often cause consum- ers to ignore leakages; so a higher price on natural resources, through green taxes, helps reduce unproductive waste.

However, low-income groups are often less able to reduce their energy use than are high-income groups. Adapting to a higher price level usually requires investment in new equipment. Whereas high-income groups tend to own their houses, people on low in- come are more often tenants, and need to co- operate with their house owners in order to make energy savings. Denmark’s energ); taxes were, in the early years, combined with targeted subsidies for insulation and other en- ergy-efficiency measures, which helped over- come some of these difficulties.

The critique that eco-taxes are socially un- just seems exaggerated, given that other taxes are also unjust and that the core purpose of an eco-tax reform is to swap present levies for green ones. It has been shown that if green taxes are balanced with reductions in VAT,

Illustration: Steve Marchant

the outcome is likely to be socially more just than the present situation (Teufel et al, 1988). Depending on the specific design of income taxes, the same argument could apply to re- placing income tax with eco-taxes.

Employment effects The Danish tax reform of 1993 introduced new environmental taxes of DKr 12 billion and lowered income tax. Most of the taxes applied only to households, but in June 1995 it was decided to increase the C02 tax on energy use in manufacturing and to remove some exemptions with regard to energy taxes. The revenue from the C02 tax is used partly for targeted energy-efficiency meas- ures and partly for neutralising the effects on income.

The finance ministry calculated the effects of a levy of DKr 200 per ton of CO, introduced unilaterally in Denmark. The environmental target was to assure an additional 5 per cent reduction in CO, emissions, so as to achieve the total 20 per cent reduction aimed for in 2005 (baseline year 1988).

Not surprisingly, the first calculations showed that an isolated carbon tax would cause a considerable decline in employment. However, if balanced by relaxation of per- sonal income tax or company tax, the effects on employment would be neutralised within five years. Ministry officials were surprised at

166 NEW ECONOMY

how positive the macroeconomic impact of a swap of income tax for energy tax would be, and the published calculations represent a rather conservative estimate.

The short-term impact on employment de- pends on the mechanism for tax relief. In the case of relief on personal income tax, the bal- ance of payments would be weakened, whereas with a direct refund to the companies there would be a short-term positive impact on employment. Unllke many other EU mem- ber states, Denmark does not have company taxes, so the proceeds from the CO, tax are being used for a direct refund on the basis of the number of people employed. The reason for the short-term positive impact on employ- ment is that the relief is being used for produc- tive purposes.

The neutral impact on employment over all belies substantial differences between in- dustrial sectors. Employment is expected to decline in environmentally problematic in- dustries, whereas new jobs will be created in other sectors only marginally affected by the CO, tax. Labour-intensive and less energy-in- tensive industries - such as textiles, graphics and construction - will benefit from the tax. The sectors most affected are cement, steel, glass and agriculture.

Given that most companies are relatively specialised and dependent on exports, and that the Danish economy is relatively open and vulnerable to changes in competitive- ness, it is remarkable that an independent CO, tax is not expected to do more damage to the economy.

Clearly, if the tax were introduced at a European level, more significant employment and environmental effects could be achieved. No doubt, Denmark anticipates that several of its neighbours will adopt CO, taxes in the future, and hopes to maintain a lead in en- ergy-efficiency technology, which in a few years will be in great demand.

Political economy of eco-tax reform Despite the expected neutral economic im-

pact of a COz tax, industries lobbied vigor- ously against its introduction. Trade unions gave some support to the argument that vol- untary agreements would be preferable to a tax, but the Labour Movements Business Council, an independent think-tank, was among the most active advocates of the in- creased C02 tax. The large Union of Un- skilled Workers was active in its support for environmental taxes, anticipating the crea- tion of jobs for its members in the energy sector.

As a result of the CO, package passed in the Danish Folketing in June 1995, Danish indus- try will pay DKr 600 per ton of CO, for energy used for heating, while the level for energy use in production processes will be DKr 90 per ton. For some highly energy-intensive production processes the CO, tax can be waived if the firm agrees to undertake best- available-technology savings. The top rate of DKr 600 is equivalent to the energy tax level for households, and will ensure a more effi- cient approach to saving energy in future. Af- ter almost 20 years of energy-saving measures targeted at households, the marginal cost of malung the savings had become unreason- ably high compared to what could be achieved in industries. The new tax is ex- pected to trigger substantial investment in saving energy and in fuel substitution, such as the exchange of natural gas for coal.

Limits to power But how far can the state go in exchanging traditional income taxes with eco-taxes? The tax system is not only a generator of revenue; it also has an important function in stabilis- ing market fluctuations. For that reason, there are limits to how far income taxes could be replaced by green taxes.

Eco-tax reform is therefore not an alterna- tive to existing tax structures, but a supple- ment. Nevertheless, environmental taxes may provide incentives of paramount importance for more sustainable development and thus for future generations’ living conditions