Dividends from energy and environmental taxes

Giorgio Brosio

Department of Economics and Statistics University of Torino

Energy use and income levels.

Environment consumption and income levels (Kuznets's curve).

Contents

Opportunities and needs for better (fiscal) use of energy to promote substainable growth.

How to combine energy

and environmental gains through taxation:

suggested tax options.

Medium income countries include many important producers of oil, gas and minerals.

Need for producing countries to keep consumption down (at levels not distant from those of non-producing countries).

All countries, however, face a common problem: preserve environment, save energy and/or use it fiscally to reduce distortions or to create opportunities.

Energy and income level

Angola Argentina Ecuador Algeria Gabon Iran Peru    Kazakhstan  Brazil

South Africa Chile Libya Colombia Mexico Namibia Uruguay Venezuela Russian Federation

Main producers of natural resources among (54) upper-middle income countries

Specific problems with producing countries

1. Excessive use of energy for both :

consumption – through subsidization of fuels and electricity

and production: energy intensive sectors

and 2. Neglect of non

Natural Resources Revenue at all levels of government (next table on down stream taxes).

3. Make difficult to finance investment for productive and social investment.

4. Create fiscal dependency.

Comparative incidence (% of GDP) of down stream taxation of oil and gas

Argentina Bolivia Brasil UK Intern. Oil Price 2000 1,22 2,80 2,04 3,2 28,5 2001 1,27 2,43 2,19 24,4 2002 1,42 2,31 2,6 2,4 25 2003 1,32 1,73 2,98 28,8 2004 1,20 1,65 2,81 38,3 2005 1,12 2,45 2,83 54,5 2006 1,00 2,18 2,88 2,6 65,1 2007 0,91 2,31 2,52 72,4 2008 0,93 2,10 2,50 97,3 2009 1,01 1,47 2,15 61,7 2010 1,05 1,59 2,04 79,5

Energy use is still much lower than in high income countries, but it is catching up quickly.

Lower intensity is matched by increase of income.

• Distorted prices and/or insufficient taxation may favor continuation of present industry mix, impacting negatively on long-term growth prospects.

All middle income countries : energy, and and GDP levels

400

600

800

1000

1200

1400

1600

1800

Energy use per groups of countries: 1980-1994

Low & middle incomeUpper middle incomeWorld

1995

1997

1999

2001

2003

2005

2007

2009

700

900

1100

1300

1500

1700

1900

2100

Energy use per groups of countries: 1995-2010

Low & middle incomeUpper middle incomeWorld

Environment and income levels

Message fromKuznets’s curve can be misleading, if action is not taken.

Permanence of industry mix.Technology can reduce incentives to collective action.

Rich people can solve individually pollution problems.

Rapid urbanization and industrialization have created some of the world’s largest mega-cities, with challenges for livability.

Environment and income levels

Climate change and energy security: challenge and opportunities for middle income countries

All countries need much new investment to adopt innovative technologies to help mitigate and adapt to the adverse consequences of climate change.

All government levels have to be involved.

Particurarly in mega-cities.

Implementation of enviromental policies is mostly local and costly.

Double Dividend: benefits

Introduction of energy/ environmental taxes provides two benefits:

fixes the pollution problem by reducing energy use and/or the use of most polluting enery sources.

revenue would allow the government to reduce distortionnary taxes,such as wage taxes, which would raise the net wage, and hence raise labour supply.

most low-medium income countries have a large informal sector. Cuts in taxes on wages contribute to shift to formal sector. Hence enhancing the overall rate of growth of the economy.

Double Dividend: caveats

Revenue from pure environmental taxes can be low, particularly if they reach the environmental targets.

Also enviromental taxes could also be distortionnary (not in the desired sense) if not properly designed.

Options for energy taxes

Better to bet on a multipackage/multitaxes option based on:

A wide-based energy/environmental tax.

A very few environmental targeted specific taxes.

Wide-based energy/environmental taxes: options

1. Pure excises on select fuels and energy sources. traditional solution applied in (almost) all countries.

environmental concerns are not to be the primary goal of excises, but rather revenue.

modulation of excises according to socio-economic considerations: diesel less taxed than gasoline.

price effect is non marginal, [[ahmad and stern (2010) ] a sufficiently large excise on petroleum products could go a long way towards constraining demand, as well as more ecologically friendly industrial restructuring.

Wide-based energy/environmental taxes:options

2. Environmentally re-modulated excises.

Goods with more environmental damage in production or consumption are taxed more heavily according to their environmental impact, such as carbon dioxide emissions,

Goods that cause relatively less environmental damage may be taxed less heavily than their substitutes.

Are an improvement against pure excises with a negligible increase in the administration and compliance cost.

Ideally, as in the next option, tax rates should be set to match the social costs of the energy source used.

Example of weights for re-modulationPure

exciseRe-

modulated excise

IEPS Modulation factors:

Amount (pounds) of CO2 emitted per unit of energy output or

heat content.

Pesos Pesos

Gasoline, per liter 1 1.34 157.2Liquid Gas, per kg 1 1.15 135

Diesel, per liter 1 1.38 161.3Heavy oil per liter 1 1.92 225Coke oil, per liter 0.1 0.14 161.3Natural gas, per

MMBtu4 4.00 117

Coal, per ton 100 183.76 215

Wide-based energy/environmental taxes:options

3. Pure measured emission taxes.

Involve payments which are directly related to metered or measured quantities of polluting effluent. General examples include carbon taxes.

Specific examples of measured emissions taxes include Sweden's tax on Nitrogen Oxides.

In all these cases, emissions sources are charged an amount based on measured total emissions from each particular source.

Are more costly to implement, may be subject to uncertainty about technological impact.

Deciles of households

In percentage of income of

households

Pesos per individual

1 9.7 1,015 2 7.2 1,397 3 6.4 1,7214 5.7 1,964 5 5.7 2,4646 4.9 2,6097 5.0 3,3438 4.6 4,0199 4.3 5,316 10 2.9 9,022Total 4.3 3,287

Distributional concerns

Mexico: Distributional impact Incidence of energy subsidies. 2010

Wide-based energy/environmental taxes: intergovernmental options

All the preceeding options are compatible with subnational surcharges.

Provided that consumption (not production) can be measured to avoid exportation of tax.

Subnational surcharges can provide ample revenue for financing environmental and other policies.

Environmental targeted specific taxes

Congestion tolls.

Water pollution charges.

Specific polluting emissions targets.

Noise emissions taxes.