questioning the measurement of environmental taxes

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Questioning the measurement of environmental taxes

Annegrete BruvollEnergy and environmental economics

Research Department, Statistics Norway

• Environmental tax statistics are used as indicators for environmental protection and in analyses of the effects of environmental policy (Morley 2010, Aidt 2010, OECD 2006, Sterner and Köhlin 2003, Ekins 1999)

• Environmental taxes are tangled with fiscal taxes

1) - a theoretical challenge: the environmental tax element is generally lower than the marginal damage cost

2) - a practical challenge: the statistical guidelines include large fiscal elements

Consequences: The international statistics significantly overestimate environmental taxes

Publication: Bruvoll, A. (2010): ”On the measurement of environmental taxes”Discussion paper No. 599, Statistics Norwayhttp://www.ssb.no/publikasjoner/pdf/dp599.pdf

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International statistics of environmental taxesRevenues from environmentally related taxes in per cent of GDP

http://www2.oecd.org/ecoinst/queries/index.htm

The OECD data base of environmentally related taxes:

Compulsory, unrequited payments levied on tax-bases of particular environmental relevance

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International statistics of environmental taxesThe international OECD/Eurostat/IEA statistics are based on the definition of an

“environmentally related tax” as

“A tax whose tax base is a physical unit (or a proxy of it) of something that has a proven, specific negative impact on the environment. It was decided to include all taxes on energy and transport in the definition of environmental taxes. Value added type taxes are excluded from the definition (Eurostat 2001)

This rule

- is not rooted in theory

- includes practically all factor inputs / all taxes, as all activities imply environmental costs

- create needs for exemptions / adjustments

Such as:

- VATs are exempted, but are principally equivalent to the other taxes included in the definition

- resource taxes are included, these are not directed at externalities but on economic rents

- resource taxes on oil are excluded, since these are large for some countries

> A theoretically rooted definition is required to compute consistent, interpretable and comparable statistics

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Clarification: Environmental versus fiscal taxes

Environmental taxes:

Purpose: correct negative externalities.

The optimal tax should be levied at the negative externality and equal the marginal damage cost (Pigou 1920, Sandmo 1975)

TE = MDC (marginal damage cost)

Fiscal taxes:

Purpose: raise revenue.

Levied where they are least likely to distort economic activity; inversely proportional to own price elasticity of demand (Ramsey 1927, Diamond and Mirrlees 1971)

TR = -1/ε (inverse own price elasticity)

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In the presence of both environmental and fiscal taxes

The optimal tax on the polluting good:

not equal to the sum of the Ramsey tax and the MDC but rather a weighed average of the Ramsey inverse elasticity rule and the Pigouvian marginal social damage (Sandmo 1975):

T = aTR + (1-a) MDC 0<a<1 a: marginal cost of public fund

Importantly:

The environmental tax rate = (1-a) MDC < MDC

I.e. the part of the tax ascribed to the environmental element is lower than the MDC

(Also: the revenue part is lower than the TR)

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The tax revenue and the environmental element

Case1: T=Tl < T*

This implies T < MDC

• Even if the tax is lower than MDC, an additional (1-a) should be subtracted to reach the environmental tax element

Externality Abatement

Marginal damage cost

MDC

Tax revenueTl

E0

Marginal abatement cost

MAC

Tax,T

T*

MDC’’

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The tax revenue and the environmental element

Case2: T=Th > T*

This implies T > MDC



MDC

T*

Tax revenuecorrespondingto MDC

Th

E0


MAC

MDC’

Tax,TThe tax revenue: the entire

shaded area

• At least Th-MDC is fiscal and should be subtracted from the revenue, even if the tax is levied directly at an externality

• An additional (1-a) should be subtracted from the MDC to reach the environmental tax element

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The international statistics

In theory: a constant

In practice: a varies over goods due to the formulation of the tax system, market failure, conflicting political stands etc.

> How to set a is unclear

Suggested rules:

I. When the tax rates on pollution are higher than the MDC, the excess tax should be subtracted to reach the maximum environmental taxes and the accordant maximum environmental tax revenues

II. The maximum environmental taxes should be corrected accordingly by the best estimate of the rate (1–a) to obtain a closer estimate of the environmental taxes and the accordant environmental tax revenues

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Empirical illustration: the Norwegian case

- environmental tax revenues according to the maximal environmental tax element- revenues according to the OECD, Eurostat and IEA definition millions of euros, 2007

Environ-

mental

taxes

OECD,

Eurostat,

IEA taxes

1. Taxes on greenhouse gases 715 1081

2. Taxes on sulfur, NOx, waste

incineration, beverage containers,

pesticides, trichloroethane and

tetrachloroethane 246 248

3. Petrol and diesel taxes 655 1816

4. Other taxes according to the OECD,

Eurostat, IEA guidelines 0 5083

Total 1616 8228

a = 0,2 (Ministry of Finance 1998) 1291

Corrected for non-environmental taxes: (motor vehicle registration tax, reregistration tax on motor vehicles, annual motor vehicle tax, annual weight-based tax on motor vehicles, electricity consumption tax, tax on mineral oils, tax on lubricating oil, base tax on disposable beverage packaging)

Reasons:- overlapping- not user dependent- no externalities associated- externalities not environmental

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Environ-

mental

taxes

OECD,

Eurostat,

IEA taxes









Total 1616 8228


Corrected for of the surplus environmental tax element, c.f.:



MDC

T*

Tax revenuecorrespondingto MDC

Th

E0


MAC

MDC’

Tax,T


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Environ-

mental

taxes

OECD,

Eurostat,

IEA taxes









Total 1616 8228


In total, only 20 percent of the taxes reported to Eurostat is environmental taxes according to the theoretical definition


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Environ-

mental

taxes

OECD,

Eurostat,

IEA taxes









Total 1616 8228


Correction for the fiscal element in the pollution taxes.

Rule of thumb in the Norwegian public sector: a=0,2 (Ministry of Finance 1998)

Then only 16 percent of the taxes reported in the international statistics as environmentally related taxes remains as environmental taxes


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Additional interpretation problems

Revenues = tax rates * emissionsHigher revenues – a signal of- an environmental friendly policy, or - increasing emissions? Elasticity of emissions < 1 – revenues will decrease due to increasing tax rates

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Additional interpretation problems

Revenues = tax rates * emissionsHigher revenues – a signal of- an environmental friendly policy, or - increasing emissions? Elasticity of emissions < 1 – revenues will decrease due to increasing tax rates

Revenues/ GDP or revenues/total taxes and charges:Low indicator may be due to - high GDP- large public sector

Revenues from environmentally related taxes in per cent of total tax revenue

http://www2.oecd.org/ecoinst/queries/PercentTaxes.pdf

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Conclusions

• The current statistical guidelines include much more than environmental elements, hence environmental taxes are significantly overestimated in international statistics

• Our empirical illustration (Norway) shows that the difference can be 1:6 when following the principle based on theory, rather than the wider, unspecified definition – indicating a problem?

• How to measure real environmental tax revenues:

1) Evaluate estimates of marginal costs of each emission

2) Revenues up to these estimates are environmental taxes

Revenues above this level are fiscal taxes, per definition

3) Also: the fiscal part of the tax up to marginal costs should be corrected

• A closer anchor to economic theory is needed in the further work with the statistical guidelines, to secure consistent, interpretable and comparable statistics

questioning the measurement of environmental taxes

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