Environmental Valuation & Cost-Benefit News

Link: http://www.greenfiscalcommission.org.uk/images/uploads/GFC_FinalReport.pdf

Executive Summary:
The concept of a green tax shift is simple: taxes on the things that are valued by society; like jobs, incomes and profits; are reduced and the lost revenue is replaced by taxes on things society does not like, such as pollution and environmental degradation. ‘Pay as you burn, not pay as you earn’ as one political formulation has put it. This shift not only reduces pollution, but is a more economically efficient way of raising necessary tax revenues. Taxes on labour at their current level, for example, distort the economy and reduce its efficiency and output. The same considerations suggest that, at times when taxes need to be increased to stabilize the public finances, green taxes should play a more than proportionate role in the increase.

While a green tax shift does not mean the overall rate of tax will change at the national level, it does mean people and business will see the amount of tax they pay change: the polluter pays. Highly polluting households and businesses will see their tax bill increase where low pollution households and businesses will see their tax bill cut below what it would otherwise be.

If the UK is to meet its climate change and other environmental targets it will need to apply a wider range of policy measures, and apply them more stringently. Price is a fundamental factor which affects the type of products and services individuals and businesses buy and the level of demand for them. Changing the price of polluting activities relative to clean ones is a vital element in any serious package of measures intended to reduce climate change emissions. Green Fiscal Reform is the best way for a national economy to achieve this shift in prices.

There have already been relatively modest tax shifts in a number of European countries, including the UK, the results of which have been shown to be generally positive. A major purpose of the Green Fiscal Commission was to explore the economic, social and environmental implications of a major green tax shift for the UK, such that revenues from environmental taxes would more than double their current seven per cent share in overall tax revenues by 2020.
The results suggest that a large-scale green tax shift would be economically sensible and environmentally effective. If implemented with appropriate complementary measures, it could also be socially acceptable, especially as increasing numbers of people come to realise the imperative of reducing carbon emissions and climate change.

Key messages
--Environmental taxes work: numerous studies, including those of the Green Fiscal Commission, have shown that green taxes are effective in reducing the environmental impacts on which they are targeted.
--Environmental taxes are efficient: there are good reasons why environmental taxes in many situations will achieve environmental improvement at lower cost than other instruments.
--Environmental taxes can raise stable revenues: some environmental taxes, like fuel duty, have been raising sizeable revenues for years. Raising them significantly would therefore both achieve environmental improvements and allow other taxes to be lower than they would otherwise need to be.
--The public can be won round to green fiscal reform: a number of polls show majority public support for a green tax shift, which increases when people are persuaded that the green taxes really will be instead of other taxes.
--The UK’s 2020 greenhouse gas targets could be met through green fiscal reform: the economic implications of doing so would be broadly neutral, and the green fiscal reform policy approach would increase employment.
--Green fiscal reform would stimulate investment in the low-carbon industries of the future: investing a small proportion of the revenues from green fiscal reform in energy-efficient homes and vehicles, and in renewable energy development, would accelerate the growth of new low-carbon industries with real export potential, as well as increasing the environmental benefit of green fiscal reform.
--Green fiscal reform can mitigate the impact of high world energy prices: high world energy prices are bad for the UK economy, which is now a net energy importer. Green fiscal reform can drive energy efficiency and make the UK economy less vulnerable to high world energy prices if they rebound once the global economy recovers.
--The impacts of green fiscal reform on competitiveness can be mitigated: relatively few economic sectors would face serious challenges to their competitiveness from green fiscal reform, and there are a number of ways in which these concerns can be addressed.
--For green fiscal reform to be fair, low-income households would need to be protected from energy price rises while their homes were being made energy efficient: the UK needs a massive programme of energy efficiency improvement to existing homes for social as well as environmental reasons. While this programme is being carried out, special measures would need to reduce the impacts on low-income households of the energy price rises entailed by green fiscal reform.
--Green fiscal reform emerges as a crucial policy to get the UK on a low-carbon trajectory; help develop the new industries that will both keep it there and provide competitive advantage for the UK in the future; and contribute to restoring UK fiscal stability after the recession. It is a key to future environmental sustainability and low-carbon prosperity.
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Effectiveness of Green Fiscal Reforms to Date:
The authors report that a carbon/energy tax in Finland from 1990-2005
cut CO2 emissions 7 per cent from levels that would have otherwise been. [A shift from carbon tax to an output tax on electricity in 1997 may have lessened the impact. A carbon dioxide tax in Norway from 1991-2007 resulted in a 21 per cent reduction in CO2 from power plants by 1995, a 14 per cent national reduction in CO2 in 1990s, 2 per cent attributed to carbon tax, 12 per cent reduction in CO2 emissions per unit of GDP. ... Increases in the UK – Fuel Duty Escalator from 1993-1999 are estimated to have produced annual carbon savings of between 1 and 2.5 MtC by 2010. Average fuel efficiency of lorries over 33 tonnes increased 13 per cent between 1993 and 1998. Swedish tax on the sulphur content of vehicle fuels is estimated to have reduced the sulphur content of fuels by 80 per cent between 1980 and 1998]. A household waste tax in Denmark from 1987-1996 is estimated to have achieved a 26%. A waste tax in Finland from 1996-2007 reduced waste by 15 per cent compared to a business-as-usual scenario. A packaging tax is said to have led to almost complete recycling rates for soft-drink packaging. Results from the wastewater tax in Denmark during the period 1996 to 1998 reduced the discharges of BOD, phosphorous and nitrogen – the three taxable pollutants – from sewage plants by 20-25 per cent. The Dutch wastewater effluent charge reduced water pollution from the 14 companies responsible for 90 per cent of the pollution by 90 per cent over 1969-75, and by a further 20 per cent by 1980. Half of this reduction was said to be due to the charge and accompanying measures. The European Environment Agency concluded that the Dutch tax not only provided a clear incentive for industry to reduce discharges at source, but as a result it also reduced the need for the construction of large new public wastewater treatment plants to a level well below comparable countries, thereby saving substantial public investment.
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Modelling a Major Green Tax Shift for the UK:
The modelling was set up to explore the extent to which this would be the case. Such modelling projects different scenarios into the future and compares their outcomes. The scenarios in this case had medium, low and high world market fossil fuel prices without a tax shift (the ‘baseline’ scenario, S1 and S2); medium and low world market fossil fuel prices with a tax shift (the GFR scenarios); and the same prices with a tax shift but with 10 per cent of the extra tax revenues spent on environmental investments (the eco-innovation’ or scenario, E1 and E2).

The baseline with a high oil price reduces UK carbon emissions, although not enough to meet the 2020 target, but also reduces 2020 GDP by 6.3 per cent compared with the medium-price scenario. The headline environmental result from modelling the GFR scenarios is that the UK meets its greenhouse gas (GHG) emissions reduction targets for 2020, whereas the baselines miss them by a large margin. On the economy, the baseline GDPs are reduced in the GFR scenarios by 0.6-0.7 per cent by 2020, a reduction in the economic growth rate of around 0.07 percentage points (i.e. from around 2.6 to 2.53 per cent per year). The reduced cost of labour in the GFR scenarios results in about 455,000 extra jobs by 2020.
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The Green Fiscal Commission is an independent body and is not affiliated to any political party or government. Its members come from business, universities, the three main UK political parties, both Houses of Parliament, and consumer and environmental organisations. Members were all appointed in a personal capacity. One of the Commission’s major aims was to assess the social, environmental and economic implications of a substantial green tax shift, such that 15-20 per cent of the UK’s tax revenues come from environmental taxes by 2020. The Commission’s full Terms of Reference and a list of members are given at the end of this report.
The Commission’s Secretariat is provided by the Policy Studies Institute (PSI), one of the UK’s leading policy-focused research institutes. Its Chairman is Robert Napier, Chairman of the Homes and Communities Agency and the Board of the Met Office, with a distinguished career in business and the environment. Its Director is Professor Paul Ekins, formerly Head of the Environment Group at PSI, but now Professor of Energy and Environment Policy at the UCL Energy Institute, University College London.

This report summarises the findings and conclusions of the work of the Green Fiscal Commission and was written on behalf of the Green Fiscal Commission by Professor Paul Ekins with contributions from Dr Simon Dresner (PSI), Professor Stephen Potter (Open University and member of Green Fiscal Commission), Ben Shaw (PSI) and the independent expert on green taxes, Dr Stefan Speck.

A series of briefings that expand upon the content of this report and gives full references to the material cited is available from the Green Fiscal Commission website. A book bringing together the content of this report, the briefings and further material on green fiscal reform will be published in 2010.

Green Fiscal Commission,c/o Policy Studies Institute: www.greenfiscalcommission.org.uk blog: gfcblog.wordpress.com
October, 2009