Table of contents
List of figures
2.2 Environmental economics
2.3.2 Emissions and global warming
2.4 The Kyoto-Protocol and the climate & energy package of the EU
2.5 Economic instruments
3 Environmental taxes
3.1 Pigovian Tax
3.2 Double Dividend
3.3 Environmental tax reform in European states
4 Impacts of the environmental tax reform
4.1 Economic impacts
4.1.1 Economic growth
4.1.2 Impacts on employment
4.1.3 Financial relief for private households
4.2 Environmental impacts
4.2.1 The E3ME Model
4.2.2 The GINFORS model
4.2.3 Carbon leakage
4.2.4 Greenhouse gas emissions in 2018
List of figures:
The E3ME model1
Energy-related CO2 Emissions in 2020 shown by the GINFORS model if environmental taxes would have been introduced in all EU states in 2010. 2
Greenhouse gas emissions in the EU from 2004 to 2014 .3
“We blow our coal mines in the air, it would easily be possible for this change to heat up the planet in such a way that it would be beyond human experience.”
Svante Arrhenius, Swedish chemist and Nobel Prize Winner in 1896
Climate Change is reality. The extreme weather conditions are increasing from year to year on the entire planet and it is also noticeably hotter in Germany. Each of the last summers was hotter than the previous summer and thus the hottest in many years. But what is to do to avoid a climate disaster? Can environmental taxes be the solution?
This paper deals with what environmental taxes are and what influence they have on emissions in the EU. In the first chapter some terms are defined which are important for the future course. Chapter 3 is about Environmental taxes, what a Pigovian Tax is, what is hidden behind the term Double Dividend and what the environmental tax reform is. In the last chapter the impacts of the environmental tax reform in Europe is pointed out, with a view as well on economic as also on environmental impacts.
At first it is necessary to define some terms that are important for appreciation of the following work. In this chapter the author wants to clarify what is meant by the terms environment, environmental economics, externalities, emissions, and economic instruments especially environmental taxes in connection with this scientific work and what the environmental tax reform is.
The concept of environment broadly encompasses the factors which determine the physical, psychological, technical, economic and social conditions and relationships that build the totality of the determinants of existence of human beings.4 In this work environment shall be understood as all the conditions that define the human habitat.5 So environment is not only the forest, the birds and the animals, it´s also the air we breathe, the water we drink and anything else around us like the climate, the atmosphere and the oceans. In 2017 there was a public opinion survey on the environment in the 28 European Union countries in which people has been asked how much the protection of the environment is important for them personally.
More than 90 percent of the respondents answered that they think the protection of the environment is important or very important for them.6
2.2 Environmental economics
Environmental Economics is a branch of the science of economics that deals with the influence of the economy to our environment. One aspect of environmental economics is the view, that the economy we all live and work in is an open system which has to extract resources from the environment and process them to provide goods and services for its human operators.7 Of course this includes also returning waste back to the environment. This balance between extracting resources and give them back in a transformed way is one of the central components of environmental economics. So this science deals with market failures like excessive production of pollution or insufficient protection of the nature and try to determine the optimal amount of it.
An externality exists whenever the consumption or productions choices of one person or firm have an influence on the utility function of another entity without that entity´s permission or an adequate compensation. Externalities are distinguished in positive and negative externalities. Positive examples of externalities are scenic agricultural landscape, purchases of quieter lawn movers, the pollination of flowers by bees and investments in research and development activities. Examples for negative externalities are stench and smoke from smoking or barbecuing, degradation of scenic environment through land development or pollution from automobile driving or flying. In case of negative externalities there is an overprovision of the produced good in question and the price of the good is too low. In case of externalities the market equilibrium is not efficient.
Emission generally means any kind of secretion disruptive factors to the environment. Emissions are substances that are toxic, unhealthy or harmful for the environment.
Emissions are on the one hand of anthropogenic origin what mean they are caused by humans. On the other hand, there are natural issuers too, like swamps and cattle emitting methane and Vulcans emitting sulphur dioxide. Sulphur dioxide released into the air by exhaust gasses is an emission. In combination with rain, acid rain is created which can contribute to the damage of the forest. Excessive pollution of the environment though pollutants can have detrimental consequences on people´s resources and health.
2.3.2 Emissions and global warming
The most often mentioned emissions in the media are carbon dioxide (CO2) emissions because of its influence on the global climate change. But CO2 is not the only substance that has an influence on the environment or the climate on planet earth. Over the last years the concentration of CO2, methane (CH4), nitrous oxide (N2O), chlorofluorocarbons (CFCs) and tropospheric ozone (O3) in the atmosphere has increased rapidly.8 One feature that all this gases have in common is that they absorb most of the thermal infra-red radiation emitted from the surface of the earth and re-emit it to the planet, which is comparable to the glass of a greenhouse.9 Because of this attribute this gases are called greenhouse gases,10 but the different gasses have different influence on the green-house effect.11 From all gases that promote the greenhouse effect Co2 is awarded the biggest effect on the climate, up to 55% in total.12 Like in a greenhouse, it´s getting warmer on the whole planet, up to 5 degrees Celsius on average in the coming years.13 This global warming will amongst other things melt the ice at North and South Pole and so raise the sea level so a lot of islands will be flooded and the continental boundaries will move inland, resulting in thousands of homeless people.
2.4 The Kyoto Protocol and the climate & energy package of the EU
The Kyoto Protocol is an international treaty that obligates the participating states to reduce greenhouse gas emissions, because this emissions cause a global warming effect. The Kyoto Protocol was named after the city where it was decided in 1997. It was entered into force in 2005. Until 2011 191 states have ratified the protocol. The participating countries pledged to reduce their annual greenhouse gas emissions by an average of 5.2 percent over the level of 1990. These emission reductions have achieved. A second period of the Kyoto Protocol did not come about, because many states finished their ratification. Nevertheless, the EU had set the goal of reducing greenhouse gas emissions by another 20 percent by 2020 and another reduction of 80 till 95 percent by the year 2050. The first goal of reducing emissions by 20 percent has failed and cannot be reached anymore.
2.5 Economic instruments
To ensure an efficient amount of emissions there are different ways a government can intervene, which are titled as economic instruments. All of these instruments want to heal markets failures by internalizing the external effects. Without any regulation polluters will always choose the business-as-usual level of pollution, where they earn the most profits. The economic instruments that are able to reduce pollution are prescriptive regulation, emission fees also called environmental taxes, subsidies and tradeable permits which are also known as emission trading. One criterion that is often decisive at choosing an economic instrument is cost-effectiveness.14 This work shall only deal with environmental taxes therefore the other instruments is only briefly explained. Prescriptive regulation is also called command-and- control regulation. At this economic instrument the environmental agency sets a standard for emissions. This standard is enforced by fines or other penalties. Resulting of the standard the production costs are increased and the price of entry into the industry-market is higher than without the standard. Examples for a prescriptive regulation are ambient standards, emission standards and technology standards. Another way to reach an efficient amount of pollution is on the one hand to give subsidies for ecologically exemplary industries and companies. On the other hand, process innovations with high productivity effects in the use of resources could be subsidized in order to promote an increase in material productivity through the use of new technologies.15 Subsidies are more “social” as steering taxes, because unlike steering taxes these do not start with the marginal consumer.16 However, subsidies also influence market activities considerably more than environmental taxes.17 Last but not least there is the instrument of emission trading. The idea behind tradeable permits is to create a market for emissions and pricing them. For this the environmental agency determines the sum of permits and allocates permits to the different polluters. The polluter must have a permit for each unit of pollution he produces otherwise he have to pay a fine or penalty. The permits are tradeable between the polluters and the environmental agency monitors emissions and sanctions violations.
3. Environmental taxes
Environmental taxes are a fiscal instrument of environmental policy with the target of conserving resources and thus paving the way for sustainable development.18 This involves polluting activities such as emissions and the consumption of non-renewable resources.19
Environmental taxes can be a way to correct market failures by internalizing the external effects of activities that damage the environment.20 All environmental taxes are built on the polluter-pays principle, to which all OECD countries have agreed.21 Environmental taxes or pollution taxes what they are also named are fees that the polluter has to pay for each unit of pollution. Such green taxes are thinkable for a lot of environmentally damaging things like scraps, exhaust, waste heat, used tires, asbestos, car wrecks, floor sealers, chemicals, chlorine, mass animal husbandry and many more.22 It´s possible to levy environmental taxes on products as well as on processes with the goal of shifting the production and consumption away from the products and processes that damage the environment towards more environmental-friendly practises and products.23 The most common environmental taxes are energy taxes. By convention, CO2 taxes are also included in this category since they are usually levied on energy products. For example the government imposes an environmental product tax on the carbon content of fuels to restrict the emissions of CO2. In 2011 in the 75% of all environmental taxes in the European Union were put on energy products.24 Other types of environmental taxes are transport taxes, pollution taxes and resource taxes. Through internalization of externalities a higher price for behaviour that damages the environment and thus a steering of the economic participants is achieved.25 The basic idea is to move the tax burden from “economic goods to environmental bads”.26 If the participants change their behaviour depends largely on the amount of taxes. The higher the tax, the more environmentally friendly the consequences will be.27 Impacts of taxes designed to change behaviour can be substantial cost differentials, price and competitiveness effects.28
1 Barker et. al., E3ME technical manual, p.11.
2 Lutz/Meyer, Bernd, Z Energiewirtschaft, p.8.
3 Wojcikj/Wasowicz, Jaroslaw, Public Policy and Administration, p. 674.
4 Nagel, Umweltgerechte Gestaltung des deutschen Steuersystems, S.39; Wicke, Umweltökonomie, S.5.
5 Nagel, Umweltgerechte Gestaltung des deutschen Steuersystems, S.39.
6 Special Eurobarometer 468, September – October 2017, p.2.
7 Turner, Pearce, Bateman, Environmental Economics, p. 1.
8 Proops/Faber/Wagenhals, Reducing CO2 Emissions, p. 33.
9 Proops/Faber/Wagenhals, Reducing CO2 Emissions, p. 33.
10 C a rr a r o /Siniscalco, The European Carbon Tax, p .1.
11 S trefler, Challenges for low stabilization of climate change, p.71.
12 Proops/Faber/Wagenhals, Reducing CO2 Emissions, p.6.
13 Carrado/Siniscalco, The European Carbon Tax, p.1.
14 S tavins, Environmental Economics, p. 8.
15 Welfens, Maria Jolanta, Wirtschaftsdienst, 655 (658).
16 Pfaller, Ökosteuern in Europa, p. 5.
17 Pfaller, Ökosteuern in Europa, p. 5.
18 Brinkmann, in: Holtmann (Ed.), S. 435.
19 Brinkmann, in: Holtmann (Ed.), S. 435
20 De Mooij, Environmental Taxation and the Double Dividend, p. 1.
21 De Mooij, Environmental Taxation and the Double Dividend, p. 1.
22 Balmes, Verfassungsmäßigkeit und rechtliche Systematisierung von Umweltsteuern, p. 44; Gosch, Juristische Beurteilung von Öko-Steuern, StuW 1990, 201 (206).
23 O E C D, Managing the Environment, p. 168.
24 S tamatova/Steurer, Statistics in Focus 26/2013.
25 Balmes, Verfassungsmäßigkeit und rechtliche Systematisierung von Umweltsteuern, p. 10f.
26 Bosquet, Evironmental tax reform: does it work?, Ecological Economics, 2000, 19 (19).
27 Balmes, Verfassungsmäßigkeit und rechtliche Systematisierung von Umweltsteuern, p. 11; OECD, Managing the Environment, p. 168.
28 O E C D, Managing the Environment, p. 168.