6 minute read
3.5 Environmental Fiscal Reform: International Experiences
BOX 3.5
Countries around the world have recently implemented environmentally related tax measures (Enache 2020). Among those implementing or increasing environmental taxes in 2020, Ireland and Sweden raised their carbon taxes, and Iceland introduced a tax on fluorinated greenhouse gas (GHG) emissions. Ireland has been active in other areas related to environmental taxation— increasing electricity taxes on businesses, replacing the previously applicable surcharge on diesel vehicle registration of 1 percent with a nitrogen dioxide (NO2)-based surcharge, and prolonging registration tax relief for hybrid vehicles to the end of 2020.
Among other recent international examples, Lithuania implemented a new pollution tax on cars in July 2020 to encourage purchases of new and lesspolluting vehicles. The Netherlands and Poland extended their special tax treatment of hybrid cars. Denmark, Italy, and Sweden approved new or increased taxes on plastic packaging and plastic bags, with Italy delaying the implementation to January 2021. The United States granted tax credits for bio and alternative fuels—hence not raising taxes but trying to shift consumer demand. Latvia abolished exemptions regarding coal, coke, and brown coal used for electricity generation from its Natural Resources Tax and increased other tax rates, such as for the mining of sand.
In the Middle East and North Africa, environmental taxes could be more effective than income taxes in raising tax revenues, given the high degree of informal employment in many of the region’s economies. Almost two-thirds of the region’s workers (excluding those in the Gulf Cooperation Council [GCC] countries) are employed in the informal sector (Gatti et al. 2014), implying that the tax base of income taxes is actually rather small in these countries.
Environmental taxes have the advantage of not being linked to the employment status of the polluting persons or entities. Hence, they can effectively increase tax revenues while simultaneously putting a price on externalities that otherwise would have to be borne by people who haven’t caused them. The experiences of several countries are further discussed below.
Sweden Sweden is an international role model when it comes to greening the tax system. With the introduction of its carbon tax—pricing carbon at SKr 250 (around US$30)a per ton in 1990–91 (the first such tax in the world)—Sweden simultaneously reduced other taxes such as its income tax. Through its grön skatteväxling (which can loosely be translated as “green tax-switch”) the marginal tax rate on top incomes was reduced from 80 percent to 50 percent and the corporate tax rate from 57 percent to 30 percent (Jonsson, Ydstedt, and Asen 2020). The carbon tax has steadily increased since its inception, and at the beginning of 2021, a ton of carbon dioxide (CO2) was priced at SKr 1,200 (around US$144).b
In 2019, the Swedish government again proposed a similar scheme in which
BOX 3.5
environmental taxes were increased while taxes on jobs and entrepreneurship were simultaneously reduced. Although changes to the carbon tax were not part of this new package, it included a new excise tax on waste incineration and a tax on plastic bags. An additional surtax was levied on highincome earners, and tax deductions were introduced for employers of new labormarket entrants between the ages of 15 and 18 (Deloitte 2019).
Belgium Other countries have used similar approaches to shift the tax burden from income to environmentally harmful activities. Belgium introduced a tax plan that reduced employers’ social security contributions gradually, from 32.4 percent in 2016 to 25 percent in 2018. It also increased the tax-free amount and tax-deductible business expenses to alleviate the tax burden on labor. To finance these tax cuts, the value added tax on electricity and the excise duty on diesel were increased. Further measures gradually increased excise duties on alcoholic drinks and tobacco and taxed capital more strictly (EC 2017).
Colombia The Colombian government introduced tax incentives in 2014 to spur investment in renewable energy sources. These include a special deduction equal to 50 percent for investments in renewable energy or energy efficiency, an accelerated depreciation rule, and exemptions from value added taxes on goods and services and customs duty on imported goods.
In 2020, these incentives were expanded to include broader activities related to plant expansion or process improvements. Importantly, these changes include a special deduction scheme, incentivizing the switch to greener alternatives by applying the deduction to nonelectrical uses of renewable energy sources (such as switching away from fossil fuels in the transportation sector or replacing them with biofuels in the industrial sector). When the investment is made to comply with environmental standards, companies do not benefit from the deduction; hence, they are encouraged to go beyond the environmental regulations required by law (EY 2020; OECD 2020).
Mexico The government of Mexico reformed its tax system and introduced several measures targeting a greener fiscal system. The General Law on Climate Change in April 2012 decreased fossil fuel subsidies and introduced additional taxes. Since August 2014, the Hydrocarbons Revenue Law has imposed a special tax regime on companies that engage in oil exploration and production. It includes exploration-phase fees and royalties, with monthly taxes to be paid by companies to municipal and state governments.
With the country’s 2016 tax reform, taxpayers investing in energy efficiency and renewable energy equipment are eligible to
(continued)
BOX 3.5
obtain a 100 percent up-front deduction for the costs of these investments. However, companies are eligible to deduct costs of investments only if they comply with regulations. This can be seen as a way to incentivize companies to go beyond minimum requirements and enhance their energy mix.
The tax reform of 2016 also abolished fuel subsidies and increased taxes on transport fuel to reflect the external cost of fuel more closely. Furthermore, a new carbon tax was introduced that covers a larger share of emissions with a price, as was the case before but now including coal albeit at a rather low level (Arlinghaus and van Dender 2017).
The tax reform also included a special mining right royalty of 7.5 percent of net profits derived from the sale or transfer of extraction activities. An additional 0.5 percent tax is levied on gross income from the sale of gold, silver, and platinum (Deloitte 2016). These efforts have helped the government raise substantial additional revenues, slowly shifting its income toward more environmentally friendly sources and shifting it away from reliance on oil exports (Arlinghaus and van Dender 2017).
a. Based on the SKr/US$ exchange rate as of January 13, 2021. b. For more information about Sweden’s carbon tax, see the dedicated page “Sweden’s carbon tax” by the Government Offices of Sweden: https://www.government.se/government-policy/swedens -carbon-tax/.
US$25 for other vehicles and rolling machines per year in its 2020 draft budget law. Of these tax proceeds, 70 percent were supposed to benefit the state, while the remaining 30 percent were supposed to be allocated to the Solidarity and Guarantee Fund for Local Communities (Atlas Magazine 2020a). Unfortunately, because of pressure by insurers—whose collection of motor premiums was reduced by 10 percent in the first half of 2020 (also strongly affected by lockdown measures)—the 2021 draft finance bill abolished the tax (Atlas Magazine 2020b).
Putting taxes in place that target fossil fuels and the emissions caused by them can be successful in lowering air pollution. For example, the Swedish carbon tax, which primarily targets the consumption of gasoline and motor diesel, has reduced CO2 emissions from the transportation sector (Andersson 2019). The carbon tax was implemented together with a value added tax on fuel. Emissions subsequently declined by almost 11 percent, of which 6 percentage points were attributable to the carbon tax. Consumers appeared to respond more strongly to changes in the
