What are the areas and options for the further use of market-based instruments at EU or national level?
In theory MBI’s could replace taxation in very many different areas. However it should be noted that in general MBI’s operate according to the laws of supply and demand. Because of fluctuations in supply and demand the price which MBI achieve fluctuates, sometimes violently. While the average long run effects in wealth transfer via MBI and tax are similar, the short run price fluctuations of MBI can cause severe effects to small business and individual consumers.
Could market-based instruments be used in a way that promotes competitiveness, and does not impose an undue burden on consumers, in particular citizens with a low-income, but at the same time ensures revenue for public budgets?
Speaking only in the context of environment it should be noted that given the EU’s position on climate change the objectives to reduce Greenhouse gas (GHG) emissions should be pursued regardless of impact on low income families. In other words, if the achievement of environmental goals is really an absolute priority, the implementation of environmental policy should be taken up regardless of whether it has different effect on different income groups.
However it should be noted, that it is impossible to achieve environmental goals without sacrificing some of the current wealth (or welfare). Additionally it would be unfair to assume that higher income groups or businesses could be made to bear the disproportionate part of this sacrifice. Such measures would severely distort the nature of tax structure of member states, which right now is quite different (for example old member-states have a more progressive income tax system).
Finally it should be acknowledge that the extremely ambitious “greening” of the economy as envisioned by the EU will cost a lot and that this burden will have to borne by the consumers and producers alike. In other words it would be folly to imagine that this shift to low carbon economy could happen relatively painlessly, because no interventionist measure, be it taxation or MBI, can achieve this without diverting significant portion of present welfare
Should the EU more actively pursue taxation to further Community policy purposes (in addition to fiscal objectives)? Is this the right response to current global challenges and the fiscal needs of national budgets?
It should be noted that the nature of fiscal and regulatory objectives are diametrically opposite in their nature. As such successful fulfillment of one objective means failure of the other (for example, take taxation of tobacco products: policy objective to limit smoking has negative effect on fiscal objective of collecting revenue). Therefore taxation to achieve policy objectives has limited impact at best.
Fiscal needs of national budgets should be left to national governments. In addition the needs of the budget can also be met via effective management and cost cutting, as opposed to introduction of new taxes. It should be recognized that the purpose of so-called environmental taxes is to influence economic decisions and promote “greener” economy, not finance the debt of central governments. Therefore EU should avoid encouraging national governments to think of new environmental taxes as a means to meet fiscal needs.
Should the EU more actively promote environmental tax reforms at national level?
How could the Commission best facilitate such reforms? Can it for example offer some kind of co-ordination process or procedure?
Given:
· differing attitudes towards environment in member states;
· different levels of economic development in the enlarged Union, most importantly the differing abilities to pay for increase in energy prices among member states;
· different structure of the economy of member-states in the enlarged EU;
· different levels of possibilities of member-states to choose the energy-mix;
· different priorities of energy policy (cheap v green):
it would be best to let the national authorities to decide what environmental taxes (or other means) are best fit to cope with unique challenges the member-states face.
Would the establishment of the abovementioned MBI Forum be useful to stimulate exchanges of experience/best practice on Environmental Tax Reform between Member States? How could it be organised in an optimal way? How should it be composed to avoid potential overlap with existing structures?
An informal entity issuing non-binding declarations this Forum would be useful to stimulate exchanges of information and ideas.
How does the need to reduce the tax burden on labour in many Member States fit with the objective to promote innovation and to support research and development in order to shift towards a “greener” economy? How can this be achieved while at the same time respecting the budgetary neutrality? Would a more significant tax shift towards environmentally damaging activities be the right answer?
Of course economic theory states that if labor became cheaper (as a result of reduced taxes on labor) employers would move into relatively more labor-intensive activities. Even if that is the case such shift could mean that production would become relatively more labor intensive and less energy intensive. As a consequence of lower energy intensity we could also expect the economy to be less GHG intensive.
This question implies that the shift towards “greener” economy could only happen by intervention from the government. However reducing taxes on labor would increase the cash flows the companies receive. The companies would then use the increased revenue to invest into R&D, or more likely (given the increasing oil prices) into more energy- efficient means of production. As such the production would become less energy intensive and that would have positive effects on prices of energy as well as CO2 emissions. Moreover making inputs (in this case labor) cheaper is superior way to encourage innovation compared to transfers or subsidies from the government. It may seem that higher energy efficiency is insufficiently “green”, but increasing energy efficiency is one of the few “green” policies that would have environmental benefits with minimum or no adverse effects to the current welfare levels.
As for taxing environmentally damaging activities the answer is unclear. To form any cohesive taxation of environmentally damaging activities we need thorough inventory of all human activities and their “damage”. Additionally it should be noted that what label as “pollution” does not occur because businesses pollute for the sake of polluting. Environmental damage is a by-product of satisfying the expressed needs of the public and wealth creation. If we are to tax this by-product we should also acknowledge that we will have to forego some of our current welfare.
What is, in the light of national experiences, the best way to advance the process of reforming environmentally-harmful subsidies?
National experiences do not provide correct insights for reductions of subsidies since this action is perceived as an unpopular one. The reluctance to do away with European Common Agricultural Policy is the best example of that. However harmful subsidies (bearing in mind, that in general all subsidies are harmful) should be removed completely. The removal of subsidies would re-align the European economy, force to give-up economically unsound use of resources and free up factors of production for more productive activities. In the environmental context, removal of subsidies would for example free up the marginal agricultural lands (i.e. wetlands) or discourage the overuse of CO2 intensive fuels (i.e. coal).
One of more politically acceptable ways to get rid of subsidies would be to “buy-out” the beneficiaries of subsidies with one-time lump-sum transfers i.e. estimated by the discounted value of forgone future subsidies. Even though this would be a costly endeavor it would get rid of harmful subsidies once and for all. The benefits from such action range from better environmental practices to increased bargaining position of the EU in the WTO negotiations.
Finally, if the EU wants to remain true to its professed moral stance on Climate Change it should abandon environmentally harmful subsidies completely and immediately, regardless of how politically unpopular they would be.
Should the Energy Taxation Directive be reviewed to make a clearer link to the policy objectives the Directive integrates, in particular in the field of environment and energy? Would this make energy taxation a more effective instrument by better combining the incentive effects of taxation with the ability to generate revenue?
As stated earlier the nature of fiscal and regulatory objectives of opposite nature and these measures should not be viewed as complementary.
Is splitting the minimum levels of taxation between energy and environmental counterparts the best way for doing so? What would be the pros and cons and the main practical aspects of such an approach? Would the environmental incentive created by energy taxation be a sufficient and adequate response to reflect the objectives of the energy policy in the field of biofuels, including the creation of a market-based incentive for second generation biofuels? Is there a need for additional taxation addressing the remaining environmental aspects of electricity production (if any)? Is the proposed approach sufficient to favour uptake of electricity of renewable origin? What is the impact of such a Community framework for electricity of nuclear origin (bearing in mind the differing approaches at national level towards the use of nuclear energy)?
Due to current level of oil prices the incentives for pursuit of energy efficiency and production of energy from renewable sources are already in place. Additional incentives distort the market and have counterproductive results. For example, the support for first generation biofuels has negative impact for development of second generation biofuels. It channels resources into a commercial activity which is not economically viable therefore some of resources do not flow into potentially economically viable areas. The same principle applies to the support schemes for renewable energy in general.
Would the suggested changes to the Energy Taxation Directive and the proposed approach to its scope be the best solution for ensuring coherence between the Directive and EU ETS? Are there other options to achieve this objective?
What are the potential options that should be explored in order to provide the necessary incentives to encourage the EU’s trading partners to undertake effective measures to abate greenhouse gas emissions?
Once again given the diversity of EU trading partners a single approach to encourage limiting greenhouse gas emissions is not possible. Therefore EU should avoid any attempts to impose any sort of trade restricting instruments against the countries who pursue the climate change policy they see best fit. EU can encourage its trade partners by “soft” means, persuasion and pointing out scientific developments concerning climate change. However it would be unwise to restrict international trade by imposing “climate change” taxes or tariffs on goods coming into EU from countries that have a different approach towards the issue of climate change. Trade restriction would definitely have negative measurable effects on EU consumers and producers in short and long runs.
What would be the best MBI to tackle emissions from shipping, taking into account the specific nature of maritime transport? How could it be best designed?
Bearing in mind that shipping is by far the most energy efficient and least CO2 intensive mode of transportation it may be feasible to leave emissions from shipping as the “lowest benchmark” and not to try to limit them altogether.
Limiting emissions from shipping may have negative environmental effects since such measures would make shipping less desirable when compared to other modes of transport. More importantly given the nature of maritime transport it would be nearly impossible to impose a single set of rules since ships operate in many different jurisdictions, including international waters.
How can infrastructure charging, including considerations related to environmental costs, best be applied to transport modes? Should this model apply to all transport modes, or take into account specificities of each transport mode? To what extent should the Eurovignette directive be used in this respect?
How can the Commission most effectively ensure implementation of the water pricing policies set out in the Water Framework Directive? What options could be explored to reinforce the links between investments in national water projects and the introduction of corresponding water pricing to provide incentives for users and avoid distorting competition? If there is insufficient progress to divert waste away from landfill, should the Commission consider proposing a harmonised landfill tax with EU-wide minimum rates?
Since land has different value in different EU countries a single harmonized landfill tax is not sound from the economic point of view. By possibly overvaluing the services of landfills in certain countries, such tax may hamper potential beneficial developments in the landfill sector. It would be best to leave the pricing decisions concerning landfills to the national level.
Does the Community legal framework provide sufficient scope for Member States to use MBI to address waste management issues? Should the Commission facilitate the application of MBI in this area, e.g. through supporting exchanges of information?
The most EU should do is facilitate the exchange of information. However it should abstain from imposing any binding regulations regarding MBI and leave this area for the national governments
Should the Member States make a more intensive use of these types of instruments? Should, in particular, “payments for environmental services” be used more intensively to achieve environmental objectives? And should the scope for introducing systems of biodiversity offsets at Community level, e.g. wetland banking, be further examined?
Do you see scope for using cross border emissions trading schemes between groups of Member States to combat conventional air pollution through SO2 and NOx? How should such a system be designed to fit with national taxes and charges that are applied in several Member States?
