Download Fiscal Policy of Environmentally Sound Economic Growth

Fiscal Policy of
Environmentally Sound
Economic Growth
Prof. Rumen Gechev, Ph.D.
• The Fiscal Policy as one of the key instruments
of the Economic Policy
• Deepening conflict between Economic Growth
(rising GDP) and the State of the Environment
• Market Economy vs. Sustainable
Development
• The environmentally oriented Fiscal Policy
consists of few main instruments:
* Taxation
* Fees and Charges
* Tradable permits
* Budget subsidies
• The Taxation is among the most powerful and
the most market oriented tools of Sustainable
Development.
• It is characterized by number of parameters,
including: structure, absolute value, percentage
level, differentiation, scope (exemptions),
level of application (local, national, regional,
international.
Tax Structure
• Tax structure is interrelated with the structure of
the National Economy and especially with the
Energy sector structure
• The Carbon taxes in Denmark , Norway and
Sweden these taxes are high but more industry
differentiated, while in Finland and Holland are
lower but more general.
• Coal based electricity production in USA and Denmark is
50% and 70% respectively, while in Sweden and Norway
is 2% and 1%. It explains why there are quite different
approaches when selecting between CARBON,
ENERGY or HYBRID tax schemes.
• Poland relies heavily on the coal based energy
production while Czech Republic, Bulgaria and Romania
widely use nuclear electric generators. These energy
source differences determine different structure and
intensity of the Fiscal Policy.
• Interdependences between the energy sector policy and the Fiscal
policy (environmental taxation, subsidies, government investment
spending)
The Bulgarian Case
The closing of the first 4 reactors of the nuclear plant would cause
number of environmental , social and economic problems:
* Extended use of coal based electricity production – much higher
air pollution (SO2) and other negative side effects on the
environment, including human health;
* Extreme difficulties fulfilling the Oslo Protocol (1994) and Kyoto
protocol. Possible financial sanction by the EU;
* Energy shortages, higher electricity prices, lower competitiveness,
higher trade deficit, etc.
Taxation and Competitiveness
• The Environmental Fiscal Policy
(Taxation, Import/Export regime, Subsidies):
Fully Harmonized vs. Nationally Differentiated
Differentiation YES, but relevant to the common rules and
principles, otherwise, such differentiation can be used as
an additional tool for competitive advantages. Such
“hidden” instruments are: a) symbolic environmental
taxation; b) fixed, artificially low
prices on nonrenewable resources; c) direct or indirect subsidization;
d) tariff and non-tariff barriers, preventing from better
resource allocation.
Tax Neutrality
• Higher taxes on pollution and natural resource
depletion, but decreased taxes on labor and
capital formation. More financial burden will be
transferred to the heavy polluters while the
investments in new technologies and improved
products will be rewarded.
Problem: Corporate and individual tax revenues
are much higher (both in % and absolute value)
than the environmental tax revenues .
Revenues from environmental related taxes in % per GDP
6.0%
5.0%
4.0%
1994
3.0%
1998
2.0%
1.0%
US
A
Ja
pa
n
Po
rtu
ga
l
De
nm
ar
k
G
re
ec
e
Ita
ly
an
y
er
m
G
Fr
an
ce
Po
la
nd
Hu
ng
ar
y
Cz
ec
h
0.0%
Environm entally related tax revenues per capita in 1998 (USD)
Japan
USA
Portugal
Sw eden
Norw ay
Denmark
Italy
Germany
Poland
Hungary
Czech
0
200
400
600
800
1000
1200
1400
1600
1800
The Kuznets Curve Hypothesis
(GDP/per Capita : Pollution)
• Main problem of discussion:
The higher pollution level depends only (mainly) on
the level of GDP per capita or the defining factor
id the Applied Technologies and/or the type of
Product?
Despite the higher economic output, the
environmental degradation has slow down in
many of the highly developed countries.
Pollution : Taxation
• Industry specific or universal taxes?
* heavy vs. light industries
* vulnerability to business cycle fluctuations.
During recessions, an increase of the
environmental taxation may cause chain of
bankruptcies.
* Shall we fiscally tolerate the “inherited
industrial companies” on expense of the new
ones? How long and under what conditions the
tolerance could take place? Can we apply the
asymmetric approach EU-New member states?
Specific restraints on the Environmental Fiscal policy in
Eastern Europe
• Lowered GDP potential, problems with the B.of
Payments, Budget deficit imbalances, foreign and
domestic government debts, relatively lower standard of
living.
• Heavy polluted environment – contradiction between the
amount of financial resources necessary for
environmental recovery and the severe financial
restriction because of the economic problems. Political
difficulties when giving higher priority to environmental
spending on expense of socially sound programs.
• Pressure from the EU for speeded up harmonization of
the environmental legislation and the respective
technical standards of production.
Possible solutions
• Debt to “environment swaps
• Tax holidays and/or free land for foreign and
domestic
investments
which
transfer
environmentally friendly technologies.
• Using the environmentally oriented funding from
EU, The World bank, EBRD, EIB as a generator
for further attraction of private investments.
• Downsized or even zero subsidies for the loss
making public sectors and transfer of the scarce
budget resources into sustainable production.
Spending on Environmental
Programs in Bulgaria
• Environmental spending - 2% of GDP in
2000, the basic trend during the last years
– slow increase;
• 80% for operational expenses and only 1/5
on Investment spending.
• R & D activities – only 1% of the overall
budget of the Ministry of Environment.
Environmental Taxation: Producers vs. Consumers
We argue that much more attention has to be paid on the
taxation on Consumers (importers). The market
economy is Demand driven and the expected multiplier
effect from Sustainable Consumption is higher than the
traditional approach (“producer pay” principle).
• Current marketing principles are in sharp contradiction
with the prerequisites for Sustainable economic growth
because now : the more you buy (consume), the less
you pay; sales or VAT taxes are neutral to the quantity of
commodities
used
(consumed);
aggressive
advertisement which often stimulates consumption of
useless, health risky products; low prices on exported
raw materials and energy sources, which force the
exporting countries to produce and export more, i.e.
speeding up the process of environmental degradation;
Tax recycling
• Direct recycling (back to the polluters) or
Indirect recycling – first to the most
efficient fiscal utilization
*Debt retirement;
* Public investment projects;
* FDI government guaranties;
* Reduction of other taxes, etc.)
Tax exemptions
• * Immediate inputs of fuels in manufacturing are
tax exempt in Finland. The tax refund is up to
85% of the amount of tax on energy products
that exceeds 3.7% of its value added.
• * In Sweden, 65% refund of CO2 taxes when
fuels are used in manufacturing industries.
• Similar tax heavens are have been made in
Denmark.
• Germany and Spain have applied Zero implicit
CO2 combined with heavily subsidized coal
production.
Taxes vs. Tradable Permits
• Tradable permit advantages:
* gives pressure on producers to improve their products
and technologies;
• It stimulates both producers with modern or aging
technologies. “Modern” producers may generate
additional income by selling the quota while the “Old
fashion” producer may prefer quota than taxes in period
of few years till the renovation of the production capacity
• Problem: Tradable permit market is well developed in the
highly developed countries. Will it be possible similar
market to be organized in Eastern Europe or we shall
use mainly taxes and environmental standards at least in
the short run?
Which is the best model for
Sustainable development?
• We believe that there is no universal model. Indeed, few
key criteria can be applied when selecting the
appropriate set of INTERRELATED Fiscal, Monetary and
other instruments of the Macroeconomic policy:
* Economic efficiency;
* Degree of environmental protection:
* Political acceptability;
* Time dimensions (Long-short run);
* Positive and negative spin-off effects;
* Scope of the effect (local, national, global);
* Control and monitoring opportunities;
Japanese lesson
• Seiyu, LTD – supermarket operator have introduced last
ECOTAX intro-company environmental tax system
• Principle:
• * Reducing the company’s environmental burden by
levying a green tax on energy consumption and waste
generation which a converted into an equivalent of
taxable carbon dioxide emissions.
• * The proposed Tax rate is $0.80 per metric tone.
• * All tax revenues will be recycled into environmental
programs.
• The fiscal policy has to be reshaped in
correspondence with the criteria for
Sustainable Development. The broader
the scope of the reforms and the higher
the level of harmonization on the basic
rules and principles at a international level,
the better the chances for mutual benefits.