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Competitiveness effects of
environmental tax reform
( COMETR )
Paper read to the seminar:
“Environmental Tax Reform ”
Institute of European Affairs
M. S. Andersen (NERI)
J. Fitz Gerald (ESRI)
S. Scott (ESRI)
20 June 2007
Outline of talk

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COMETR an ex post study
ETR background
Competitiveness issues
Pricing power
Technology
Macro
COMETR
Competitiveness Effects of Environmental Tax Reform
Specific Targeted Research Project (STREP) of the ‘Scientific Support to Policies’
initiative under the EU’s Sixth Framework Programme for Research (FP6)
A
Partners:
1.
Cambridge Econometrics
2.
ESRI Dublin
3.
Institute for Economic and Environmental Policy, Prague
4.
Policy Studies Institute, London
5.
Vienna Institute for International Economics
6.
NERI, Aarhus University (coordinator)
Modules:

Conceptual: revenue-neutral carbon tax and competitiveness issues

Sectors vulnerable to competition - Pricing power

Micro sectoral effects - technology potential

Macroeconomic effects

Case studies - threat of relocation ’carbon leakage’

Mitigation and compensation mechanisms.
Competitiveness definition
Competitiveness is lost if cost of production
rises relatively faster than for competitors
Share of global production and export intensity
decrease, and import penetration rises
 A sustained loss in standard of living.

ETR background

EC 1990 proposed carbon/energy tax + rev recycling
Least cost strategy. Encourages technology. Targets the true objective.

6 EU states implemented ETR of this sort
1990
1992
1996
1997
1998
1999

Sweden
Denmark
Netherlands
Finland
Germany
UK
Detail: Energy-environment taxes introduced as part of policy to lower
income taxes for employees (SW, FN).
Employers’ social security contributions replaced by climate change levy/CO2
taxes (UK, DK).
Mixed approach, recycling split between employers and employees (DE, NL).
Competitiveness issues
Labour intensive sectors have little to fear.


Potentially vulnerable?
Energy intensive
Trade intensive
Low abatement potential, and
Low pricing power ?
 Lose
market share? Close down? Relocate?
Potentially vulnerable sectors
to be analysed for pricing power
Pulp, paper and board
Wood and products
Basic chemicals
Pharamaceuticals
Non-metallic mineral products
Basic metals
Food and beverages
Pricing power explored
Using sector’s past behaviour on cost increases:
a.
Output price externally determined?
( price-taker, vulnerable )
OR
b.
Mark-up on domestic costs?
( price-setter, market power, less vulnerable )
This question was tested using an econometric model for ETR countries.
Results on pricing power:
Sectors ranked from most vulnerable
1. Basic metals
MOST VULNERABLE
2. Paper and paper products
3. Wood and wood products
4. Chemicals
5. Food, beverages and tobacco
6. Non-metallic mineral products LEAST VULNERABLE
Vulnerability on energy intensity and pricing power
Vulnerability on technical scope and pricing power
(UK only)
Conclusions: vulnerability
Important differences in PRICING POWER
Sectors can be assessed and ranked:
Basic metals has least pricing power (most vulnerable),
Non-metallic mineral products has most pricing power
(least vulnerable).

Can prioritise sectors in policies to alleviate vulnerability
Where the foreign price is dominant it is the EU price
(not US or world price)

EU-wide ETR application effective.
Micro study of selected sectors in ETR countries
% Change in unit costs
Change in competitiveness
Gain
No change
Loss
Total
<= 1
1
37
9
47
1-5
0
7
0
7
>5
0
2
0
2
Total
1
46
9
56
Loss of competitiveness: the share of global production and export intensity
decrease, and import intensity rises.
Source: PSI WP3 COMETR.
How to reduce vulnerability?

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Negotiated agreements – e.g. UK CCA 80% rebate on CCL
Exemptions – but problems of EU State Aid rules !
Reduced rates - to sectors or processes
- above certain thresholds

Recycling – in addition to reducing labour taxes,
earmark some revenue to energy efficiency subsidies
e.g. UK Carbon Trust.

ETR was very modest !
Technology:
UK Climate Change Agreements
Specific energy consumption better than targets
Chemicals
Index (2000 = 1.0)
1.2
1.0
0.8
BAU
Target
Actual
0.6
1990
2000
2010
Technology:
UK Climate Change Agreements
Specific energy consumption better than targets
Cement lime and plaster
Index (2000 = 1.0)
1.2
1.0
BAU
0.8
Target
Actual
0.6
1990
2000
2010
Technology: UK Climate Change Agreements
Specific energy consumption trends index
Meat processing – mixed results
Index (2000 = 1.0)
1.2
1.0
BAU
0.8
Target
Actual
0.6
1990
2000
2010
Technology: UK Climate Change Agreements
Specific energy consumption better than targets
Ferrous metal
Index (2000 = 1.0)
1.2
1.0
0.8
BAU
Target
Actual
0.6
1990
2000
2010
Macro impact of ETR - emissions of GHG
Cambridge Econometrics E3ME
CHART 7.3: THE EFFECT OF ETR ON GHG EMISSIONS
% difference
Slovenia
0
-2
-4
Denmark
Netherlands
UK
-6
Finland
-8
1994
Note(s)
Germany
1997
:
2000
2003
Sweden
2006
2009
2012
% difference is the difference between the base case and the counterfactual
reference case.
Source(s) : CE.
Macro impact of ETR - GDP
Cambridge Econometrics E3ME
CHART 7.4: THE EFFECT OF ETR ON GDP
% difference
1
Finland
Netherlands
0.5
Germany
Denmark
0
Slovenia
Sweden
-0.5
1994
Note(s)
:
1997
UK
2000
2003
2006
2009
2012
% difference is the difference between the base case and the counterfactual
reference case.
Source(s) : CE.
Conclusions:
Competitiveness effects of environmental tax reform
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Some sectors are potentially vulnerable
Fewer are truly threatened – e.g. Basic metals
Use e.g. agreements
Technology was encouraged
EU-wide ETR would be best
Modest ETR in 6 countries had good results
COMETR website: www2.dmu.dk/cometr/
Follow Link to conference page Report with Policy Brief
Appendix: Price-setting model
The following model is considered:
pi = 0 + 1mci + pfi
where for sector i
pi = the domestic output price
mci = the domestic marginal cost
pfi = the foreign or world price
(US or German prices)
Specifically: Pd* = f(Pj , Rj , Wk ), where:
Pd* = the long-run wholesale price for the sector’s domestic output
Pj = the wholesale price index in the ‘competing’ country or bloc j
Rj = the exchange rate with country or bloc j. PPP imposed
Wk = the price index for domestic input factor k. Wage rates are used.
Error Correction Model representation:
Yt  1   (Yt 1  1 X t 1 )   2 (i)yt i   3 (i)X t i   yt
Appendix: nominal tax rates for industry
Effective rates were lower. Idea of scale: initial Swedish rate is 10 to 12 $US per barrel of oil
Heavy fuel oil tax rate for industry
Light fuel oil tax rate for industry
180
180
160
160
DK
FI
DE
NL
SI
SE
UK
DK-heavy
100
80
60
40
DK
FI
DE
NL
SI
SE
UK
DK-heavy
120
100
80
60
40
20
20
0
0
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
€/1000 litre
120
140
€/1000 litre
140
Coal tax rate for industry
Gas tax rate for industry
120
100
90
100
40
20
80
70
€/1000m3
60
60
50
40
30
20
10
0
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
0
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
€/ton
80
DK
FI
DE
NL
SI
SE
UK
UK-IPPC
DK-heavy
DK
FI
DE
NL
SI
SE
UK
UK-IPPC
DK-heavy
Appendix: Technology scope:
UK estimated abatement costs, example (ETSU)
Wood, wood products and furniture (20+36)
EURO / GJ
.
100
50
0
-50
0%
10%
20%
Percentage Energy Saving
30%
Appendix: Technology scope
UK estimated abatement costs, example (ETSU)
Non-metallic mineral products (26)
EURO / GJ
.
100
50
0
-50
0%
10%
20%
Percentage Energy Saving
30%
Appendix: Micro analysis of energy intensity
Ho : Carbon tax reduces energy intensity
(consistent with Porter Ho )
Tested: savings in energy costs due to Δ energy intensity
> Δ Costs due to new tax.
Results: 19 out of 32 tested positive (consistent).
Inconsistencies can be explained by low tax rate or low
energy intensity, except:
Cement (FN):high tax, high intensity but no improvement .
Appendix:
micro study of change in competitiveness
Details of nine losses of competitiveness:
Non-ferrous metals
Pharmaceuticals
Paper
Meat
Glass
Ferrous metals
2
2
2
1
1
1
UK, NL
DL, FN
UK, DL
UK
DL
UK
Appendix: Ireland’s possible ETR 1994
Losers / gainers: Net effect of carbon tax with reduction
in social insurance contributions –£ m, first round effects,
O’Donoghue 1997 ESRI WP no. 82
50.00
40.00
30.00
10.00
-10.00
-20.00
-30.00
-40.00
-50.00
Sector (NACE Code)
89
79
71
67
63
59
55
51
47
43
39
35
31
27
23
19
11
15
.0
0
9
5
0.00
1
Total Change in Costs
20.00
Appendix cont’d: Sector codes
Nace
Sector
Code
01 Agric/Forestry/Fishing
03 Coal
07 Petrol Products
09 Electricity/Water
NG Natural Gas
13
15
17
19
21
23
25
Metals and Ores
Non Metal Mineral
Chemical Products
Metal Products
Machinery
Office Machines
Electrical Goods
Nace
Code
27
29
31
33
35
37
39
41
43
45
47
49
51
53
Sector
Motor Vehicles
Other Transport Equip.
Meat/Meat Products
Milk & Dairy Products
Other Food Products
Beverages
Tobacco Products
Textiles/Clothing
Leather/Footwear
Wood Prod./Furniture
Paper/Printing Prod.
Rubber/Plastic Prod.
Other Manufacturing Prod.
Building & Construction
Nace
Code
55
57
59
61
63
65
67
69
71
73
79
81
89
93
Sector
Repair/Recovery Service
Wholesale/Retail Trade
Lodging/Catering Serv.
Inland Transport
Maritime/Air Transport
Auxiliary Transport
Communication Services
Credit & Insurance
Business Services
Rent Immovable Goods
Other Market Services
General Public Services
Non Mkt. Health Services
Other Non Mkt. Services
Appendix: Ireland Energy elasticities
(EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004)
Long-Run
Income
Elasticity
Long-Run
Price
Elasticity
Household
0.41
-0.26
Services
0.63
-0.36
Industry
0.78
Long-Run
“Max Price
Elasticity”
-1.09
Appendix cont’d: Ireland Electricity elasticities
(EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004)
Long-Run
Income
Elasticity
1.12
Long-Run
Price
Elasticity
-0.24
Services
0.74
-0.29
Industry
0.28
-0.29
Household
Appendix: Ireland’s proposed ETR
Effects on prices in 2003 of Tax of €20 a tonne of CO2
(EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004)
%
Coal
Oil
Gas
Elec.
Peat
House
holds
18.6
11.0
7.8
3.2
36.2
Electri
city
103.6
49.2
27.8
87.1
Appendix: Ireland - proposed ETR
(EPA-ERTDI paper by Bergin, Fitz Gerald et al. 2004)
Change Compared to 1990
0.35
0.3
0.25
0.2
0.15
0.1
0.05
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
0
Benchmark
CO2 Tax
Kyoto Limit