Environmental Fiscal Instruments: A Few International Experiences

Abstract

This article attempts to document the status of environmental fiscal instruments (EFIs) so as to explore relevant international experiences on ecotaxes in the context of India and to examine India’s specificities in these taxes within a wider perspective of other fiscal measures. Environmental levies across 15 countries were reviewed and the countries categorised are into two groups: Annex II and Non-Annex I. The revenues from levies imposed in the countries were also analysed. The most common form of taxes in Annex II countries in the form of energy taxes, followed by transport taxes. For India, energy and transport taxes could prove to be vital types of ecotaxes for addressing issues of climate change. Pollution taxes are difficult to levy for administrative reasons, but resource taxes are imperative because of severe environmental problems associated with mining and related activities. The revenue generated from environmental taxes and charges for all Annex II countries hovered between 2 and 4 per cent of their respective GDPs, except for Canada and the United States of America, whereas for Non-Annex I nations, this ranged only between 0 and 1 per cent.

JEL Classification: H23, Q50, Q58

Keywords

Environmental fiscal instruments Environmental taxes Externalities

1. Introduction

The provisioning of environmental goods suffers from market failure,¹ for which externalities are one of the prime causes. This is because environmental goods—for example, lakes, forest resources, atmosphere and so on—are considered to be public goods whose property rights are ill-defined leading to their over-exploitation (Coase, 1960). This not only affects the environmental resources but also the living and non-living bodies in and around, which are intricately linked to them, either directly or indirectly, thus, generating negative externalities, that is, a deterioration in the entire ecosystem either in quality or quantity or both. Market failure in the context of the environment also occurs where a positive externality is generated due to innovations in environmental-friendly technologies such as the production of electricity through solar, wind or tidal energy. In such cases, there is a likelihood of under-investment owing to the huge costs involved in producing such technologies, while the private benefits accruing to investors are normally less than their social benefits, thus leading to a sub-optimal level of output. Against this backdrop, an attempt is made in this article to understand the role of environmental fiscal instruments (EFIs) in addressing the issues of market failure specific to India. The article attempts to review the use of such instruments across a few environmentally active countries and other emerging countries, to help understand India’s status vis-à-vis the successful countries and to also draw useful lessons wherever possible. Such a review can be very useful given the fact that several European countries have already demonstrated their positive impact on the environment (refer Table 1).

Table 1
Impact of a Green Shift in Taxation: Selected International Evidence

Country and Tax Period Evaluated Impact

Finland: Energy and Carbon Taxes 1990–2005 CO2 emissions 7% lower than would have otherwise been; a shift from carbon tax to output tax on electricity in 1997 may have lessened the impact

Norway: Carbon and Sulphur Dioxide Taxes 1991–2007 21% reduction in CO2 from power plants by 1995; 14% national reduction in CO2 in the 1990s; 2% attributed to carbon tax; 12% reduction in CO2 emissions per unit of GDP

Denmark: Energy and Carbon Taxes 1992 CO2 emissions in affected sectors down by 6%, economic growth up by 20% between 1988 and 1997 and a 5% reduction in emission in 1 year in response to tax increase; in the 1990s, a 23% reduction in CO2 from the usual trend and energy efficiency increased by 26%; subsidy to renewables may have accounted for a greater proportion of emissions reductions than the tax

Sweden: Energy and Carbon Taxes 1990–2007 Emissions reductions of 0.5 million tons per annum; emissions would have been 20% higher than 1990 levels without tax

The Netherlands: Energy Tax 1999–2007 Emissions 3.5% lower than would have otherwise been; Low tax rates may have limited impact

Germany: Environmental Tax Reform, Taxes on Transport, Fuels and Electricity 1999–2005 CO2 reduced by 15% between 1990 and 1999 and 1% between 1999 and 2005; CO2 emissions 2–3% lower by 2005 than they would have been without tax; German re-unification an important factor in reductions

UK: Industrial Energy Tax 2001–2010 UK CO2 emissions reduced by 2% in 2002 and 2.25% in 2003 and cumulative savings of 16.5 million tons of carbon up to 2005; reduction in UK energy demand of 2.9% estimated by 2010

Country and Tax	Period Evaluated	Impact
Finland: Energy and Carbon Taxes	1990–2005	CO2 emissions 7% lower than would have otherwise been; a shift from carbon tax to output tax on electricity in 1997 may have lessened the impact
Norway: Carbon and Sulphur Dioxide Taxes	1991–2007	21% reduction in CO2 from power plants by 1995; 14% national reduction in CO2 in the 1990s; 2% attributed to carbon tax; 12% reduction in CO2 emissions per unit of GDP
Denmark: Energy and Carbon Taxes	1992	CO2 emissions in affected sectors down by 6%, economic growth up by 20% between 1988 and 1997 and a 5% reduction in emission in 1 year in response to tax increase; in the 1990s, a 23% reduction in CO2 from the usual trend and energy efficiency increased by 26%; subsidy to renewables may have accounted for a greater proportion of emissions reductions than the tax
Sweden: Energy and Carbon Taxes	1990–2007	Emissions reductions of 0.5 million tons per annum; emissions would have been 20% higher than 1990 levels without tax
The Netherlands: Energy Tax	1999–2007	Emissions 3.5% lower than would have otherwise been; Low tax rates may have limited impact
Germany: Environmental Tax Reform, Taxes on Transport, Fuels and Electricity	1999–2005	CO2 reduced by 15% between 1990 and 1999 and 1% between 1999 and 2005; CO2 emissions 2–3% lower by 2005 than they would have been without tax; German re-unification an important factor in reductions
UK: Industrial Energy Tax	2001–2010	UK CO2 emissions reduced by 2% in 2002 and 2.25% in 2003 and cumulative savings of 16.5 million tons of carbon up to 2005; reduction in UK energy demand of 2.9% estimated by 2010

Source: Green Fiscal Commission (2009) as cited in Srivastava and Kumar (2014).

The EFIs can be defined simply as those fiscal instruments that are pro-environment, which have been conceived as imparting subsidies to initiatives that tend to have environment-friendly impacts, such as solar projects, levying a tax on polluting activities and so on. These instruments are expected to lead to environmental improvements by taking into account both positive and negative externalities. They can be broadly divided into two groups: instruments that address positive externalities and those targeting negative externalities (Figure 1). The first group consists of environmental subsidies and environmental tax expenditures,² whereas the second group consists of environmental taxes and charges. This article categorises these instruments in a different manner when compared with the existing literature on environmental policy (such as Kosonen & Nicodeme, 2009), which normally identifies an environmental subsidy as the only component of the first group (Figure 1). Further, this study also explicitly links EFIs with market failures while categorising them, which again addresses a gap in the literature.

Figure 1

Source: Authors’ construction.

A probable reason as to why EFIs in the literature are generally classified under the first two categories, that is, taxes/charges and subsidies, is that fiscal instruments emerge from the domain of public finance which has been traditionally defined by Dalton (1922) as a subject which, ‘is concerned with the income and expenditure of public authorities …’ Defined this way, taxes/charges are treated as income for the government and thus address negative externalities through the levying of a fee, whereas subsidies account for a share of government’s direct expenditure and thus address the issues of positive externality by providing incentives. These arguments justify the general categorisation of EFIs into taxes and subsidies. However, this study considers tax expenditure to be different from subsidies for addressing positive externalities (Figure 1). This is because tax expenditures could be defined as the revenue foregone by the government on account of tax concessions. The tax expenditures could occur in the form of reduced tax rates or there could be a complete tax exemption, normally used for promoting R&D in environmentally sound projects. Thus, such concessions would relate to revenue foregone by the government, whereas subsidies are direct payments to encourage consumption or production of a commodity. Hence, this article treats tax expenditures as a separate category in contrast to the categorisation of tax concessions as a form of subsidies (Kosonen & Nicodeme, 2009) and is akin to Goulder (2005) who considers tax credits as an additional fiscal instrument for environmental protection. This framework will be utilised in the present article to attain the objective of documenting ecotaxes in the wider perspective of EFIs and in analysing the revenue from them. The article has been structured as follows: Section 2 gives details on data sources and the method followed to achieve the stated objectives. The status of EFIs in Annex-II and Non-Annex-I countries has been described in Section 3 and Section 4 analyses the revenue generated from such levies and concluding remarks are given in the final section.

2. Data and Methodology

The documentation of EFIs has been done using the only comprehensive database available, that is, the OECD-EEA database.³ It not only gives extensive information about various kinds of EFIs used across several countries but also gives revenue details for these instruments. For a meaningful analysis of policy options, a set of 15 countries was chosen. These countries were chosen from the classification of UNFCCC,⁴ which categorises the signatories of the convention into three broad groups: Annex I, Annex II and Non-Annex I. Since the fiscal policy options examined here relate to the preservation of the environment, the choice of countries from the UNFCCC is obvious. They have been chosen from the Annex II and Non-Annex I countries because the former group (which consists of developed countries) would not only give financial and technical assistance to the latter (developing countries) but also assist in developing and transferring environmental-friendly technologies (UNFCCC, 2014). The development of these technologies would also require the adoption of certain EFIs such as tax exemptions, reduced taxes, tax credits and so on, by both Annex II and Non-Annex I countries, thus justifying their use. Such a choice would also ensure a rich mix of developed and developing countries.

From among the Annex-II countries, 11 OECD countries have been selected of which five are Nordic countries—Denmark, Finland, Iceland, Norway and Sweden—and the rest are Australia, Canada, Netherlands, Germany, the United Kingdom (UK) and the United States of America (USA). The Nordic countries were chosen because they are considered the most environmentally conscious countries worldwide and also the pioneers in levying environmental taxes (OECD, 2002, 2006 as cited in Barde & Godard, 2012). The other European countries were included as they are also environmentally active (Szigeti, 2005); Australia, Canada and the United States of America were chosen because among the non-European OECD members, they recently have been pro-active on environmental improvement. Among the Non-Annex I countries, the BRICS nations have been selected so as to analyse the development of ecotaxes among developing countries which are comparable to India in terms of their macroeconomic structure. However, Russia had to be excluded because of the unavailability of data on EFIs and also as it is a part of the Annex I countries. Thus, we were able to make a comparison only across the remaining four countries, that is, Brazil, India, China and South Africa.

The second objective of this study is to analyse the revenue from ecotaxes in a comparative perspective of the 15 countries selected from the OECD-EEA database. Analysing the financial cost of subsidies and tax expenditures would have been the optimum measure to examine the cost to the exchequer associated with these measures, but this could not be done due to the unavailability of data. Analysing the revenue generated from these taxes is essential, because it is a by-product of such levies, and can be used for various environmental and developmental purposes including financing of environmental subsidies. Further, provided the detrimental condition of environmental goods in India, in terms of deteriorating air quality, water bodies, etc. (The World Bank, 2014), an important policy question in the Indian context would then be, how best to utilise the revenue from these instruments.

To enable comparison across the countries, absolute revenue details were converted into relative ratios of GDP and total tax revenue for the Annex II countries and GDP and total net indirect taxes (NIT) for the four Non-Annex I nations. Since the data on total tax revenue for the Non-Annex I nations was not available from a common database, data on their NITs was obtained from the World Bank database. The GDP figures for these countries were not available from the OECD/EEA database, so they were also taken from the World Bank database. The GDP figures for Annex-II countries are at current prices and current exchange rates, while GDP for Non-Annex I nations is at current prices. The data on total tax/NITs revenue are also in nominal values. This would not affect the analysis; the concern here is ratios and not absolute values; hence, if both the numerator and denominator are in nominal or real values, the ratios will not be affected. The time period for the entire analysis is from 1994 to 2010. This is because the revenue from only some taxes is available for 2011 and 2012.

3. Status of EFIs in Annex II and Non-Annex I Countries

The next two sub-sections review EFIs, that is, environmentally related taxes and charges, and the environmental subsidies and tax expenditures across the 11 Annex II and four Non-Annex I countries.

3.1. Environmentally Related Taxes/Charges

The levies in this section have been classified into six categories: energy taxes, transport taxes, pollution taxes, resource taxes, fees/charges and others. The first four categories are adopted from Eurostat (2001)⁵ as cited in Steinbach, Palm, Cederlund, Georgescu and Hass (2009), whereas the ‘Others’ category was added to include environmentally related taxes, which could not be classified under the first four categories. Fees and charges have been kept separate to differentiate them from taxes and are categorised for Annex II and Non-Annex I countries in sub-Sections 3.1.1 and 3.1.2.

3.1.1. Annex II Countries

Energy Taxes: In the 11 Annex II countries, energy taxes are the most common environmental levies⁶ among those described earlier. They comprise 27 per cent of the total environmental levies in these countries. The United Kingdom and South Africa are the two countries which rely mostly upon energy taxes (38% of the total environmental levies comprise energy taxes), and Australia the least (only 9% comprise energy taxes). The tax base of the energy taxes in the countries are mostly petroleum products and electricity. Further, all countries levied some form of energy taxes. But, the range in the proportion of use of energy tax across the countries is 29 percentage points, which is quite large.

Transport Taxes: These are another important form of environmental levies in the Annex II countries, as they comprise 14 per cent of the total environmental levies in these countries. Iceland relies on these taxes most (30%) and Germany the least (9%). The variation across countries is lower than for energy taxes but is still large at 21 percentage points. The tax base is mostly vehicles, and the tax is levied both in the form of ad-valorem and per unit tax. The tax rate is progressive as it differentiates on various bases, such as seating capacity, weight of the vehicle, fuel used and so on.

Pollution Taxes: As per the definition, pollution taxes are those levied upon emissions. Four of the 11 countries do not levy any tax that could be categorised under this heading. The total proportion of this tax is only 5 per cent, which indicates that this is not a preferred tax in these countries, as a result of the difficulties in administering it. It is difficult to monitor emissions from polluting sources, which is probably why countries such as Canada, Germany, the United Kingdom and Iceland do not have any tax in this category. In this category, the proportion of these taxes is the highest for Australia (17%), followed by Netherlands (16%) and Norway (15%). Australia and Netherlands are the only countries that levy a pollution tax on noise generated from airplanes. Also, Australia’s pollution taxes cover all the types of pollution as mentioned in the classification earlier, that is, air, water, solid waste and noise.

Resource Tax: This is yet another kind of tax that is not very familiar among the selected Annex II countries. Only 7 per cent of the total levies consist of resource taxes. Finland, Germany, Iceland, Norway and the United Kingdom do not levy any form of resource taxes. South Africa is the frontrunner in this category with 12 per cent of its total levies as resource taxes. The rest of the countries’ share ranges between 2 and 5 per cent. South Africa has 30 such levies which can be categorised as follows: severance tax, mining tax/license and timber tax, with the other levies being some variant of these. The tax bases for the other countries are similar to that of South Africa.

Others: This category forms the third-largest of the six defined classes, indicating that the Eurostat classification (2001) is not holistic. All those taxes that could not be classified under the aforementioned four classes were put under this category. Totally, 23 per cent of the total environmental levies could be treated as ‘others’. The maximum share of environmental taxes in this category is levied in the United States of America, Iceland and Norway, as 30 per cent of the levies in these countries could not be classified under the four Eurostat categories. Germany is the only country where all the levies were classified under the Eurostat definition. The taxes mostly included under this category are those on hazardous chemicals and lead batteries, waste and sewerage and fees/charges on fishing, hunting, etc.

Fee/Charges: The environmental levies in this category are the second most used in the Annex II countries and its total share is around 25 per cent. Germany has the highest respective share of fees and charges in its total environmental levies 73 per cent of its environmental levies are in the form of a fee or a charge. For the United States of America, this share is only 5 per cent. Of the 16 charges levied in Germany, 11 are on water extraction. Other countries also levy charges on water extraction, hunting, sewage and waste management, etc. (Table 2)

Table 2
Details of a Few Environmentally Related Taxes in Annex-II Countries

Countries Name of Tax Specific tax base Rate

Australia Oil recycling levy Petroleum based oils and greases and their synthetic equivalents 0.0384Ä per litre (liquids) or per kg (greases)

Product stewardship oil levy Lubricant oil 0.0396Ä per litre.

Canada Motive Fuel Taxes Diesel fuel 0.0658Ä per litre

Hydrocarbon duty Coke used in steel production 0.0095Ä per kg

Denmark Duty on CO2 Coal 59.5243Ä per tonne

Duty on nitrogen Nitrogen used by households 0.6702Ä per kg

Finland Excise on fuels and electricity A Energy tax—40 Coal 54.5400Ä per tonne

Strategic stockpile fee (Security of supply fee) 40 Coal 1.1800Ä per tonne

Germany Duty on electricity Electricity consumption exceeding 4,000 kWh per year in all-year dwellings that are heated by electricity 0.0552Ä per kWh

Nuclear fuel tax Use of nuclear fuels 145.0000Ä per gram plutonium 239, plutonium 241, uranium 233 or uranium 235 used in nuclear fuel rods

Iceland Carbon tax Diesel 0.0354Ä per litre

General excise on petrol Unleaded petrol 0.1508Ä per litre

Netherlands Duty on petrol Leaded petrol 0.6529Ä per litre

Fuel tax (tax on coal) Coal 12.5600Ä per 1,000 kg

Norway Basic tax on mineral oil Heavy fuel oil 0.1995Ä per litre

CO2-tax on mineral products Diesel 0.0794Ä per litre

Sweden Energy tax on electricity Electricity consumption—in some remote areas 0.0216Ä per kWh

Tax on nuclear power Thermal installation in nuclear power stations 1462.2980Ä per MW and month

United Kingdom Non-fossil fuel obligation levy Electricity production 0.7% of the price

Climate Change Levy Coal consumption—ordinary rate #N/A

United States of America Compressed natural gas tax Compressed natural gas 0.0364Ä per litre

Aviation fuel tax Kerosene for use in aviation, LUST tax 0.0002Ä per litre

Countries	Name of Tax	Specific tax base	Rate
Australia	Oil recycling levy	Petroleum based oils and greases and their synthetic equivalents	0.0384Ä per litre (liquids) or per kg (greases)
Product stewardship oil levy	Lubricant oil	0.0396Ä per litre.
Canada	Motive Fuel Taxes	Diesel fuel	0.0658Ä per litre
Hydrocarbon duty	Coke used in steel production	0.0095Ä per kg
Denmark	Duty on CO2	Coal	59.5243Ä per tonne
Duty on nitrogen	Nitrogen used by households	0.6702Ä per kg
Finland	Excise on fuels and electricity	A Energy tax—40 Coal	54.5400Ä per tonne
Strategic stockpile fee (Security of supply fee)	40 Coal	1.1800Ä per tonne
Germany	Duty on electricity	Electricity consumption exceeding 4,000 kWh per year in all-year dwellings that are heated by electricity	0.0552Ä per kWh
Nuclear fuel tax	Use of nuclear fuels	145.0000Ä per gram plutonium 239, plutonium 241, uranium 233 or uranium 235 used in nuclear fuel rods
Iceland	Carbon tax	Diesel	0.0354Ä per litre
	General excise on petrol	Unleaded petrol	0.1508Ä per litre
Netherlands	Duty on petrol	Leaded petrol	0.6529Ä per litre
	Fuel tax (tax on coal)	Coal	12.5600Ä per 1,000 kg
Norway	Basic tax on mineral oil	Heavy fuel oil	0.1995Ä per litre
	CO2-tax on mineral products	Diesel	0.0794Ä per litre
Sweden	Energy tax on electricity	Electricity consumption—in some remote areas	0.0216Ä per kWh
Tax on nuclear power	Thermal installation in nuclear power stations	1462.2980Ä per MW and month
United Kingdom	Non-fossil fuel obligation levy	Electricity production	0.7% of the price
Climate Change Levy	Coal consumption—ordinary rate	#N/A
United States of America	Compressed natural gas tax	Compressed natural gas	0.0364Ä per litre
Aviation fuel tax	Kerosene for use in aviation, LUST tax	0.0002Ä per litre

Source: OECD-EEA Database, n.d.

3.1.2. Non-Annex I Countries

While analysing the data for the Non-Annex I countries (refer Table 3), problems were faced in categorising several taxes because of insufficient information. Thus, for those levies, an additional category was created, ‘data unavailable’.

Energy Taxes: In all, 30 per cent of the total environmental levies in the selected Non-Annex I countries could be classified under energy taxes. Unlike the Annex II countries, a major proportion of the taxes is not in the form of energy taxes. Brazil had the largest share in Non-Annex I nations, levying 40 per cent of its total levies in the form of energy taxes. India is second, with 35 per cent. China, in contrast, does not have any levy which could be strictly termed under the category of energy tax; it levies a domestic consumption tax on fuel and cars, which could come under both energy and transport taxes. The energy taxes in Brazil comprise a tax on electricity and fuel, whereas for India almost all the states have a tax on electricity which accounts for the major share of energy taxes. South Africa levies three different kinds of taxes on electricity, fuel and road accidents. A tax to generate a fund for road accidents is levied on diesel and petrol and is thus termed as energy taxes.

Transportation Taxes: This is the largest category in terms of its share in total levies; 35 per cent of the total levies in the selected Non-Annex I countries are in the form of transportation taxes. This is the only category in which all four countries have some form of taxes. India and Brazil have the largest share amounting to 40 per cent. For India, most of these are in the form of motor vehicles tax, but there are also taxes on old vehicles to discourage their use. Six Indian states have this form of tax but not all the states are listed in the database (Verma, 2016). It is evident from this study that there are other taxes as well which are missing from the OECD-EEA database. South Africa has the smallest share in this category, which amounts to only 12 per cent of its total levies. These are in two forms: ad-valorem customs and excise duty and an airport passenger departure tax.

Pollution Tax: China has the maximum share in this category, amounting to 10 per cent. The situation is similar to that of Annex II countries, because this form of tax is not prevalent in Non-Annex I countries like India and Brazil. Here, a possible explanation could be the difficulty in monitoring emissions, especially from a non-point source like motor vehicles. China’s pollutant charge system is one of the oldest emissions systems across the globe. It was established in 1982 and was reformed in 2003 (Xu, 2012). South Africa levies a CO₂ vehicle emissions tax which was introduced only in 2010. It just has two differential tax rates which would be levied after crossing a threshold limit.

Resource Tax: The situation in this category is similar to that of pollution taxes and thus both categories have the lowest shares in terms of levies in Non-Annex I countries, which amount to only 2 per cent. The only major difference is that while among pollution taxes China and South Africa have a share, for resource taxes, only China has a share of 20 per cent. None of the other three countries have any levies, which could be classified under this category. China’s resource tax was introduced in 1993, and it has over 63 categories under which various rates are charged. These categories consist of various minerals and the tax is levied on the extraction of their ores.

Others: Only 3 per cent of the environmental levied in Non-Annex I group were not classified under the Eurostat classification. The share is minimal and far less than in Annex II countries. China and South Africa are the only countries which have two environmental levies each that could not be classified under any of the aforementioned categories. These are as follows: farmland for non-agricultural use tax and urban land-use tax for China, and an incandescent light bulb levy and plastic shopping bags levy in South Africa.

Fee/Charge: Only 9 per cent of the total levies are termed as fees/charges in the Non-Annex I nations. Among the four countries, only South Africa and China have these charges. Almost half of the South African levies are fees/charges, while these are only 20 per cent in China. This is again a major difference between the Annex II countries and Non-Annex I nations. They have 25 per cent of their total levies as fee/charges. China and South Africa have levied charges on water usage, as had the Annex II countries. South Africa, in addition, also levies charges on electricity and airport activities.

Data Unavailable: The share of those levies for which data is unavailable amounts to 20 per cent. Of this 25 per cent is for India, 20 per cent is for Brazil and 6 per cent for South Africa. In the case of India, data were insufficient for only one tax, that is, the tax on goods and passengers levied in 21 states of the country. This is why 25 per cent of the environmental levies in India could not be classified under any of the categories. There is no mention of the tax base or tax rate for this tax and only revenue data are given over the period. Thus, it becomes impossible to classify it into any category. The situation for Brazil is similar, as there is no information on tax rates and tax bases for the taxes named contributions for interventions in the economic domain (CIDE), which is also the case for the road licensing fees in South Africa.

Table 3
Some Environmentally Related Taxes in Non-Annex-I Countries

Country Name of Instrument Specific Tax Base Tax Rate (in Euros)

Brazil Tax on the circulation of goods and services—electricity Electricity #N/A

Tax on the circulation of goods and services—fuels Diesel #N/A

India Green tax on motor vehicles Old vehicles Various rates depending upon the state in which it is levied and type of vehicle: rates levied are: 3.056, 3.82, 7.64 15.28, 76.41

Additional tax on electrical energy (green cess) All plants/generating companies in the state of Gujarat producing electrical energy 0.0003 per kW unit of energy

China Pollutant charge Discharge of Class I water pollutants 0.07 Ä

Urban land-use tax Land use in county, town and mining areas 0.07–1.37 per m²

South Africa Electricity levy Electricity generated from non-renewable sources 0.0027

Carbon dioxide vehicle emissions tax Double cabs-CO2 emissions above a threshold of 175 gCO2/km 7.7991

Country	Name of Instrument	Specific Tax Base	Tax Rate (in Euros)
Brazil	Tax on the circulation of goods and services—electricity	Electricity	#N/A
Tax on the circulation of goods and services—fuels	Diesel	#N/A
India	Green tax on motor vehicles	Old vehicles	Various rates depending upon the state in which it is levied and type of vehicle: rates levied are: 3.056, 3.82, 7.64 15.28, 76.41
Additional tax on electrical energy (green cess)	All plants/generating companies in the state of Gujarat producing electrical energy	0.0003 per kW unit of energy
China	Pollutant charge	Discharge of Class I water pollutants	0.07 Ä
Urban land-use tax	Land use in county, town and mining areas	0.07–1.37 per m²
South Africa	Electricity levy	Electricity generated from non-renewable sources	0.0027
	Carbon dioxide vehicle emissions tax	Double cabs-CO2 emissions above a threshold of 175 gCO2/km	7.7991

Source: OECD-EEA Database.

3.2. Environmentally Related Subsidies and Tax Expenditures

In this section, we will give details of the other two types of EFIs mentioned in the introduction, that is, environmentally related subsidies and tax expenditures in the selected Annex II and Non-Annex I countries (Tables 4 and 5). Even though the database classifies these fiscal instruments under the broad class of subsidies, and further into grants, soft loans, tax reductions and other, this study classifies them under subsidies and tax expenditure on the basis of the fundamentals of public finance, as argued in the introduction section. Data for the Non-Annex I countries are available only for India and China, thus we were not able to analyse these EFIs for Brazil and South Africa. The EFIs for which the classification was not clear are classified under ‘Other’, which was further divided it into three: Other (Combination), Other (Insufficient Information) and Other (None).

Table 4
Details of a Few Environmentally Related Subsidies in Annex-II Countries

Country Name of Instrument Details

Australia Biodiversity and natural icons Aims to increase the area of native habitat and vegetation that is managed to reduce critical threats to biodiversity and to enhance the condition, connectivity and resilience of habitats and landscapes. Also aims to reduce the impact of invasive species.

Low emissions energy development fund LEED funding support of around AUD30 million has been invested in a range of projects, including wave, geothermal and solar thermal power generation; biomass projects including a mallee harvester, bio-fuel from algae and biomass pyrolysis and power generation from commercial and agricultural waste streams; LNG methane and carbon-dioxide recovery.

Canada Subsidy for conservation of soil and water courses N/A

Residential energy efficiency programme Households with an income of $30,000 or less that use either home-heating fuel or electricity as the primary heating source will be eligible for a grant of up to $200 for furnace testing and tune-ups, a $1,000 grant to top-up financial assistance for energy-saving renovations available through the federal EnerGuide for low-income households programme (limited to houses built before 1980), real-time power meters and energy-efficiency training courses for homeowners.

Denmark Grants for environmentally friendly agriculture To improve the use of environmental-friendly practises in the agricultural sector. Half of the financing is supplied by the European Union.

# -- General subsidy for integrated product policy Cleaner products—refunds from the CO2 tax: this is an extension of the other sub-scheme, where some of the revenues from the CO2 tax are used specifically for subsidising the manufacturing industry.

Finland Subsidy for the sanitation/wastewater sector Grant, maximum 50% of costs.

Electricity Conservation Check Electricity Conservation Assistants visit low-income households to check where they can save on electricity expenses.

Germany Support programme for hybrid buses in public transport Investment into hybrid motors: The maximum grant amount for solo buses is EUR150 000; articulated buses receive up to EUR250 000.

Municipal directive for the support of climate protection projects Development of climate protection concepts

Iceland Subsidy for maintenance of forests Income and corporate tax exemptions on the incomes of forestry owners

Energy investment allowance Tax relief for investing in sustainable energy and certain types of energy-saving assets, providing an extra deduction in profit before tax of 44% of the total amount of qualifying energy investments in a calendar year. The energy investment deduction is available if a separate qualifying corporate asset costs at least EUR450 and the total amount of energy investments per calendar year exceeds EUR2,100.

Netherlands General support for environmental projects and activities Subsidies for sustainable electricity generation Companies, households, municipalities and civil organisations can apply

Electricity generation based on landfill gas: A grant is given per unit of electricity produced, at the following rates: 1.1.2004: 0.0; 1.7.2004: 0.006Ä; 1.1.2005: 0.021Ä per kWh

Norway VAT exemption for electrical vehicles Electric vehicles are exempt from value-added taxation

Return of taxes on fertilisers and pesticides N/A

Sweden Eco car subsidy 2.5-year programme where SEK10,000 was paid to the buyers of an ‘eco car’

Environmental support in agriculture The aim is to reduce the pressure on the environment from agriculture, for example, by preservation of certain types of valuable land in the agricultural landscape, keep the landscape open, restoring and preserving the environment of sensitive areas, and organic production

United Kingdom Boiler Scrappage Scheme Rebate for new boilers: households can apply for a grant of GBP400 to replace a working G-rated boiler with an A-rated boiler

Green Bus Fund Funding for low-carbon emissions buses: large subsidies paid to organisations to invest in fleets of electric or hybrid buses

United States Energy efficient home credit Builders can receive USD2,000 for houses built that uses at least 50% less energy for heating and cooling than a comparable dwelling, and USD1,000 for a house that uses at least 30% less (but less than 50% less) energy on heating and cooling than a comparable dwelling.

Grants for low-emission school buses This enables districts to obtain less-polluting school buses and new pollution control equipment for their current fleets.

Country	Name of Instrument	Details
Australia	Biodiversity and natural icons	Aims to increase the area of native habitat and vegetation that is managed to reduce critical threats to biodiversity and to enhance the condition, connectivity and resilience of habitats and landscapes. Also aims to reduce the impact of invasive species.
Low emissions energy development fund	LEED funding support of around AUD30 million has been invested in a range of projects, including wave, geothermal and solar thermal power generation; biomass projects including a mallee harvester, bio-fuel from algae and biomass pyrolysis and power generation from commercial and agricultural waste streams; LNG methane and carbon-dioxide recovery.
Canada	Subsidy for conservation of soil and water courses	N/A
Residential energy efficiency programme	Households with an income of $30,000 or less that use either home-heating fuel or electricity as the primary heating source will be eligible for a grant of up to $200 for furnace testing and tune-ups, a $1,000 grant to top-up financial assistance for energy-saving renovations available through the federal EnerGuide for low-income households programme (limited to houses built before 1980), real-time power meters and energy-efficiency training courses for homeowners.
Denmark	Grants for environmentally friendly agriculture	To improve the use of environmental-friendly practises in the agricultural sector. Half of the financing is supplied by the European Union.
# -- General subsidy for integrated product policy	Cleaner products—refunds from the CO2 tax: this is an extension of the other sub-scheme, where some of the revenues from the CO2 tax are used specifically for subsidising the manufacturing industry.
Finland	Subsidy for the sanitation/wastewater sector	Grant, maximum 50% of costs.
Electricity Conservation Check	Electricity Conservation Assistants visit low-income households to check where they can save on electricity expenses.
Germany	Support programme for hybrid buses in public transport	Investment into hybrid motors: The maximum grant amount for solo buses is EUR150 000; articulated buses receive up to EUR250 000.
Municipal directive for the support of climate protection projects	Development of climate protection concepts
Iceland	Subsidy for maintenance of forests	Income and corporate tax exemptions on the incomes of forestry owners
Energy investment allowance	Tax relief for investing in sustainable energy and certain types of energy-saving assets, providing an extra deduction in profit before tax of 44% of the total amount of qualifying energy investments in a calendar year. The energy investment deduction is available if a separate qualifying corporate asset costs at least EUR450 and the total amount of energy investments per calendar year exceeds EUR2,100.
Netherlands	General support for environmental projects and activities Subsidies for sustainable electricity generation	Companies, households, municipalities and civil organisations can apply
Electricity generation based on landfill gas: A grant is given per unit of electricity produced, at the following rates: 1.1.2004: 0.0; 1.7.2004: 0.006Ä; 1.1.2005: 0.021Ä per kWh
Norway	VAT exemption for electrical vehicles	Electric vehicles are exempt from value-added taxation
Return of taxes on fertilisers and pesticides	N/A
Sweden	Eco car subsidy	2.5-year programme where SEK10,000 was paid to the buyers of an ‘eco car’
Environmental support in agriculture	The aim is to reduce the pressure on the environment from agriculture, for example, by preservation of certain types of valuable land in the agricultural landscape, keep the landscape open, restoring and preserving the environment of sensitive areas, and organic production
United Kingdom	Boiler Scrappage Scheme	Rebate for new boilers: households can apply for a grant of GBP400 to replace a working G-rated boiler with an A-rated boiler
Green Bus Fund	Funding for low-carbon emissions buses: large subsidies paid to organisations to invest in fleets of electric or hybrid buses
United States	Energy efficient home credit	Builders can receive USD2,000 for houses built that uses at least 50% less energy for heating and cooling than a comparable dwelling, and USD1,000 for a house that uses at least 30% less (but less than 50% less) energy on heating and cooling than a comparable dwelling.
	Grants for low-emission school buses	This enables districts to obtain less-polluting school buses and new pollution control equipment for their current fleets.

Source: OECD-EEA Database.

Table 5

Details of Some Environment-related Subsidies/Tax Expenditures in Non-Annex-I Countries

Country	Name of Instrument	Details
India	VAT exemption for plant and machinery used in the generation of electricity from renewables	The following are exempt from VAT: plant and machinery, including their parts, used in the generation of electricity from: (a) solar (b) wind power and energy; (c) biomass as defined under the policy for promoting electricity generation from biomass
India	VAT exemption for waste paper	To promote recycling waste paper (raddi) is exempted from VAT.
China	Subsidies for energy-saving products to benefit the people programme	To accelerate the spread of high-efficient and energy-saving products and stimulate economic development: a certified recycler of e-waste will receive CNY35, 85 and 80 as subsidy from the government for each set of air-conditioners, personal computers and refrigerators they dispose off, respectively
China	National scheme for subsidising the recyclers of electronic and electrical waste	To promote the appropriate disposal of electronic and electrical waste: a certified recycler of e-waste will receive CNY85 and 35 as subsidy from the government for each TV set and washing machine they dispose off, respectively.
	National scheme of favourable prices for electricity generated by coal-burning power plants with desulphurisation and denitrogenation facilities	To promote coal-burning power plants to establish de-sulpurisation and denitrogenation facilities and reduce the emission of SO2 and NOx: electricity generated by a coal-burning power plant with denitrogenation facilities will be offered a favourable price when it supplies electricity to the national grids. The cost will be transferred to consumers through price adjustments.

Source: OECD-EEA Database

3.2.1. Annex II Countries

Environmentally Related Subsidies: Under this category, 864 different parts of 569 EFI schemes have been analysed across the 11 countries. Of this, 395 schemes can be classified under environmentally related subsidies, as per the classification adopted in this article. Thus, it forms 46 per cent of the EFIs levied by the Annex II countries, which is also the largest proportion in this category. Further, all the EFIs levied in Denmark and Iceland are in the form of environmental subsidies. In case of Sweden, except for one EFI all the others are in the form of subsidies. On the other hand, Norway is the only country which does not have any environmental subsidy.

Various kinds of subsidies are provided in these countries. Most of them extend subsidies for conserving bio-diversity, forests and water; and soft loans for green initiatives, energy efficiency programmes, renewable energy, etc. Apart from these, many countries have specific subsidies such as for tyre recycling in Canada, ecological buildings in Denmark, soft loans for pollution control in Finland and the United States of America, market incentive programmes in Germany, carbon credits in Netherlands and so on.

Environmental Tax Expenditures: These are also widely used EFIs in Annex II countries as their share in environmental subsidies and tax expenditures is 41 per cent, that is, 352 in total. Norway has only three EFIs and all of these promote the use of electric vehicles through favourable income tax treatments and VAT exemptions. On the other hand, Denmark, Germany and Iceland do not have any such tax expenditure. After Norway, the share of EFIs in the form of tax expenditure is highest for Finland, that is, 78 per cent, which amounts to 25 such EFIs. These instruments are diverse and range from subsidising vehicles using alternative fuels, like biofuel and methane, to the use of renewable electricity, pollution-abatement methods, biogas, etc. The United States of America also relies heavily upon tax expenditures as its share is 68 per cent of the total EFIs used. Some of the examples are tax concessions or credits to agriculture water conservation system, renewable electricity generation, energy-efficient commercial buildings, pollution-control activities, alternative fuel vehicles, biodiesel, ethanol, etc.

Other: This category consists of those EFIs not classified under those mentioned previously and is further divided into three: Other (Combination), Other (Insufficient Information) and Other (None). The first consists of those EFIs which use both subsidies and tax expenditures as policy tools in a particular scheme, second comprises EFIs which were not classified because of insufficient information, and the last includes EFIs which neither follow the definition of a subsidy nor that of tax expenditure. Canada is the only country that uses both subsidies and tax expenditure for five schemes (which account for 4% of its total EFIs, four schemes of which are for disposing off old vehicles. One of these schemes is at the federal level and the rest are implemented by three provinces: British Columbia, Manitoba and Nova Scotia. The fifth scheme is for upgrading homes with efficient energy products.

Among the EFIs used in these countries, 3 per cent could be classified under Other (Insufficient Information), and most of these consist of soft loans for which there is not much clarity on which government bears the cost or if the banks do so. In the United Kingdom, 7 per cent of the EFIs were classified under this sub-head. The last category of Other (None) mostly consists of grants offered by public or private companies. For example, in Canada all 37 per cent or 52 EFIs in this category are implemented by public or private sector companies providing environmental-friendly products or services. Thus, in a strict sense, these cannot be considered an environmental subsidy as here we are only concerned with fiscal instruments levied by governments. In total, 14 per cent of the EFIs implemented by Annex II countries are classified as ‘Other’, indicating the lacuna in the database.

3.2.2. Non-Annex I Countries

Environmentally Related Subsidies: Among these countries, only China has some EFIs that can be classified under this category, as five of the six EFIs (83%) it implements are in the form of subsidies. All five promote the appropriate disposal of e-waste, that is, they subsidise the recycling of air conditioners, computers, refrigerators, TVs and washing machines.

Tax Expenditure: There are only three schemes which could be classified under this category. Two of these are provided by the state of Rajasthan in India which exempts VAT on plant and machinery used for generation of electricity through renewable resources, and on waste paper. China provides favourable prices to thermal power stations, which have installed facilities for desulphurisation and denitrogenation of emissions.

4. Analysing the Revenue from EFIs

After reviewing the forms of environmental levies across Annex II and Non-Annex I countries, the revenue details for these taxes/charges are analysed in this section. Under a strict Pigouvian framework, the aim of an environmental tax would never be to maximise revenue but to design taxes so that the revenue accruing from them would decline over the years. Therefore, the revenue raised from these taxes shall be viewed as a by-product used to support other causes, such as financing environmental projects through the provision of subsidies and tax expenditure, or for reducing other distortionary taxes. This section is broadly divided into two: the first analyses revenue from environmentally related taxes/charges and the second provide details of data gaps in financial costs incurred by governments for providing subsidies and tax concessions.

4.1. Revenue From Environmentally Related Taxes/Charges

4.1.1. Annex II Countries

The 11 countries were grouped according to the pattern of their revenues: relatively stable, relative gradual decline and relative steep decline. The first group consists of Denmark, Finland, Netherlands and Sweden; second includes Australia, Canada and the United States of America; and the third group comprises Germany, Iceland, Norway and the United Kingdom.

Figures 2 to 4 give the ratios of the revenue from environmental levies to GDP for the Annex II countries. As is evident from Figure 2, the revenue from environmental taxes/charges⁷ as a proportion of GDP is clearly highest for Denmark throughout the analysed period, from 4 per cent of GDP to a maximum of 5 per cent in 1999.The ratio remained almost stable during 2000 to 2006 at a level of 4.6 per cent before falling back to around 4 per cent in the subsequent periods. This downturn in the ratio after 2006 occurred because the rate of growth of GDP was more than the environmental tax revenue (ETR)⁸ (Table 6). Further, the relative steep decline in 2008 could be attributed to the global recession, which not only affected GDP but also the ETR for Denmark. This is also the case for all the other Annex II countries, except that the decline for the United States of America and Germany is not as steep as that for Denmark. This analysis was not possible for Australia and Canada because post-2007 and 2006, respectively, the data were discontinuous.

Figure 2

Source: Authors’ construction, based on basic data from the OECD/EEA Database.

The second category of countries (Australia, Canada and South Africa) experienced an almost a continuous decline, except for certain periods where there was an abrupt increase in revenue, such as 1997 and 2006 for Australia. This decline is relatively gradual when compared to the third category (Figures 3 and 4): Iceland and the United Kingdom show the steepest decline in the third group followed by Norway, but Germany is relatively the most stable of all. In these countries, the ratios between 2 per cent and 3 per cent on a whole, except for Iceland where the ratio dropped below 2 per cent after 2007. This sudden drop is largely because of a drastic decline in the revenue from two taxes: excise on motor vehicles and petrol and diesel. The contribution of the former tax in the decline is the largest, amounting to around USD97mn.

Figure 3

Source: Authors’ construction, based on basic data from the OECD/EEA Database.

Figure 4

Source: Authors’ construction, based on basic data from the OECD/EEA Database.

An analysis of the proportion of revenue from environmental levies to total tax revenue for these countries shows an almost similar trend, except that the ratios are higher.⁹ The ratio in the Netherlands moves closer to Denmark and, in fact, crosses Denmark in 2008 and stabilises at 9.39 per cent while Denmark declines to 8.37 per cent. This ratio for Finland is around 8 per cent and for Sweden it stabilises at around 6 per cent. In the case of the second category, the pattern of decline is similar to that of Figure 3 but the movement in the ratio for the United States of America is more evident: it begins at around 4 per cent and ends at around 2 per cent. On the other hand, there is a much steeper decline for almost all the countries in the third category, but the pattern of decline is similar to that of Figure 3, and their ratios move along a bandwidth of 6 per cent to 9 per cent of their respective total tax revenue.

Since for most of the countries, the proportion lies between 5 per cent and 10 per cent of their total tax revenue and between 2 per cent and 4 per cent of their GDPs, this indicates that environmental levies form a substantial part of their taxes and also their economies. Among the European countries, the dominance of the Nordic countries (Denmark, Finland, Iceland, Norway and Sweden) is clearly depicted in Figures 2 and 4: their ETRs lay between 2 per cent and 5 per cent of their GDP. The only non-Nordic European country whose ETR proportion lies close to Nordic countries is the Netherlands. The findings of this study are similar to the existing literature (OECD, 2002, 2006 as cited in Barde & Godard, 2012; Srivastava & Kumar, 2014; Szigeti, 2005). Explanations for the patterns of ETR proportions for all the countries have been provided in Table 6.

Table 6

Pattern of Environmental Levies’ Revenues in Annex II Country Revenues

S. No.	Countries	Behaviour	Explanation Through Data	Reasons			Reference
S. No.	Countries	Behaviour	Explanation Through Data	Mathematical Explanation	Policies of Government	Tax Rate	Reference
1	Australia	1.From 1998 onwards, a continuous decline in the share of environmental levies’ revenues in GDP and total tax revenue till 2005. 2.Rate of growth of ETR and GDP fluctuate a lot. 3.In 2006, abrupt increase in both ratios.	*High fluctuation in the growth rate of ETRs is because of a discontinuity in data. Abrupt increase in 2006 is because the revenue of six environmental levies have been reported only since 2006.	The rate of growth/decline in GDP is more/less than in ETRs between 1998 and 2005 leading to its decline	The continuous decline in both the shares of ETRs could be attributed to the non-adoption of Environmental Tax Reform policy, which ensures stability or an increase in the ratios.	Information Unavailable	*OECD/EEA Database
2	Canada	1.1996 onwards, continuous decline in the share of environmental levies’ revenues in GDP and total tax revenue till 2006 2.Abrupt decline in both the ratios in 2005	*Abrupt decline in the ratios is because the revenue for motor vehicle licenses in British Columbia has not been reported since 2005, which led to a decline in the total ETR by around $2,300mn in 2005.	The decline is primarily because the rate of growth in GDP is more than ETRs	The continuous decline in both the shares of ETR could be attributed to the non-adoption of environmental tax reform policy which ensures stability or increase in the ratios.	Information Unavailable	* OECD/EEA Database
3	Denmark	Share of environmental levies in GDP declined from 2006 till 2009 but its share in total tax revenue declined from 2007, with the decline in both ratios being most in 2008. Denmark has the highest environmental levies’ revenues share in GDP	Data are properly reported	Decline between 2006 and 2009 could be attributed to a higher rate of growth in GDP than in ETRs	Information Unavailable	*Due to one of the highest energy and CO2 tax rates in the world, the ETR-to-GDP ratio is the highest	*Government of Denmark (2004: 4–5) in Fujiwara, Ferrer, & Egenhofer (2006)
4	Finland	Share of environmental levies’ revenues in GDP and total tax revenue increased till 1997 and declined in 2000 with a subsequent increase thereafter till 2004. There was an abrupt increase in 2004 after which a continuous decline till 2009.	1.Decline in 2000 can be attributed to a decline in ETRs for a few taxes related to fuels and water charges. 2.Increase in 2004 could be attributed to the aforementioned taxes and a discontinuity in data	The decline after 2004 is because of a higher rate of growth in GDP than in ETRs.	*Waste water and water charges remained the same in 1999 and 2000, but water charges were increased from EUR/m3 0.77 to EUR/m3 0.86 in 2001, which could have led to an increase in total ETRs and hence in the ratios since 2002.	Information Unavailable	*Hiltunen (2004, p. 16) in https://helda.helsinki.fi/bitstream/handle/10138/40441/FE_676en.pdf? sequence=1
5	Germany	Movement in the share of environmental levies’ revenues in GDP and total tax revenue are similar. Both show a steep decline in 1995 and an increase between 1999 and 2003 further, there is an abrupt decline in 2009.	The abrupt decline after 2009 is because of a discontinuity in the data	The decline in 1995 because of the rate of growth of GDP is 17% and that of ETRs is only 13% and vice versa between 1999 and 2003	*Environmental Tax Reform was introduced in 1999, which not only led to the introduction of new taxes but the tax rates for several taxes were also increased, thus leading to an increase in the ratios between 1999 and 2003.	Information Unavailable	* Government of Germany (2003) in Fujiwara et al. (2006)
6	Iceland	Share of environmental levies’ revenues in GDP declined from 2000 till 2009, except for a rise between 2003 and 2005, though the share in total tax revenue started to decline since 1998. There was an abrupt increase in 2010.	1.Increase in ratio in 2010 is because of discontinuity in the data. 2.The increase between 2003 and 2005 is because the ETR of the excise on motor vehicles and the special excise on petrol and diesel increased.	The rate of growth in GDP and TTR was more than ETRs during 2000 and 2009.	*Overall the decline in the ratios could be due to non-adoption of the environmental tax reform policy by the government, in contrast to the other Nordic countries which did.	Information Unavailable	*Andersen et al. (2007)
7	Netherlands	The share of environmental levies’ revenue in GDP and total tax revenues move in tandem, except between 1999 and 2001. Both ratios show a decline in 1995. There is an abrupt increase in the ratios in 1996. From 2007 onwards, its share in total tax revenue is highest among the 11 countries analysed.	*In 1996, the ETRs from the duty on petrol and excise duties on mineral oil (other than petrol) increased substantially.	The decline in 1995 was because the rate of growth of GDP was higher than ETRs. From 2007 onwards, the share in total tax revenue for the Netherlands declined less rapidly than in Denmark, thus, making Netherlands the country with the highest ratio	The abrupt increase in 1996 was because of the introduction of the energy tax.	Information Unavailable	*OECD/EEA Database
8	Norway	Both the shares depict a similar pattern of continuous decline from 1998 till 2009, except for 2001–2004.	The increase in 2001 is primarily due to two taxes: electricity consumption and motor vehicle registration, but mostly to the latter which monotonically increased till 2007.	The decline is because the rates of growth of GDP and TTR are more than ETRs	CO2 and sulphur tax on aviation were introduced in 1999, which could have led to an increase in the ratios between 2001 and 2004. *Overall the decline in ratios could be due to the non-adoption of the environmental tax reform policy by the government unlike the other Nordic countries which did.	*The tax rate on sulphur in fuels was doubled in 2000 which could have led to a slight increase between 2001 and 2004	* European Environment Agency (2000, p. 70) Schlegelmilch (2000, p. 10) in Fujiwara et al. (2006) **Andersen et al. (2007)
9	Sweden	Both the shares depict stability since 1998 and an alternate decrease and increase between 1994 and 1998	The increase in 1996 is highest in terms of ETRs and is primarily because of an increase in the shares of three taxes: energy taxes on fuel and electricity and the tax on CO2	The stability is because the rates of growth or decline in the GDP and TTR were in tandem with ETRs	*The government introduced two environmental tax reform policies in the 1990s and 2001s, which could be a reason for overall stability in the ETR.	The ETR for taxes on CO2 increased because of an increase in the tax rate in 1996. *Also the energy tax on fuel was raised from EUR259.8 to EUR297.1 and EUR 429.7 to EUR488.6 on diesel and petrol, respectively.	Withana, Brink, Illes, Nanni & Watkins (2014) *Speck (2008)
10	United Kingdom	Both ratios increased in 1998 and declined steeply since 2000.	‘Duty on Hydrocarbon oils’ & ‘Air Passenger Duty’ are responsible for an increase in the ratios in 1998. The decline in the former environmental duty since 2000 led to the decline in total ETRs for 2000 and 2001.	The rate of decline in ETRs is more than that for GDP in 2000, which led to a decline in both ratios. This mismatch continues for the subsequent periods.	Information Unavailable	*The increase in the ETR in 1998 could be attributed to an increase in the tax rate on hydrocarbon oils from 8.2%–9.3% on 1 July 1997 to 9.2%–11.8% on 17 March 1998.	Seely (2014) *Bolton, Seely and Twigger (2000)
						Further petrol prices were very low, $10/barrel In 2000, prices of crude oil soared to $28/barrel and further, the duty was also increasing, thus diminishing overall demand and hence the ETR.
11	USA	Both the shares declined in a similar manner throughout the period. Mostly, there was a continuous decline in both ratios with a steep decline in 2004 and 2010.	*The major reason is the discontinuity in the dataset. In 2004, the ETR for motor vehicle registration licenses is unavailable, causing a decline of $16,000 mn compared to 2003. In 2010, the data on the ETR for 47 taxes/charges are missing	The rates of growth in GDP and TTR were higher than ETR for most of the period analysed, which led to the continuous decline.	The continuous decline in both shares of ETR could be attributed to the non-adoption of the environmental tax reform policy, which ensures stability and/or increase in the ratios.	Information Unavailable	*OECD/EEA Database

Source: Authors’ construction and as mentioned in the table.

Note: The asterisks and other symbols used in the table indicated the reference from which the data has been taken.

4.1.2. Non-Annex I Countries

Figure 5 depicts revenues from environmental levies as a proportion of GDP for Non-Annex I countries. The figure does not include Brazil because its pattern is hugely irregular which distorts the analysis for the other three countries, and we have considered Brazil separately in Figure 6. The analysis shows that the ratios for India and Brazil remained stable in the initial years, at around 0.2 per cent and 3.4 per cent of their respective GDPs, whereas the ratio for China stabilised only during 2004–2008 at 0.8 per cent of its GDP, after which there was an abrupt increase. On the other hand, the ratio for South Africa stabilised only during 2003–2006 at around 1.7 per cent of its GDP, otherwise its ratio fluctuated considerably. Figure 6 depicts an abrupt increase for Brazil in 2002 and even more in 2006. The increase in 2006 is due to a discontinuity of data on taxes on electricity and cars. The revenue from these taxes was reported only since 2006; therefore, it indicates an increase of around USD17,000 mn, thereby distorting the analysis. Similarly, the increase in 2002 was because the ETRs from a tax called ‘Contributions for interventions in the economic domain’ were reported only since 2002, thus indicating an increase of around USD2,500 mn in total ETRs in 2002. India has a similar situation in 2005 when the drastic increase in its ETRs is largely because the revenue from 16 of the 85 environmental levies has been reported only since 2005. In case of China as well, both shares, that is, the share of ETR in GDP and in total NIT revenue, increased between 2000 and 2003 and in 2009. The first increase is because the ETRs from the domestic consumption tax on fuels and cars and the vehicle purchase tax were reported only from 2000 to 2001, respectively; in 2009 the increase was again because of the domestic consumption tax on fuels and cars, but not due to a discontinuity in the data but due to an increase in tax rates in 2008 (Xu, 2012).

Figure 5

Source: Authors’ construction based on basic data from the OECD/EEA Database.

Figure 6

Source: Authors’ construction based on basic data from the OECD/EEA Database.

South Africa is the only exception in this group, where discontinuity in data has not affected the analysis. As discussed earlier, South Africa shows a lot of variations in both ratios and the patterns of these ratios are similar for the entire study period. For example, from 2001 onwards, both ratios declined till 2007, except for the share in GDP ratio which increased slightly after 2004 for 2 years. The ratios also increased from 1996 to 2000. The decline in both ratios could be attributed to the ETR in 2001 which declined largely because of the reduction in revenues from the general fuel levy. From 2003 onwards, the decline in the rate of growth of revenues from environmental levies was greater than the total NIT revenues because of which the share of ETR in NIT declined. A synopsis of this analysis, which also includes explanations through changes in the policies of respective governments and tax rates, can be found in Table 7.

Table 7

Analysing the Pattern of Environmental Levy Revenues in the Non-Annex I Country Revenues

S. No.	Countries	Behaviour	Explanation Through Data	Mathematical Explanation	Reasons		Reference
S. No.	Countries	Behaviour	Explanation Through Data	Mathematical Explanation	Policies of Government	Tax Rate	Reference
1	Brazil	Share of environmental levies’ revenue in GDP and NIT revenue depicts a similar pattern, that is, an abrupt increase in 2002 and 2006 and a sharp decline in 2008	*The increase in 2006 is due to a discontinuity of data on taxes on electricity and cars, while in 2002, it is because ETRs for CIDE is reported only from 2002	The decline is because the rate of growth of GDP and NIT revenue is higher than the growth rate of ETR	CIDE was introduced in 2000 thus leading to an increase in ETRs in 2002	Information Unavailable	*OECD/EEA Database
2	India	1.Both ratios are stable till 2004 2.They show an abrupt increase in 2005 3.They exhibit a sharp decline in 2007 and a sharp increase in 2008	The increase in 2005 is because the revenue from 16 of 85 environmental levies has been reported only since 2005. The decline in 2007 is because of under-reporting of data on ETRs from the sales tax on motor spirits and lubricants. The stability in the ratios could be due to the modest increase in the ETR from motor vehicles tax which is the only tax reported for India till 2004.	The stability is because the rate of growth or decline in the GDP and TTR behaved in the similar way as the growth in ETR	Information Unavailable	Information Unavailable	OECD-EEA Database
3	China	1.Both shares increased between 2000 and 2003 and stabilised thereafter till 2008. 2.Both shares increased sharply in 2009.	The increase in 2000 is because the ETRs for ‘Domestic Consumption Tax’ and ‘Vehicle Purchase Tax’ were reported only since 2000 and 2001, respectively.	The increases in both shares is also because of the higher rate of growth in ETR than in the GDP and NIT.	*The increase in 2009 is because of the increase in the ETR of the Domestic Consumption Tax on fuels and cars. This is because the government revised the tax rates in 2008	Information Unavailable	*Xu (2012)
4	South Africa	1.From 2000 onwards, both ratios declined till 2007, except for the share in the GDP ratio, which increased slightly after 2004 for 2 years. The ratios also increased between 1996 and 2000. 2.Both ratios increased in 2009 but the share of ETR in NIT rose from 2008	The decline in the ETRs from the general fuel levy is the prime reason for the decline in both ratios in 2001.	From 2003 onwards, the decline in the rate of growth of revenues from environmental levies is more than the NIT revenues and vice versa from 2008 onwards.	*The increase in 2009 is because the government introduced a levy on electricity that year	In 2001, the levy on unleaded petrol and diesel was increased by 2.4 cent/litre and 1.9 cent/litre, respectively. Further, world fuel prices were extremely high thus, leading to a decline in consumption and hence ETR. *In 2009, fuel levies and road accident levies were also increased, which increased total ETR and hence the ratios	OECD/EEA Database http://www.energy.gov.za/files/esources/petroleum/historyprice2001.html **Speck (2010)

Source: Authors’ construction and from other sources indicated by asterisks and other symbols in the table.

4.2. Analysing the Financial Costs from Environmental Subsidies and Tax Expenditures

Data on the financial costs associated with environmentally related subsidies and environmental tax expenditure are available only for a very few parts of the various subsidy schemes adopted by the Annex II countries. This restricts any analysis for these fiscal instruments. Except for Iceland and Denmark, data are unavailable for more than 80 per cent of such instruments. Iceland is an exception because it has only two such levies, so there is no difficulty in obtaining the data. Denmark is the only country which has continuous time series data for 90 per cent of its total fiscal instruments. This highlights the lacuna in the OECD/EEA database in providing details on the financial costs of such fiscal instruments. The condition for non-OECD countries is even worse, because the financial costs of environmentally related subsidies and tax expenditure were available only for two countries, that is, India and China, and these too were incomplete.

5. Conclusion

In this article, an attempt was made to track the status of EFIs so as to explore relative international experiences of ecotaxes in the context of India; and to examine India’s specificities in these taxes in a wider perspective of other fiscal measures. This was carried out by reviewing environmental levies and their revenues across 15 countries that were categorised into Annex-II and Non-Annex-I groups based upon the UNFCCC classification. The EFIs were categorised into three groups: environmental taxes/charges, environmental subsidies and tax expenditure. Although, it is clear that ecotaxes have a dominant advantage over the other two in terms of generation of revenue as a by-product, subsidies and tax expenditure are also being used along with ecotaxes to enhance the environmental gains from ecotaxes. This is because both EFIs work in tandem, as one dis-incentivises polluting behaviour and other incentivises positive environmental behaviour. Thus, ecotaxes can be understood as an indispensable initial and economically viable step for environmental preservation through the use of EFIs. Further, there were issues pertaining to categorisation as certain levies could not be classified under any of the four categories mentioned by Eurostat (2001). There are certain levies which are prevalent in India but were not classified by the database like the forest development tax, the Sikkim ecological fund, etc. (Verma, 2016).

The analysis further showed that the most common taxes in the Annex II countries are in the form of energy taxes, followed by transport taxes. For India, energy and transport taxes could prove to be vital types of ecotaxes as the country has committed to reducing its emissions intensity by 33–35 per cent by 2030 (Government of India, 2015). These forms of taxes have proven to depict positive impacts in several European countries, such as Finland, Norway and Denmark, by way of observed reductions in CO₂ emissions in these countries in the range of 7 per cent to 23 per cent (refer Table 1). Pollution taxes would be difficult to levy in the Indian context, which is also the case for the other Annex-II countries, given the technological and administrative requirements for such taxes. Resource taxes, on the other hand, would be an important class of ecotaxes that would be required because of severe environmental problems associated with mining and related activities in India (MoEF, 2009). In this regard, India could take lessons from the United States of America on levying ecotaxes on mining; however, there is not much literature on the effectiveness of this type of tax. Both subsidies and tax expenditure are prevalent across the Annex-II countries in various forms such as grants, soft loans, tax reductions and others. Some examples of these are subsidies for conserving bio-diversity, forests and water; soft loans for green initiatives, etc.

The financial cost of the EFIs could not be ascertained due to the paucity of data, nevertheless it is very important for countries using such instruments to track revenue losses from implementing uninformed policy decisions. The analysis of the revenue generated from the levy of environmental taxes/charges showed that it accounted for a substantial part of the total tax revenue for all the Annex II countries. It hovered between 5 per cent and 10 per cent of their respective total tax revenue and between 2 per cent and 4 per cent of their GDP, except for Canada and the United States of America. On the other hand, Non-Annex I nations’ ETR-to-GDP ratios ranged only between 0 and 1 per cent of their GDP and between 1 and 10 per cent of their total NIT revenue. This share, when compared with Annex-II countries, is low for Non-Annex I countries and could possibly be because of the relatively recent origin of these taxes in these countries (Verma, 2016).

Footnotes

Notes

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