Public Choice and the Environment Markus Ohndorf ETH Zürich 351-1006-00L Public Choice 08.12.2011
The role of environmental Taxes 2
Tax exemptions and political influence 3
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Asymmetric burden - NOx-Charge in Sweden 5
International competitiveness Example Cement 6
Price elasticities and competitiveness 7
Example: Swiss heavy goods vehicle road use fee heavy goods transport should pay for all its costs move more transport from road to rail Fee category 1(corresponds to emission class Euro 0): 1.15 ct/tkm. Fee category 2 (corresponds to emission class Euro 1): 1.0 ct/tkm. Fee category 3 (corresponds to emission class Euro 2 and better): 0.85 ct/tkm. Results: stop in the former growth trend in number of vehicle km of heavy goods vehicles. transit traffic has been reduced and the number of lorries crossing the Swiss alps is about 8% lower than in 2000 emissions of pollutants (CO2, NO2 and PM 10) from heavy goods vehicles about 6-8% lower. expected switch from road to rail has not occurred so far. 8
Judgement by the OECD [A] lesson that can be learned from the Swiss case is the importance of seizing the right moment for pushing through a delicate project on the political agenda, i.e. when the circumstances are favourable. But it also shows that it is essential to have done the necessary basic work when the opportunity arises. The positive experiences with the Swiss heavy vehicle fee show that road pricing is a suitable means of managing transport demand. 9
Public Choice behind it: 1985: introduction of a flat fee for heavy goods vehicles. fee in the years to come. 1994: a large majority of the Swiss people accepted the constitutional basis for a distance-related fee in a referendum. 1996: outcome of the consultation about the proposal for a law that was necessary to implement a distance related fee was negative tactical manoeuvres had stopped the technical work essential for a successful implementation. Change in the political environment (bilateral negotiations with the EU) the law, redrafted according to the critique in the consultation was accepted by 57% of the Swiss people. The fee was introduced 1 January 2001. 10
Distributive Impacts of environmental taxes Most studies show that environmentally related taxes have a regressive impact on the income distribution of households. With low demand elasticities taxes to industry are passed on to consumers Important implications for 1. Political support and 2. Distributive concerns Example: German Green Tax Reform 11
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Grandfathering and Windfall gains in the EU ETS Simulation Cap and Trade market With grandfathering, companies don t have to pay for the initial allocations But they can pass over costs to consumers given their marginal costs (i.e. per unit (GWh)) Opportunity cost principle leads to actual gains from environmental regulation by the industry. Strong distributive effects from end-consumers to electricity producers. Additional problem: Rent-seeking for initial allocations BUT: Rent-Seeking also occurs for Tax/Auctioning Revenues (MacKenzie/Ohndorf (2012)) 13
Using Public Choice: Strategy to introduce ETS (Example EU ETS) With the introduction of the regulation Free allocation of certificates Ensures industry support Once the regulation is in place: Switch to auctioning or taxing of windfall profits (e.g. Belgium) Ensuring support by end-consumers EU ETS Initially pure Grandfathering trial phase 2005-2007 First Kyoto Commitment period (2008-2012) Then switch to hybrid system with gradual increase in auctioned permits: 2013-2020 14