Fiscal Studies (1998) vol. 19, no. 4, pp. 375–402
Equity and Ecotax Reform in the
EU: Achieving a 10 per cent
Reduction in CO2 Emissions Using
Excise Duties
TERRY BARKER and JONATHAN KÖHLER*
Abstract
This paper considers the distributional effects of imposing additional excise duties on energy
products according to carbon content. The assumed duties escalate from 1999 to 2010 and achieve
levels reducing CO2 emissions by 10 per cent below baseline by 2010 for 11 EU member states. By
2010, real personal disposable incomes are 1.6 per cent above baseline and employment is 1.2 per
cent above, assuming that the change is tax-revenue-neutral. The study concludes that the changes
will be weakly regressive for nearly all the member states in the study if revenues are used to
reduce employers’ taxes and strongly progressive if they are given back lump-sum to households.
JEL classification: C53, D12, H22, Q48.
I. INTRODUCTION
This paper inquires into changes in the distribution of expenditure and income
that would follow the introduction of revenue-neutral tax changes to reduce CO2
emissions across the European Union (EU). Consumer expenditures on
environmentally-sensitive goods and services (ESGSs) are examined and the
effect on these expenditures of imposing different excise duties on energy
products calculated. The consequences for incomes and employment are also
considered. The analysis concentrates on the distribution across different groups
*
Department of Applied Economics, University of Cambridge.
The authors would like to thank Paul Ekins and two referees for their useful advice.
Fiscal Studies
of households, classified by their level of consumption expenditure and by socioeconomic group. The results come from the E3ME, an environment–energy–
economy model for the EU, which generates results for 11 member states of the
EU up to the year 2010.
Reductions in greenhouse gas (GHG) emissions, in particular CO2, are once
more an important issue in international policy. The 1998 Kyoto protocol has set
a specific target for GHG emission reductions for the EU of 8 per cent below
1990 levels on average between 2008 and 2012. Given the need to achieve
emission reductions, the use of market-based instruments is now widely accepted
as an approach that brings the efficiency of markets to bear on the problem of
sustainable development in an effective way. The concepts and implementation
issues are discussed in European Environmental Agency (1996), EFILWC
(1996) and Ekins (1997). The European Commission has proposed additional
excise duties on energy products in place of the carbon/energy tax, although the
rates proposed are too low to make much contribution to the target. Nevertheless,
ecotax reform remains on the tax agenda, and even if new proposals are made for
emissions trading, the simulation of tax policies is helpful in assessing the
effects of auctioning permits, since in theory these should have much the same
effects (Cramton and Kerr, 1997).
However, there have been two main objections to the use of fiscal policy to
reduce CO2 emissions, such as increased excise duties on energy products: the
first is that such taxes will increase industrial costs and weaken the competitive
position of energy-intensive industries; the second is that the taxes are
inequitable, an objection that had its most powerful political expression in the
defeat of the UK government’s proposal to increase VAT on domestic fuels in
1994. On the first objection, the literature has found no evidence of significant
reductions in international competitiveness that would follow ecotax reforms
(Barker and Köhler, 1998). However, there are still widely differing opinions
about the distributional consequences of ecotax reform, partly because they
depend on the way in which the revenues from proposed legislation are recycled
in the economy. This paper addresses the issue by considering a reduction in
distortionary labour taxes and comparing the results with recycling via lump-sum
payments to all households.
The literature is very sparse in this area, and much of it is focused on the
effects of a carbon tax. For instance, it is frequently argued that the distribution
effects of a carbon/energy tax will be largely regressive: the burden of the tax
will fall disproportionately on lower-income households (see Poterba (1991),
Dower and Zimmerman (1992), Smith (1992), Commission of the European
Communities — CEC — (1992) and Johnson, McKay and Smith (1990) for
discussions). The basis upon which it is usually assumed that carbon/energy
taxes are regressive is intuitively obvious: lower-income households tend to
spend a larger proportion of total household expenditures on fuel for domestic
energy services (i.e. heating, hot water, cooking and lighting).
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Equity and Ecotax Reform in the EU
A recent review of the literature and state of the art in research on equity
effects of environmental policies in relation to climate change has been made by
the OECD (1995). Three of the conclusions of this review are:
1. ‘With regard to income distribution effects, empirical studies suggest that a
national carbon tax or trading programme would be at least mildly regressive
... in many OECD countries, although there is some evidence that such
programmes might actually be progressive in developing countries.’
2. ‘Perhaps the major conclusion of the empirical studies is that distributional
effects need to be considered very carefully as policy proposals move from
concept, to design, and then to implementation.’
3. ‘The specific mitigation or compensation strategies also need to be spelled
out more clearly. If taxes are collected, how exactly would the revenues be
“recycled” or used?’
The three most detailed quantitative studies for national economies of the
equity effects of a carbon tax are by Symons, Proops and Gay (1994) for the UK,
Hamilton and Cameron (1994) for Canada and Cornwell and Creedy (1996 and
1997) for Australia. These are static, mostly partial equilibrium analyses, making
use of input–output tables and consumer demand systems to calculate the effects
of carbon taxes under different assumptions about recycling. The conclusions are
that the magnitude of a carbon tax to reduce CO2 emissions — for example, by
20 per cent — is large, but transfer payments can be adjusted to compensate for
the regressivity of the tax without decreasing total revenues (see, for example,
Cornwell and Creedy (1996, p. 35)). However, there is no technological
substitution in these models, and no revenue-recycling through reductions in
employment taxes.
The most comprehensive study of the expenditure distribution effects of
carbon/energy taxation in Europe is that undertaken by the European
Commission (Smith, 1992; CEC, 1992). The results are also discussed in OECD
(1995). The study mainly relied on EU household expenditure surveys for six
countries, usually for 1985 (Spain, Italy, the Netherlands, France, Germany
(1983) and Ireland (1987)). The analysis was mainly static, assuming (a) no
indirect effects, (b) that any taxes do not change demand patterns, (c) that all the
tax is passed on to prices and (d) that there is no revenue-recycling. Under these
assumptions, the ratio of regressivity — defined as carbon tax payments as a
percentage of household total expenditure of the poorest quartile over the
corresponding percentage for the richest quartile — was calculated for 11
countries. The conclusion was that carbon and energy taxes were weakly
regressive for most countries, but more strongly regressive for the UK and
Ireland. The analysis (CEC, 1992) goes further in considering indirect effects in
some illustrative calculations for France and Germany, which confirm the static
calculations (CEC, 1992, p. 134). Smith was able to go further in considering the
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Fiscal Studies
effects of recycling either as lump-sum payments or across-the-board reductions
in tax rates, but only for the UK in 1988 (Smith, 1992, pp. 264–6) and again
without considering indirect and dynamic effects.
The main limitation of the EC study is that it concentrates on one side of
environmental fiscal reform (EFR) — the effects of tax increases on
expenditures; the other side of EFR — the use of revenues to reduce employers’
taxes and increase employment — is not treated specifically. EFR is intended to
increase employment and reduce unemployment as well as improve
environmental performance; it is likely that the extra employment will have
favourable effects on the distribution of income, given that low-income
households are likely to benefit more than other households from reductions in
unemployment.
In the large quantitative studies of the effects of the EC’s proposed
carbon/energy tax (Data Resources Incorporated (DRI), 1991 and 1992) or of a
substantial package of environmental policies (DRI, 1994), distributional
questions have been incidental, rather than fundamental, components of the
analysis. The reason is partly the lack of data and the poor quality of the data
available, although consistent data covering the EU are becoming available.
The paper is organised as follows. The next section introduces the E3ME
model and describes its development to incorporate expenditure distributions. It
also describes the data on ESGSs. The scenarios for ecotaxation and their
relationship to the 1997 proposed Directive on additional excise duties on energy
products are detailed in Section III. Section IV gives the macroeconomic context
for the detailed results and Section V sets out the increases in prices for goods
and services bought by the socio-economic groups in the study and the effects of
these increases on real disposable incomes. Section VI concludes.
II. THE E3ME MODEL AND DATA
The energy–environment–economy model for Europe, E3ME, is a sectoral,
regionalised, econometric model of the EU (CEC, 1995 and 1998). It is a
disaggregated time-series, cross-section econometric model, which is distinct
from the alternative methodology of (computable) general equilibrium (CGE)
models, although it has benefited from the techniques used in CGE models —
for example, in calibration on recent data. The model has been constructed by a
team of partner institutes across Europe, with Cambridge Econometrics acting as
co-ordinator of the project.1 The model treats member states as distinct economic
1
The E3ME project is supported by the CEC, DGXII for Science, Research and Development, under the EC
Non-Nuclear Energy Programme (JOULE-THERMIE) 1994–98, contract no. JOS3-CT95-0011. Participating
organisations (contractors and associate contractors only) are: Cambridge Econometrics; Chambre de
Commerce et d’Industrie de Paris; ERECO (Brussels); Bureau Federal du Plan (Brussels); Statistics Norway;
University of Oulu; INFRAS (Zürich).
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Equity and Ecotax Reform in the EU
entities interacting with one another; but at the same time it is one model, giving
the benefits of common classifications, definitions and methodology, and with
equation estimates and results capable of being aggregated to the European level.
In this it differs from the suite of DRI econometric models used to analyse
possible EU E3 policies (DRI, 1991, 1992 and 1994) or the HERMES model
(see CEC (1993)) used to analyse the EC’s proposed carbon/energy tax. In some
respects, E3ME is similar to some national models used for E3 policy analysis
(Cappelen, 1991; Barker and Lewney, 1991).
Previous model applications have been limited in two respects. First, they
have relied either on an integrated EU macro-model (for example, QUEST used
in CEC (1992)) so that they fail to capture important sectoral effects, or on a
suite of national models (HERMES or DRI (1991)) so that they fail to capture
proper integration at the sectoral level. The use of E3ME as an integrated
sectoral model addresses these problems. Second, the work on CO2 abatement
has been almost entirely divorced from that on SO2, an approach that is clearly
inappropriate since many measures targeting one of these kinds of emissions will
affect the other. Since policy needs to encompass a package of measures that will
tackle both kinds of emissions, it requires a tool for analysis that models
instruments and emissions consistently, including unintended side-effects.
The current operational version of the model includes 11 member states (the
EU-12 without Greece), 30 industries, 27 consumer categories, 17 fuel users and
11 fuels. It provides substantial detail on CO2 emissions. The model solves for
output, prices, employment, fuel demand and supply each year to 2010 in
considerable detail under various assumptions about fiscal and exchange rate
policy. The key assumptions of the model are as follows:
• employment can adjust freely in response to demand (i.e. there is no fullemployment assumption);
• the additional duties affect prices only; there is no independent response via
R&D, innovation or other factors affecting competitiveness;
• prices are determined according to estimated responses from time-series
equations with long-run full passing-on of unit costs (i.e. prices are not
required to clear markets, but are largely administered);
• wage rates are determined in a wage-bargaining framework such that all taxes
and duties are paid by the final consumer in the long run;
• economic activities and prices in the rest of the world are unaffected by the
introduction of the additional duties in Europe; the world oil price is
unchanged between projections; and
• exchange rates and interest rates are all unchanged between projections.
The model has been extended by introducing two new classifications or sets
for the analysis of household expenditures: 10 ESGSs and 14 socio-economic
groups classifying households on the basis of consumption expenditure, by
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occupation — manual labour or unemployment — and by main source of
income. These classifications have been chosen after consideration of the data
available on the distribution of expenditures (EUROSTAT, 1992 and 1993) and
the detail available on consumers’ expenditures in EUROSTAT accounts. They
concentrate on socio-economic groups that are generally considered to be the
poorer sections of society and which may suffer considerable increases in the
prices of vital goods (for example, heating for pensioners) if ecotaxes are
introduced.
1. The Treatment of Nominal Incomes by Socio-Economic Group
At present, E3ME distinguishes the following nominal income and expenditure
flows to the personal sector by region: wages and salaries by industry, social
security benefits, residual incomes, direct income tax payments and employees’
social security payments. The wages and salaries are derived from wage and
employment equations for 30 industrial groups (see Barker and Gardiner
(1996)). Residual income flows are also estimated from equations. Rates for
social security benefits, for taxes and for social security payments are all
calculated from historical data and held constant in the projection at the last
observation values, unless further information about changes in rates is
available. This assumption implies that these flows will rise at the same rate as
regional wages and salaries, since the rates are in relation to wages and salaries.
Information on the income characteristics of the socio-economic groups is
required in order to attribute these flows to the groups. Data for total gross
income, net income, social security income, pensions income, and income tax
and National Insurance payments are taken from the Luxemburg Income Study.
See Köhler (1998) for a detailed treatment of the data.
The nominal incomes per head from the E3ME dataset for 1988 are then
converted to expenditures using the average saving ratios by region. They are
then compared with the total nominal expenditures for the socio-economic
groups from the EUROSTAT surveys and ratios between the two calculated and
stored. These ratios represent the differential saving ratios between the groups
and the average for each region as well as differences in definitions, grossing-up
and other discrepancies. It is assumed that these differentials and residuals
remain a constant proportion of nominal expenditures over the projection period.
Since there are comprehensive data for one round of surveys only, the
question arises as to the constancy of the proportions of income from the
different sources. They may be expected to change gradually over time (for
example, as the proportion of pensioners in the population grows) and they may
change over the economic cycle as unemployment rises and falls. Some evidence
on the behaviour of the coefficients is given for the UK in Table 1. The table
shows that, from 1983 onwards, there is no obvious pattern for the proportion of
380
TABLE 1
Wages and Salaries as Source of Household Income in the UK, and Unemployment Rates
Per cent
1996– 1995– 1994–
97
96
95
7.5
8.2
9.3
Unemployment rate
Wages and salaries
Lowest quintile
Second quintile
3.6
23.9
4.1
22.5
3.2
22.7
Year of FES
1990 1989
1993
1992
1991
10.3
9.7
8.1
5.8
3.6
21.3
3.2
25.3
4.9
25.4
3.1
29.6
1988
1987
1986
1985
1984
1983
6.3
8.1
10.0
11.1
10.9
10.7
10.5
3.7
27.7
3.3
27.6
4.4
26.4
3.9
28.2
2.6
26.9
3.4
29.5
3.9
28.9
Sources: Family Expenditure Survey; Monthly Abstract of Statistics; Annual Abstract of Statistics.
Fiscal Studies
wages of the lowest quintile and perhaps a slight decline for the second quintile.
Taking the last business cycle as running from approximately 1984 to 1995,
there is also no obvious relationship between the unemployment rate and the
wage source of income.
2. The Treatment of Real Expenditures and Price Indices of ESGSs by SocioEconomic Group
The 1988 survey results, as aggregated, extended and processed by Köhler,
Luhmann and Wadeskog (1997), provide data on all households’ expenditures on
environmentally-sensitive goods and services. The main data source used was
the EUROSTAT Family Budgets (EUROSTAT, 1992 and 1993), which contain
detailed household consumption data based on surveys carried out in the 12
member states in 1988. The data cover 11 of the 12 EEC states, but detailed data
for (West) Germany are not available in this source, so the German survey
(Statistisches Bundesamt, 1994) was used. The EUROSTAT data include
expenditures of households grouped by expenditure categories, by socioeconomic groups and by the main income source of the household. The data
across the expenditure categories provide information on the distribution of
consumption expenditure, and the income-source groups enable the ‘at-risk’
groups — those whose income is mainly derived from social transfers and state
pensions — to be analysed. These data provide the only source of expenditure
data that have been calculated on a consistent basis for the EEC states. The data
do not identify expenditure on vehicle fuels as an individual category. These data
were assembled from national data sources. The data for Germany have been
converted into the EUROSTAT categories.
The EUROSTAT data are limited in that numbers of households in the
various surveys are not given and the data are given for adult-equivalents
(converted from the household membership using the OECD scale), so further
analysis cannot be undertaken. This also means that no account can be taken of
effects due to household composition, but Smith (1992, p. 252) suggests that this
will not give rise to major biases. The EUROSTAT expenditure categories
concentrate on low expenditure groups: the highest category is ‘1.6 × the average
expenditure over all households’. In the UK 1988 Family Expenditure Survey
(Central Statistical Office, 1990), this was found to cover 2,134 of the 7,265
households surveyed, so the wealthy parts of the populations are not described in
much detail. However, since the objective of this analysis is to concentrate on
the low expenditure/income groups which may be disadvantaged by new
ecotaxes, the organisation of the data is well suited to this purpose. Another
problem is that households in low expenditure groups may have a high income
but be frugal, instead of having their expenditure constrained by a low income.
This would mean that the low expenditure categories were not necessarily
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Equity and Ecotax Reform in the EU
FIGURE 1
16
16
14
14
Percentage of total expenditure
Percentage of total expenditure
Distribution of Expenditure Proportions on Domestic Fuels, 1988
12
10
8
6
4
2
0
<0.4
12
10
8
6
4
2
0.4–0.6 0.6–0.8 0.8–1.2 1.2–1.6
Expenditure group
(proportion of average expenditure)
Belgium
Denmark
France
Ireland
Italy
>1.6
0
<0.4
0.4–0.6 0.6–0.8 0.8–1.2 1.2–1.6
Expenditure group
(proportion of average expenditure)
Luxemburg
Netherlands
Portugal
>1.6
Spain
West Germany
UK
Sources: EUROSTAT Family Budgets, 1992 and 1993; EUROSTAT calculations; Statistisches Bundesamt,
1994; Bundesministerium für Wirtschaft, 1996; UK Family Expenditure Survey, 1988; Italian household
survey, 1988; Belgian household survey, 1988; Spanish household survey, 1988; EU project PL950582
Environmental Fiscal Reform.
composed of households that were poor. The distribution of expenditures
compared with incomes will also be skewed by differences in saving rates for
different income groups. These issues are discussed further in Köhler, Luhmann
and Wadeskog (1997).
Köhler, Luhmann and Wadeskog describe the data in detail, and Figures 1
and 2 present expenditure proportions on domestic fuels2 and householder
transport.3 The percentage of households’ budgets spent on domestic energy
decreases as they spend more overall, i.e. the poor spend a larger percentage of
their budgets on energy. For most countries, the budget portion spent on energy
decreases from a range of 3.54 per cent in Spain to 9.95 per cent in Denmark for
2
Given in the EUROSTAT data as gas, electricity and other fuels.
Calculated as vehicle purchases + purchased transport from the EUROSTAT data with expenditures on petrol
and diesel fuel added from national data.
3
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Fiscal Studies
FIGURE 2
20
20
18
18
16
16
Percentage of total expenditure
Percentage of total expenditure
Distribution of Expenditure Proportions on Transport, 1988
14
12
10
8
6
4
2
0
<0.4
14
12
10
8
6
4
2
0.4–0.6 0.6–0.8 0.8–1.2 1.2–1.6
Expenditure group
(proportion of average expenditure)
Belgium
Denmark
France
Ireland
Italy
>1.6
0
<0.4
0.4–0.6 0.6–0.8 0.8–1.2 1.2–1.6
Expenditure group
(proportion of average expenditure)
Luxemburg
Netherlands
Portugal
>1.6
Spain
West Germany
UK
Sources: Same as for Figure 1.
the 0.4–0.6 × average expenditure group to a range of 2.09 per cent in Spain to
4.36 per cent in Denmark for the highest expenditure group. The pattern of
transport expenditure is in sharp contrast to that of expenditures on domestic
energy: for all countries, it increases with overall expenditure. In Italy, Portugal
and the UK, there is a particularly sharp increase between the 1.2–1.6
expenditure group and the highest expenditure group (>1.6 × average
expenditure). Most households spend more of their budgets on transport than on
energy: for households in the 0.8–1.2 expenditure group, the spending on
transport is between 6.26 per cent (Belgium) and 11.09 per cent (France)
compared with a variation between 2.74 per cent (Spain) and 6.50 per cent
(Denmark) for expenditure on energy. The high expenditure groups spend very
heavily on transport: in Denmark, France, Italy, Luxemburg and Portugal, more
than 15 per cent of household expenditure is on transport for the highest
expenditure group.
The E3ME database and projections of consumers’ expenditures per head in
27 categories, when converted to the same ESGS classification as above, provide
a second set of estimates. These data are compared in 1988 and the ratios stored.
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Equity and Ecotax Reform in the EU
The E3ME projections of consumers’ expenditures can then be converted to
ESGS projections in constant 1988 prices. The corresponding price indices of
ESGS by region, converted to 1988=1.0, can also be calculated from the price
indices of consumers’ expenditures for the 27 categories.
Two strong assumptions are then necessary to derive the real expenditures on
ESGSs by socio-economic group and the corresponding price indices. First, it is
assumed that each group responds to price and income changes in the same way
as the average household in each region. Second, it is assumed that the prices of
the ESGSs move the same way for all groups in a region, i.e. although there may
be differentials in the prices paid, the differentials remain constant over the
projection. The real expenditures on ESGSs, by socio-economic group, region
and year, can then be calculated and summed to give totals by group, domestic
heating by group or householder transport by group. The price indices for
ESGSs, socio-economic group, region and year can then be calculated and
weighted to give the group indices.
This method preserves the characteristic spending patterns of the socioeconomic groups as given by the 1988 survey results and shows how each group
is affected by the changes in prices of ESGSs following an increase in
environmental tax rates. The nominal expenditures by the groups can then be
deflated by the price indices to give real expenditures by region and year.
III. ASSUMPTIONS FOR THE PROJECTIONS
1. Additional Excise Duties on Energy Products
The European Commission (Press Release, Brussels, 12 March 1997, reported in
the Financial Times) has proposed a Directive to widen the scope of the
minimum rate system to include all energy products. This proposal combines two
requirements made by the Council of Ministers: the first is to present new
proposals for energy taxation following the failure of the carbon/energy tax
proposal to be agreed; the second is to reduce distortions in the energy market
caused by different rates of excise duties on fuels in different member states. The
proposal is intended to give member states the flexibility to differentiate rates of
taxation on the basis of environmental criteria, while complying with the
minimum rates; it encourages member states to avoid increasing the tax burden
and to use extra revenues to reduce taxes on labour.
The new proposal extends the present framework of harmonising duties on oil
products to cover coal, gas, electricity and other energy products. New minimum
rates starting on the dates 1 January 1998, 1 January 2000 and 1 January 2002
are proposed for motor fuels and heating fuels. A wide range of exemptions is
proposed: fuels used by airlines, products used on navigation within Community
waters and special cases. Member states may choose to exempt renewable
energy sources. Special refunds are proposed for firms whose energy costs are in
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Fiscal Studies
excess of 10 per cent and 20 per cent of production costs. The proposal is being
considered by the Council of Ministers and governments but has yet to be
adopted.
2. Treatment of Additional Energy Duties versus a Carbon Tax
E3ME can include both a carbon/energy tax and excise duties. The main
difference between them is the inclusion of a carbon tax in the basic prices of the
energy industries. Excise duties on energy products are intended to be paid
further down the chain of production, with the inputs into electricity and oilrefining untaxed, and electricity itself subject to tax; in this case, the basic prices
of the energy industries are largely unaffected, except inasmuch as their labour
costs and own use of electricity and fuel are taxed. The scenarios analysed in this
paper consist of excise duties and not the carbon/energy tax.
Additional excise duties on energy products have been treated in E3ME
specifically as a new set of excise duties on purchases by industries and
consumers of coal, oil products, gas and electricity, with the tax being assumed
to be passed fully on to prices, the same treatment as for other excise duties.
3. Scenarios
In the projections reported in this paper, a set of escalating additional excise
duties for EU member states has been calculated for the period 1999–2010,
graduated according to the carbon content of the energy products being taxed
(with electricity taxed on the basis of the carbon content of its generating input
fuels, but other exemptions and special treatment of the proposed Directive not
included). These rates are assumed to escalate in constant absolute amounts each
year and are calculated, in the main projection, to achieve an overall reduction of
10 per cent in CO2 emissions below base-case projections by 2010 for the total
for all 11 member states included in the current version of the model (EU-11).
(For a comparison, the 2010 rates of tax to achieve the 10 per cent reduction
correspond to a rate of $16, 1999 prices, per barrel oil-equivalent (boe)
compared with the $10 per boe, 1993 prices, for 2000 proposed by the
Commission for a carbon/energy tax.) An indication of the magnitude of these
additional taxes is also given by the ex-ante estimates of their revenues as a
proportion of GDP in current prices. These estimates are shown in Table 2 for
the years 2000, 2005 and 2010. For the EU-11, they rise from 0.4 per cent of
GDP in the year 2000 to 2.2 per cent by 2010. These estimates can be compared
with those of Smith (1994) for the proposed $10 per boe carbon/energy tax,
which are also ex ante but ignore any exemptions or effects of economic growth
and baseline changes in economic structure. Given these differences in
treatment, the percentages are very similar, with the differences in rates between
countries reflecting their CO2 emissions per unit of GDP and the exemptions of
the additional excise duty proposal. The increases can also be compared with
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Equity and Ecotax Reform in the EU
TABLE 2
Ex-Ante Revenues from Additional Excise Duties as a Percentage of GDP
(current prices)
2000
2005
2010
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
0.4
0.5
0.3
0.7
0.4
0.8
0.4
0.6
0.3
0.6
0.4
1.2
1.4
0.8
2.3
1.4
2.4
1.5
2.1
1.2
2.2
1.2
2.0
1.9
1.4
4.0
2.5
3.6
2.4
4.1
2.1
4.0
1.9
EU-11
0.4
1.3
2.2
Per cent
Smitha
$10/barrel tax
1.7
1.0
1.0
1.8
0.9
2.6
1.6
1.3
1.2
1.3
1.3
a
Smith (1994) does not specify a year.
Sources: EU project PL950582 Environmental Fiscal Reform; Smith (1994, p. 282) quoted in OECD (1995).
existing rates of tax on energy and labour. In 1993, the EU-15 levied taxes on
production factors (labour, capital, energy and environment) of 42 per cent of
GDP (European Environmental Agency, 1996, pp. 24–5); the taxes on energy
were relatively small — some 3 per cent of GDP — while the taxes on labour
were about 20 per cent of GDP. The energy tax share may have risen slightly
since 1993, but the increase of some 2.2 percentage points represented by the
additional excise duties required to reduce CO2 emissions by 10 per cent would
be a significant switch in the sources of tax revenue, raising the energy share and
reducing the labour share, if employers’ contributions were reduced to keep the
switch tax-revenue-neutral.
The revenues from these additional duties are assumed to be spent by each
member state in reducing employers’ contributions to social security schemes so
that the overall effect is to keep the total tax revenues from the duties and the
contributions constant, i.e. the tax change is tax-revenue-neutral in this restricted
sense; however, overall tax revenues and public sector borrowing may well
change as other tax revenues and spending change in response to the changed
economic conditions.
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Fiscal Studies
This main projection requires a baseline projection for comparison and has
been supplemented by three other projections which help to explain the results.
E3ME has therefore been solved for:
The baseline:
Projection 1:
Projection 2:
Projection 3:
Projection 4:
Projection 5:
A projection of business-as-usual growth in output, employment
and CO2 emissions, with a calibration of the growth of energy
demand to yield an overall increase in CO2 emissions of some 7
per cent above 1990 levels by 2010 for the 11 member states
covered in the model (EU-11).
Additional excise duties on energy products in proportion to
their carbon content imposed at escalating rates from 1999
sufficient to reduce EU-11 CO2 emissions by 10 per cent below
baseline by 2010. These duties are tax-revenue-neutral via
reductions in employers’ contributions to social security.
The additional duties of projection 1 but without any reductions
in employers’ contributions.
The additional duties of projection 1 but excluding additional
duties on fuels for road transport; tax-revenue-neutral.
The additional duties of projection 1 but excluding additional
duties on fuels for heat and power (i.e. including additional
duties on fuels for road transport only); tax-revenue-neutral.
The additional duties of projection 1 but tax-revenue-neutral via
recycling of revenues by an equal lump-sum payment to all
households, weighted by the number of adult-equivalents and
without any reductions in employers’ contributions.
By comparing these projections with the baseline and with each other, an
assessment can be made of the effects of the policies on income distributions, as
well as on GDP, employment and CO2 emissions.
IV. EFFECTS ON GDP, EMPLOYMENT AND CO2 EMISSIONS
Before presenting the detailed effects on income and expenditure by socioeconomic group, it is helpful to give some macroeconomic results by member
state. The top panel of Table 3 shows the effects of additional duties on energy
products without recycling of the revenues, i.e. with the revenues being used to
reduce public borrowing. The results clearly show small but mixed effects for
GDP and employment and large effects (over 10 per cent overall) for CO2
emissions. The overall effects for GDP are positive but negligible; those for
employment are negative. The reason for the mixed GDP results is that, in
general, imports fall more than exports, because the EU is a substantial net
importer of energy products bearing the higher taxes; gross output falls below
the baseline in every member state, although the falls are most pronounced in the
388
Equity and Ecotax Reform in the EU
energy industries. The outliers in GDP effects are the Netherlands (–2.0 per cent
below base) and Belgium (+0.8 per cent). Exports from the Netherlands fall
more than imports and the decline in GDP is exacerbated by a decline in
investment in energy-intensive industries (oil and metals). Imports into Belgium
fall more than exports and consumers’ expenditure is increased by wage rates
being exogenous (an assumption imposed for Belgium and Luxemburg to reflect
behaviour in these labour markets).
TABLE 3
Effects on GDP, Employment and CO2 Emissions, 2010
Additional Duties, without Recycling (Projection 2 – Baseline)
GDP
Per cent
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
EU-11
Employment
Thousands
Per cent
0.8
0.0
0.7
–0.4
0.3
0.3
–2.0
–0.5
–0.2
–0.5
0.2
14.2
1.3
–49.8
0.0
–75.4
0.4
–11.1
2.2
–60.6
–109.8
–199.8
0.3
0.0
–0.2
0.0
–0.3
0.2
–0.2
0.1
–0.4
–0.4
–0.6
0.1
–488.3
–0.3
CO2 emissions
Million tonnes
Per cent
of carbon
–6.3
–20.8
–1.2
–7.6
–14.8
–14.3
–1.3
–10.9
–14.3
–11.7
–0.2
–11.3
–3.1
–6.6
–0.8
–4.6
–8.7
–12.5
–16.6
–10.0
–17.3
–8.1
–84.7
–10.6
389
Fiscal Studies
Additional Duties, with Recycling (Projection 1 – Baseline)
GDP
Per cent
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
EU-11
Employment
Thousands
Per cent
1.9
1.3
1.4
0.8
1.7
1.0
–0.8
0.6
1.2
1.8
1.4
116.8
14.8
202.1
22.1
553.7
2.9
69.7
52.6
203.9
426.7
245.2
2.9
0.6
0.7
1.5
1.9
1.2
1.2
1.3
1.4
1.4
0.7
1.4
1,910.4
1.2
CO2 emissions
Million tonnes
Per cent
of carbon
–6.1
–20.2
–1.1
–7.3
–14.7
–14.2
–1.3
–10.9
–13.1
–10.6
–0.2
–10.7
–2.8
–5.8
–1.0
–5.6
–8.0
–11.4
–15.0
–9.0
–16.8
–7.8
–80.1
–10.0
Note: This and subsequent tables show results to various degrees of significance; this should not be taken to
imply the accuracy of the projections.
The bottom panel of Table 3 shows the effects on GDP, employment and CO2
emissions of the duties with revenues recycled by reducing employers’
contributions. For the EU-11, GDP is 1.4 per cent above base by 2010,
employment 1.2 per cent above and CO2 emissions exactly 10 per cent below by
design. The usual experience in most EU economies in the last 20 years has been
‘jobless’ growth, with employment growing much less than output. However, the
projection has employment growing at a similar rate to output, through the effect
of reductions in the costs of labour to employers. This causes firms to substitute
labour for other inputs to production and also reduces total production costs,
providing a stimulus to the economy. Furthermore, since labour taxes are often
distortionary, a reduction in these taxes will reduce the distortion and provide a
further stimulus. These factors explain the increase in GDP relative to the
baseline.
GDP increases in all regions except the Netherlands (which experiences some
loss of international competitiveness), with the largest increase, of over 1.9 per
cent (i.e. 0.2 per cent per annum 1999–2010), for Belgium. The ‘double
dividend’ of increases in employment and reductions in emissions is evident for
all the member states covered by the simulations. The increases in employment
are very uneven across states, ranging from 0.6 per cent for Denmark and France
to 2.9 per cent for Belgium. The Belgian result is partly due to the assumption
that wage rates in the economy are rigid, so that reductions in non-wage costs
have maximum effect on total labour costs. The reductions in CO2 are very
similar to those in the top panel of the table, showing that they are the effect of
the excise duties rather than of the reductions in employment taxes. Since the
390
Equity and Ecotax Reform in the EU
economy is operating at a higher level of activity, the reduction in emissions is
slightly lower for most countries.
The estimates of positive double dividends agree with other empirical studies
of carbon and energy tax in the EU (DRI, 1991 and 1994; Ekins, 1997); the
theoretical literature of the topic is reviewed by Bohm (1997) who concludes
that carbon taxes ‘cannot be regarded as distortionary in any conventional sense
of the term’ (p. 122) and that if the tax revenues are used to reduce a tax on
employment or the tax is an alternative to command-and-control policy, ‘there
exists a double dividend’ (p. 121).
V. EFFECTS ON EXPENDITURE AND INCOME OF SOCIOECONOMIC GROUPS
The effects of additional ecotaxes on vulnerable socio-economic groups come
from:
•
•
•
•
the increases in prices of the goods and services they buy;
the increase in their income from the use of the revenues from the taxes;
the reductions in environmental damages they experience; and
the indirect effects from the interactions of the policies on the economy and
the environment.
The immediate impact of additional duties on energy products is to increase
prices of domestic energy, as shown in the middle panel of Table 4. However,
although the price of householder road fuels also increases, the effects on
householder transport and overall average price levels (shown in the last and first
panels of Table 4 respectively) are mixed, because the reductions in employers’
contributions are passed on by employers in the form of lower prices of all goods
and services bought by consumers. These include prices of new vehicles, which
form a large proportion of households’ expenditure on transport. For seven of the
11 countries (not Belgium, France, the Netherlands and Portugal), the domestic
energy price increases are weakly progressive, with the higher expenditure
groups facing the higher increase in prices because they have a higher share of
electricity in their fuel use (and, in many countries, electricity is generated using
coal). However, the increases in prices of householder transport are strongly
regressive, i.e. the lower expenditure groups tend to face larger price increases.
This result is, perhaps, counter-intuitive. It happens because the increases in
prices of vehicle fuels are outweighed by reductions in prices of air transport and
new vehicles (as a result of the reductions in employment costs). Spending on
these is much more progressive than spending on vehicle fuels, which does not
exhibit a strong trend across the different socio-economic groups (Köhler,
Luhmann and Wadeskog, 1997).
391
Fiscal Studies
In order to assess the impacts on real incomes, the real expenditures on these
goods and services and the nominal incomes of the groups have to be taken into
account. The real expenditures vary strongly across expenditure groups, as
shown in the earlier discussion of the data, with domestic energy spending being
regressive and spending on householder transport being progressive. The effects
of the increases in nominal incomes across expenditure groups will offset these
increases in nominal expenditures, depending on the sources of income and the
increases in occupational wage rates of the wage earners in the different groups.
Assumptions affecting these income changes are made in the projections:
namely, (a) that social transfers and pensions will be increased at the same rate
as the increase in wage rates, (b) that the reductions in employers’ contributions
are across-the-board and not targeted at the lower-paid and (c) that the
proportions of income coming from wages and salaries do not alter with the level
of unemployment.
With these assumptions, the overall effects on the real personal disposable
incomes (real PDIs) of the socio-economic groups can be estimated. The results
are presented for the differences between projection 1 and the baseline in the
first panel of Table 5. Note that since no estimates of the numbers of households
or adult-equivalents are given for each group, it is not possible to provide any
392
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
–1.05
–0.04
–0.54
1.61
–1.34
–0.78
–0.16
–0.63
–0.16
1.77
–1.13
All
households
<0.4
–0.23
0.41
–0.52
2.67
–1.24
–0.65
0.68
–0.01
0.67
1.93
0.39
Change in Overall Average Prices
Expenditure group
with proportion of average expenditure:
0.4–0.6
0.6–0.8
0.8–1.2
1.2–1.6
–0.68
–0.87
–1.14
–1.27
0.10
0.10
–0.05
–0.10
–0.54
–0.54
–0.53
–0.57
2.38
2.09
1.70
1.29
–1.20
–1.23
–1.28
–1.34
–0.76
–0.77
–0.77
–0.79
0.12
–0.05
–0.15
–0.26
–0.52
–0.64
–0.53
–0.70
0.28
0.01
–0.17
–0.34
2.25
1.94
1.65
1.61
0.25
–0.05
–0.62
–1.02
>1.6
–1.57
–0.13
–0.56
0.94
–1.50
–0.85
–0.35
–0.76
–0.56
1.14
–1.20
Changes in Projection 1 Prices for Socio-Economic Group Expenditure, 2010
(percentage difference from baseline)
TABLE 4
–0.64
0.08
–0.52
2.57
–1.22
–0.53
0.14
–0.64
0.14
2.44
–0.59
Social
transfers
–0.86
0.10
–0.48
2.00
–1.16
–0.79
–0.10
–0.33
0.19
1.71
–0.74
Per cent
Pensions
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
25.56
13.97
6.31
33.71
16.30
10.90
22.68
11.15
32.45
24.47
17.51
All
households
<0.4
25.83
13.66
6.24
33.15
13.56
10.05
22.95
11.15
31.71
21.03
16.64
Change in Domestic Energy Prices
Expenditure group
with proportion of average expenditure:
0.4–0.6
0.6–0.8
0.8–1.2
1.2–1.6
26.11
25.80
25.06
25.30
13.17
14.12
13.78
14.42
6.33
6.16
6.34
5.93
33.31
33.49
33.81
33.91
14.52
15.17
16.25
17.48
10.49
10.49
10.92
11.34
22.88
22.65
22.63
22.76
11.15
11.15
11.15
11.15
31.68
31.94
32.45
32.80
23.56
25.12
25.20
26.40
16.64
16.64
16.65
16.69
>1.6
24.72
14.13
5.92
34.13
18.94
11.43
22.49
11.15
33.37
24.86
16.77
25.82
14.77
5.87
33.57
18.08
11.73
22.03
11.15
32.35
22.96
16.68
Social
transfers
26.25
12.39
6.88
32.83
16.71
11.69
22.37
11.15
33.41
21.43
16.85
Per cent
Pensions
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
0.03
1.37
0.99
2.07
0.35
0.21
0.71
1.38
–0.37
4.70
–0.83
All
households
<0.4
0.86
3.83
1.75
5.24
3.14
1.89
2.12
3.31
0.49
7.49
1.11
Change in Householder Transport Prices
Expenditure group
with proportion of average expenditure:
0.4–0.6
0.6–0.8
0.8–1.2
1.2–1.6
0.68
0.49
0.31
–0.27
2.27
2.78
1.81
1.00
1.87
1.67
1.05
0.66
4.25
4.08
2.80
1.62
3.14
3.01
2.61
1.38
0.87
0.53
0.25
0.05
1.01
1.16
0.80
0.59
3.60
3.40
3.96
2.46
0.36
0.04
0.02
–0.55
7.03
6.70
6.54
6.55
0.38
–0.34
–0.85
–1.06
>1.6
–0.41
0.65
0.59
1.00
–0.91
0.02
0.31
0.37
–0.77
2.60
–1.18
0.52
2.40
1.45
3.64
0.51
0.95
0.66
0.91
–0.07
7.43
0.04
Social
transfers
–0.06
2.52
1.24
1.87
1.37
–0.07
0.62
4.45
–0.07
5.34
–0.78
Per cent
Pensions
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
3.65
0.82
0.81
2.71
2.42
1.82
1.54
1.34
0.84
3.33
2.01
All
households
<0.4
2.96
0.42
0.80
1.67
2.31
1.72
0.73
0.73
0.01
3.18
0.53
Expenditure group
with proportion of average expenditure:
0.4–0.6
0.6–0.8
0.8–1.2
1.2–1.6
3.36
3.51
3.75
3.88
0.71
0.70
0.84
0.88
0.81
0.81
0.81
0.84
1.96
2.24
2.62
3.03
2.28
2.31
2.37
2.42
1.82
1.82
1.81
1.83
1.29
1.45
1.54
1.65
1.23
1.34
1.24
1.40
0.40
0.66
0.84
1.01
2.86
3.17
3.45
3.49
0.67
0.95
1.51
1.91
Change in Real PDIs: Additional Duties (Projection 1 – Baseline)
Changes in Real Personal Disposable Income, 2010
(percentage difference from baseline)
TABLE 5
>1.6
4.17
0.91
0.83
3.37
2.58
1.90
1.74
1.46
1.23
3.95
2.08
3.25
0.71
0.79
1.78
2.33
1.58
1.26
1.34
0.53
2.69
1.48
Social
transfers
3.47
0.68
0.76
2.36
2.23
1.83
1.49
1.05
0.48
3.42
1.63
Per cent
Pensions
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
3.28
0.68
0.42
2.48
1.87
1.42
1.38
1.24
0.05
2.85
1.35
All
households
<0.4
2.54
0.23
0.34
1.35
1.72
1.31
0.55
0.40
–0.77
2.64
–0.19
Expenditure group
with proportion of average expenditure:
0.4–0.6
0.6–0.8
0.8–1.2
1.2–1.6
2.96
3.14
3.38
3.51
0.54
0.54
0.70
0.75
0.40
0.42
0.42
0.44
1.69
2.01
2.40
2.78
1.77
1.80
1.85
1.88
1.38
1.40
1.42
1.44
1.10
1.27
1.38
1.48
0.98
1.12
1.19
1.28
–0.37
–0.11
0.09
0.22
2.35
2.69
2.99
3.02
–0.04
0.27
0.85
1.25
Change in Real PDIs: Additional Duties excluding Road Fuels (Projection 3 – Baseline)
>1.6
3.78
0.78
0.45
3.13
1.99
1.50
1.58
1.40
0.41
3.43
1.42
2.89
0.56
0.43
1.55
1.79
1.29
1.08
1.28
–0.22
2.15
0.83
Social
transfers
3.07
0.50
0.36
2.13
1.77
1.37
1.31
1.30
–0.27
2.94
0.95
Per cent
Pensions
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
0.39
0.24
0.39
0.23
0.56
0.40
0.17
0.11
0.80
0.50
0.67
All
households
<0.4
0.43
0.32
0.45
0.32
0.60
0.41
0.18
0.33
0.79
0.55
0.72
Expenditure group
with proportion of average expenditure:
0.4–0.6
0.6–0.8
0.8–1.2
1.2–1.6
0.42
0.40
0.39
0.39
0.28
0.27
0.24
0.23
0.41
0.38
0.38
0.40
0.27
0.23
0.22
0.24
0.52
0.51
0.53
0.54
0.43
0.42
0.39
0.39
0.19
0.18
0.16
0.17
0.26
0.24
0.06
0.12
0.78
0.79
0.76
0.81
0.52
0.49
0.48
0.49
0.71
0.69
0.67
0.67
Change in Real PDIs: Road Fuel Duties (Projection 4 – Baseline)
>1.6
0.41
0.23
0.38
0.24
0.60
0.39
0.16
0.07
0.83
0.54
0.68
0.38
0.26
0.35
0.23
0.55
0.28
0.18
0.07
0.76
0.56
0.66
Social
transfers
0.42
0.30
0.40
0.23
0.47
0.46
0.18
–0.25
0.76
0.50
0.69
Per cent
Pensions
Fiscal Studies
EU-11 totals, except for all households in the EU-11 which are calculated to
have an increase of real PDI of 1.6 per cent above base by 2010. The most
striking result is that every expenditure group in every member state in the
analysis benefits from the tax shift, with the extent of the benefit ranging from
the lowest of 0.01 per cent for real PDI in households with under 0.4 of mean
expenditures in Spain to the highest of 4.17 per cent for the highest expenditure
group in Belgium. The results for vulnerable groups (‘social transfers’ and
‘pensions’) are similar to those for the bottom two expenditure groups, reflecting
their relatively low expenditures and incomes. In all countries, vulnerable groups
benefit, but generally less than the average of all households. The differences
between countries tend to be much larger than the differences between
expenditure groups in the same country.
TABLE 6
The Distributional Effects of Taxes to Cut CO2 Emissions: Ratios of Regressivity
Overall tax
Belgium
Denmark
France
Ireland
Italy
Luxemburg
Netherlands
Portugal
Spain
UK
West Germany
1.008
1.002
1.000
1.014
1.003
1.001
1.004
1.002
1.008
1.011
1.014
With recycling
Domestic
Petrol tax only
energy tax only
1.008
1.000
1.002
1.000
1.000
1.000
1.014
1.000
1.002
1.001
1.001
1.000
1.005
1.000
1.004
0.998
1.008
1.000
1.011
1.000
1.015
1.000
Lump-sum
recycling
0.969
0.919
0.997
0.990
1.000
0.940
0.967
0.991
0.999
0.993
0.973
No recycling
Excise duties
only
1.011
1.004
1.002
1.014
1.003
1.002
1.006
1.003
1.009
1.013
1.013
Notes: Ratio of regressivity calculated as percentage change in personal disposable income of >1.6 expenditure
group over the percentage change in personal disposable income of 0.4–0.6 expenditure group; a value greater
than 1 indicates regressivity.
Projections:
Overall tax — Projection 1: duties on carbon to reduce CO2 emissions by 10 per cent by 2010;
recycling by reductions in employers’ social security contributions to make duties revenueneutral.
Domestic energy tax — Projection 3: duties on domestic energy as in overall tax, no duties on
vehicle fuels; recycling by reductions in employers’ social security contributions to make
duties revenue-neutral.
Petrol tax — Projection 4: duties on vehicle fuels as in overall tax, no duties on domestic
energy; recycling by reductions in employers’ social security contributions to make duties
revenue-neutral.
Lump-sum recycling — Projection 5: the additional duties of projection 1, but with recycling
of revenues via lump-sum payments to households instead of the reduction in employers’
contributions.
Excise duties only — Projection 2: the additional duties of projection 1, but without any
reduction in employers’ contributions.
398
Equity and Ecotax Reform in the EU
The middle and last panels of Table 5 show the two components of the
overall change — the increases in duties excluding those on petrol and diesel,
and the increases in duties on petrol and diesel alone; in each case, the revenues
are recycled via reductions in employers’ contributions. The purpose of showing
these results is to demonstrate that the overall result of weak regressivity is due
to the increases in taxes on domestic energy; if road fuels are taxed on their own,
the outcome is weakly progressive for most EU economies. The much smaller
effects for petrol and diesel are due to the fact that these fuels have much smaller
carbon contents in relation to their costs to the final purchaser than most fuels, so
an additional tax related to their carbon content has a smaller effect in terms of
increases in their percentage cost to final users.
Table 6 brings together the results for regressivity by presenting ratios of
indices for the top expenditure group to the second lowest (expenditures 0.4–0.6
of the mean); the lowest expenditure group appears to contain very few
households for many countries in the EUROSTAT sample, so results for this
group are regarded as too erratic and unrepresentative. The indices are the
percentage changes given in Table 5 plus 100 to transform the negative changes.
A regressive effect is shown by the index for regressivity in Table 6 being above
1.000. Results are presented for the three projections in Table 5 plus the
projection with recycling of revenues via lump-sum payments to households and
the projection without recycling, showing the effects of the additional duties.
The results are dominated by the effects of domestic energy taxes, which are
weakly regressive; there is no overall pattern if road fuel duties alone are
imposed. Comparing the projection without recycling in the last column to the
overall tax with recycling in the first column, it can be seen that the effect of
recycling by means of reductions in employers’ social security contributions
slightly reduces the ratios of regressivity. Overall, it can be seen that the package
of measures that is examined here is regressive across expenditure groups, but
only to a small degree. In comparison, recycling of revenues via lump-sum
payments to households can be seen to have a progressive effect. However, such
a scheme would be unlikely to be adopted and, if used instead of a reduction in
labour taxes, would reduce the overall economic benefits of the tax reform.
VI. CONCLUSIONS
This study is intended to contribute to the literature on the equity effects of
carbon taxation in the EU. In comparison with the earlier studies (Smith, 1992;
CEC, 1992),
• it uses more recent household survey data for 1988;
• it is a comprehensive analysis including indirect effects of intermediate
demand, consumption, investment and trade, as well as employment, prices
and wage rates;
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• it provides a forward-looking, fully dynamic, integrated analysis for 11
member states of the EU year by year to 2010;
• it is based on the additional excise duties proposed for energy products in
March 1997; and
• it is tax-revenue-neutral, not through lump-sum repayments to consumers, but
through reductions in employers’ contributions to social security schemes.
In order to reach the results, a set of assumptions have been made, the most
important of which are: that the real expenditure characteristics of the socioeconomic groups of the study vary in the same way as those for all households,
country by country, particularly the responses to changes in relative prices of
energy products; that the proportions of income from different sources for each
group remain constant; and that social security and other transfers are increased
in line with any increase in wage rates as a result of the tax changes.
The main findings of the study are:
• In all countries, the tax changes lead to an increase in personal disposable
income from the baseline case for all socio-economic groups; there is also an
increase in employment in all countries.
• The eventual effects on the distribution of incomes associated with carbon
taxation in the EU are not nearly so regressive as the initial impact on
expenditure suggests.
• The most regressive impact is on West Germany, the UK and Ireland,
although the impact is weak.
• The regressive effect comes from the impact of taxation on domestic energy
consumption.
• If revenues are recycled through reductions in employer taxes, all member
states and all socio-economic groups in the study experienced an increase in
real disposable income; the UK, Italy, Belgium, Ireland and West Germany
stand to gain the most, but the largest gain is only an increase in the growth
rate of 0.3 per cent a year for Belgium over 1999–2010.
• The scale of the revenues is such that the changes can easily have a
progressive effect, but this is not likely to be via the market responses and is
only likely to take place by deliberate policy — for example, (a) targeting
reductions in employer taxes on employment of the lower-paid, (b) using
some of the revenues to improve the energy efficiency of domestic fuel use
by lower income groups or (c) using the revenues to raise incomes of
vulnerable groups directly via social security payments.
To summarise, the results are dominated by the overall effects of the fiscal
change on income and employment. By 2010, real personal disposable incomes
are 1.6 per cent above baseline and employment is 1.2 per cent above, assuming
that the change is tax-revenue-neutral, with employers’ contributions to social
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security schemes being reduced to compensate for the additional revenues from
excise duties. Governments are assumed to index social security benefits and
state pensions in line with the increase in wage rates following the change.
However, without deliberate further policy changes to redirect the extra incomes
towards the more vulnerable socio-economic groups, the change will be weakly
regressive for nearly all the member states in the study. Although lowexpenditure households might be expected to experience an increase in real
income following this limited ecotax reform, high-expenditure households
experience an even greater increase.
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