&RPSHWLWLYHQHVV (IIHFWV RI (QYLURQPHQWDO 7D[ 5HIRUPV Final Report to the European Commission, DG Research and DG Taxation and Customs Union NERI, University of Aarhus (Denmark) Cambridge Econometrics (UK) ESRI (Ireland) IEEP, Univ. of Economics (Czech Republic) PSI (UK) WIIW (Austria) 2007 (& 6L[WK )UDPHZRUN 3URJUDPPH IRU 5HVHDUFK $FWLYLW\ $UHD 6FLHQWLILF 6XSSRUW WR 3ROLFLHV &RQWUDFWÃQRÃSCS8-CT-2004-501993 ,QVWUXPHQW Specific Targeted Research or Innovation Project 7KHPDWLFÃ3ULRULW\ÃÃ8 - Underpinning European integration, sustainable development, competitiveness and trade policies (including improved means to assess economic development and cohesion) 3HULRGÃFRYHUHGÃEntire project durationÃ(month 1 – 30)à 'DWHÃRIÃSUHSDUDWLRQÃÃ31 August 2007 6WDUWÃGDWHÃRIÃSURMHFWÃÃ1 December 2004 'XUDWLRQ 2.5 years 3URMHFWÃFRRUGLQDWRU Professor Mikael Skou Andersen 3URMHFWÃFRRUGLQDWRUà RUJDQLVDWLRQ National Environmental Research Institute, University of Aarhus (NERI), Grenåvej 14, DK-8410 Rønde; http://www.dmu.dk/COMETR )URQWÃSDJHÃSKRWR Offshore windmills (DK), Samsø Energy Academy. 5HYLVLRQÃ1.0 3URMHFW &RQVRUWLXP &RQWUDFWRUV &RQWDFW SHUVRQ 1(5,8QLYHUVLW\RI$DUKXV 0LNDHO6NRX$QGHUVHQ 32%R[PVD#GPXGN '&5RVNLOGH '(10$5& &DPEULGJH(FRQRPHWULFV 6XGKLU-XQDQNDU &RYHQW*DUGHQ 6XGKLU-XQDQNDU#FDPHFRQFRP &DPEULGJH&%+6 8& (FRQRPLFDQG6RFLDO5HVHDUFK,QVWLWXWH 6XH6FRWW :KLWDNHU6TXDUH VXHVFRWW#HVULLH 6LU-RKQ5RJHUVRQ V4XD\ 'XEOLQ ,5(/$1' ,QVWLWXWHIRU(FRQRPLFVDQG -LULQD-LONRYD (QYLURQPHQWDO3ROLF\LHHS#LHHSF] 8QLYHUVLW\RI(FRQRPLFVLQ3UDJXH :&KXUFKLOOD 3UDKD²æLçNRY &=(&+5(38%/,& 3ROLF\6WXGLHV,QVWLWXWH5RJHU6DOPRQV +DQVRQ6WUHHW /RQGRQ::83 8& 9LHQQD,QVWLWXWHIRU,QWHUQDWLRQDO (GZDUG&KULVWLH (FRQRPLF6WXGLHVFKULVWLH#ZLLZDFDW 2SSRO]HUJDVVH $9LHQQD $8675,$ 2 'DWDVKHHW Title: Competitiveness Effects of Environmental Tax Reforms (COMETR) Subtitle: Final report to the European Commission, DG Research and DG TAXUD Authors: Mikael Skou Andersen1, Terry Barker2, Edward Christie6, Paul Ekins5, John Fitz Gerald3, Jirina Jilkova4, Sudhir Junankar2, Michael Landesmann6, Hector Pollitt2, Roger Salmons5, Sue Scott3 and Stefan Speck1 (eds.). Departments: 1)Department of Policy Analysis, National Environmental Research Institute, University of Aar- hus (Denmark). 2)Cambridge Econometrics (United Kingdom). 3)Economic and Social Research Institute (Ireland), 4)Institute for Economic and Environmental Policy, University of Economics Prague (Czech Re- public), 5)Policy Studies Institute (United Kingdom) 6)Vienna Institute for International Economic Studies (Austria). Publisher: National Environmental Research Institute University of Aarhus - Denmark URL: http://www.neri.dk Year of publication: December 2007 Editing completed: November 2007 Referees: Work package deliverables have been reviewed by members of the project consortium. Financial support: European Commission, Sixth Framework Programme for Research, Activity Area “Scientific Support to Policies”, Contract no. SCS8-CT-2004-501993. Please cite as: Andersen, M.S., Barker, T., Christie, E., Ekins, P., Gerald, J.F., Jilkova, J., Junankar, S., Lan- desmann, M., Pollitt, H., Salmons, R., Scott, S. and Speck, S. (eds.), 2007: Competitiveness Ef- fects of Environmental Tax Reforms (COMETR). Final report to the European Commission. Na- tional Environmental Research institute, University of Aarhus. 543 pp. - http://www.dmu.dk/Pub/COMETR_Final_Report.pdf Reproduction permitted provided the source is explicitly acknowledged Abstract: COMETR provides an ex-post assessment of experiences and competitiveness impacts of us- ing carbon-energy taxes as an instrument of an Environmental Tax Reform (ETR), which shifts the tax burden and helps reduce the carbon emissions that cause global warming. COMETR: reviews the experience in ETR in seven EU Member States (Denmark, Germany, Netherlands, Finland, Slovenia, Sweden and UK); analyses world market conditions for a set of energy- intensive sectors, as a framework for considering competitiveness effects; analyses the effects of ETR on sector-specific energy usage and carbon emissions in Member States with carbon- energy taxes introduced on industry; presents a macroeconomic analysis of the competitive- ness effects of ETR for individual Member States as well as for the EU as a whole; provides ex- post figures for environmental decoupling and assesses carbon leakage; reviews mitigation and compensation mechanisms for energy-intensive industries. Keywords: competitiveness; tax; CO2; socio-economic; macro-economic; energy-intensive; trade; Porter hypothesis; environmental tax reform; double dividend; energy taxation; climate Layout: Ann-Katrine Holme Christoffersen Number of pages: 543 Internet version: The report is available in electronic format (pdf) at NERI's website http://www.dmu.dk/Pub/ COMETR_Final_Report.pdf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is a specific targeted research project under the EU’s sixth framework programme for research and its activity area ‘Scientific support to policies’. In addition to this final report there are two other publications from the project; the annexes and the summary report. The reports as well as further information about the COMETR project can be found on the project web-page http://www.dmu.dk/COMETR. The results of the final report were presented at the European Commission’s TAX FORUM and a subsequent COMETR workshop for specialists, both of which took place in Brussels 19-21 March 2007. We would like to express our gratitude to all the involved project partners for fruitful and pleasant cooperation. We are also indebted to Ian Perry, DG Research, for helpful advice and counselling on the administrative issues throughout the project, as well as to Katri Kosonen, DG TAXUD, for constructive comments and suggestions for our research activities. While the financial support from the European Union is gratefully acknowledged, we appreciate as well the academic freedom to pursue the research according to our own plans and reflections. The contents of this report, as well as any omissions or errors, therefore remain the responsibility of the authors and not of the European Commission. Carey Elizabeth Smith Mikael Skou Andersen Administrative coordinator Scientific coordinator 5 $QLQWURGXFWLRQWR HQYLURQPHQWDOWD[UHIRUPDQG WKHFRPSHWLWLYHQHVVLVVXH :3 0LNDHO6NRX$QGHUVHQ 1(5,8QLYHUVLW\RI$DUKXV ,QWURGXFWLRQ The conceptual thinking on environmental tax reform (ETR) dates back to the late 1980’s and emerged in a number of European countries at about the same time in response to the growing recognition of the seriousness of environmental problems. The idea to shift taxation from goods to bads – from labour to pollution - was as compelling as it was simple, and starting with Sweden’s tax reform in 1989 a number of European countries began cautiously to alter their tax systems in this direction. Yet, from the very start of the ETR-debate concerns about competitiveness impacts on energy-intensive producers have been at the heart of policy-making. In a Europe where trade barriers were removed in the pursuit of a single market, unilateralism in ETR was not a simple undertaking, and the result of introducing tax shifts while at the same time minimising competi- tiveness impacts has led to complex tax schemes with many exemptions. Concerns about competitiveness impacts have surfaced in virtually all member states where ETR’s have been either unilaterally implemented or under consideration. In view of some draconian pro- posals to double or triple energy prices the concern has a strong intuitive appeal and is hardly sur- prising, although in reality most ETR’s have adopted cautious and incremental approaches to in- crease environment taxes, while lowering social contributions or labour taxes. In many cases the arguments presented on competitiveness grounds refer merely to the budget- economic implications of ETR for individual firms and on