Ex post evaluations of CO2 –based taxes: a survey

Paolo Agnolucci

June 2004

Tyndall Centre for Climate Change Research

Working Paper 52

Ex post evaluations of CO2 –based taxes: a survey
Paolo Agnolucci*

Tyndall Working Paper 52

Environment Group, Policy Studies Institute, University of Westminster, 100 Park Village East, London NW1 3SR

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SUMMARY Since 1991 eight countries (Denmark, Finland, Germany, Italy the Netherlands, Norway, Sweden, and the United Kingdom) have introduced CO2-based taxes, which are defined as charges, the rate of which depends mainly, but not only, on the CO2 content of fossil fuels, and which are introduced with the explicit intention of abating CO2 emissions. This paper surveys studies quantifying the effects of the CO2-based taxes which have been introduced, concentrating on the methodological approach used and assessing them against four criteria: environmental effect and effectiveness (where the latter assesses the effect against the objectives of the tax or against other instruments), economic efficiency, stability and quantity of revenues, and distributional effects (in respect of both households and industrial sectors). These criteria are not straightforward to interpret and the paper discusses their meaning, and the approaches that have been used to obtain quantitative indicators for them, in some detail. For those CO2-based taxes that have been evaluated (those of all the above countries except Italy and Germany), their nature and mode of implementation is described, revealing that they bear little relation to textbook examples of optimal environmental taxes, and differ substantially from each other, having been designed to take account of local conditions. Two main types of evaluation methodologies have been employed, modelling and surveys of firms. The differences between the taxes, their complexity, and the facts that they are often introduced as parts of policy packages or changed over time, makes individual ex post evaluation of them very difficult, and comparative evaluation across countries more difficult still. However, some conclusions can be drawn. The first conclusion is that the studies have shown that CO2-based taxes, either on their own or as part of a wider package, do reduce emissions, as theoretically predicted. However, where the tax is part of a package of measures, the individual contribution of the component parts of the package is very uncertain. In particular, the contribution of negotiated agreements and, especially, subsidies, has been called into question. Secondly, the CO2-based taxes themselves seem to have been cost-efficient, in terms of the cost of collecting them, but because the packages have involved widely varying marginal costs being imposed on different polluters (due to agreements and subsidies), it is unlikely that they have been cost-effective (in the sense of attaining their environmental benefit at least possible cost). On the stability of revenues, while it is clear that in no country have the taxes resulted in a precipitate decline in the use of carbon-based energy, and the revenues seem to have been broadly maintained, there is very little work that allows more detailed conclusions to be drawn. On distribution, fears about competitiveness have resulted, in most countries, in the industrial sector, and especially energy-intensive industries within it, being taxed less heavily than households. An exception is the UK’s climate change levy, from which households are exempt. Opinions about the burden imposed by the taxes vary very much, not surprisingly, according to the interests of those expressing them. * = correspondence should be sent to p.agnolucci@psi.org.uk

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1 Introduction In the early years of the last decade CO2-based taxes have received a great deal of interest from European policy makers. Between 1991 and 1996 five countries introduced these kinds of taxes while many others took a close look at these experiments. In the meantime the European commission prepared several drafts of a tax to be introduced in the whole Union. Notwithstanding the failure of the European tax, ten years after the introduction of the first taxes three other European countries (UK, Germany and Italy) have introduced or are planning to introduce CO2 taxes. This work surveys studies quantifying the effects of the CO2-based taxes introduced so far. As taxes on CO2 are a particular case of environmental taxes, section 2 surveys the theoretical framework underlining the use of such taxes and discusses limitations of different approaches to the evaluation of environmental policy. Section 3 focuses on CO2-based taxes. After presenting four criteria and related indicators for ex-post evaluations, the section ends with a survey of the reasons put forward when granting alleviation measures to certain sectors of society. Taxes can be classified according to the aim of the government introducing them or according to the ultimate effect1 of the tax. In this survey the former approach is adopted and CO2-based2 taxes are therefore defined as charges, whose rate depends mainly, but not only, on the CO2 content of fossil fuels, and which are introduced with the explicit intention of abating emissions. Even if this definition leaves a grey area3, it incorporates the taxes introduced in Sweden, Finland, Norway, Denmark, the United Kingdom, Germany and Italy (which have been dubbed CO2, energy or climate change4 taxes by the respective governments). However, as the main focus of this survey on ex-post evaluation studies, only the taxes already evaluated are surveyed in section 4. In section 5 ex-post evaluations studies, grouped according to the criteria’s taxonomy introduced in section 3, are presented. The focus in this section is on both the figures obtained by these studies and on the methodological approach used. Finally, conclusions are presented in section 6.

An example of involuntary environmental policy is the substantial reduction of pollution in industrial wastewater occurred in the Netherlands between 1975 and 1980. This has been more the result of policy instruments (affluent charges) not officially designed for this purpose, than the result of instruments (direct regulation) specifically intended to achieve this objective. 2 In the survey these taxes are sometimes called simply CO2 taxes for the sake of brevity. 3 The aim of some taxes has historically evolved according to the broader concerns of the society. Furthermore, the ultimate aim of taxes can be very different from the aim stated when introduced. 4 Taxes, like the road tax duty in the UK, having an effect on the CO2 emissions but not introduced for this purpose, are not included by the tax definition adopted in this study.

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2 Environmental taxes and methodological issues in their evaluation Environmental pollution is analysed in economics through the concept of externality5. An economic agent imposing externalities on third parties is producing or consuming at an inefficient level, as he does not consider the full costs and benefits of his activity. In the case of a firm polluting the environment, a curve describing the Marginal Damages (MD) to victims and another describing the firm’s Marginal Abatement Costs (MAC) can be drawn for every level of emission. When polluters’ behaviour is not constrained, the maximum profitable quantity of pollution (EM in Figure 1) will be emitted.
£

MAC

MD

t*
2 1

E*

EM

Emissions

Figure 1. Marginal Damage (MD) and Marginal Abatement Costs (MAC) curve. The latter is sometimes called Marginal Savings: the logic is that polluting the environment represents a saving for the firm, as it does not have to sustain costs to abate pollution. The socially optimal level of emissions is where the two curves intersect, as a further cut of pollution (area to the left of E*) requires a MAC bigger than the MD; conversely for a further emission of pollution (area on the right of E*). The Pigouvian tax t* is equal to the marginal damage caused by the pollution when evaluated at the efficient level of pollution (Kolstad, 2000)6. A polluter facing this kind of tax has two options: to pay the tax or to abate emissions. In particular a cost-minimising polluter will abate as long as the MAC are smaller than the tax and pay the tax for the remaining pollution. The total costs on the polluter can be divided into abatement costs (area 1) and tax payments (area 2). OECD (2001) defines environmental taxes as “any compulsory, unrequited payment to general government levied on tax-bases deemed to be of particular environmental relevance. Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payment” (p.15). The most striking feature of this definition is the absence of any reference to marginal valuations and optimal levels of pollution. That can be explained by the fact that the standard pricing approach – see Baumol and Oates (1971) – is a more suitable theoretical background for the environmental taxes introduced so far. The difficult bit of implementing the Pigouvian approach is the estimation of MAC and MD of a certain
An externality exists when the consumption or production choices of one economic agent enter the utility or production function of another without the second’s permission or compensation (Kolstad, 2000). There is a positive externality when the “victim” experiences an increase in his welfare, while there is a negative externality in the other case. 6 * * * In the case of Fig. 1 this means t = MD(E ) = MAC(E ).
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activity at its optimal level7. This is not required in the case of the standard pricing approach, which proposes to fix an environmental standard and then introduce a tax to reach that level. This appeals to policy makers, who are generally concerned about curbing pollution to socially acceptable levels. The properties of environmental taxes can be evaluated through theoretical evaluations, exante simulations and ex-post evaluations. Two classical examples of theoretical evaluations are the concept of static (i.e. related to the allocation of the total amount of abated pollution among several polluters) and dynamic efficiency (i.e. related to the intertemporal incentives on polluters). To discuss static efficiency, suppose there are two polluters - or preferably two kinds - one with high MAC and the other with low MAC, and compare abatement costs required by an environmental tax and an environmental standard allowing for the same quantity of emission. Environmental standards grant each polluter the right to emit a given quantity of pollution (ES in Figure 2) and oblige them to cut the rest. Consequently, after the introduction of the standard each polluter faces different MAC (MACS1 and MACS2). In the case of environmental taxes, costminimising polluters have the same MAC (MACT in Figure 2) but different emission levels: polluters with high MAC emit a larger quantity of pollution (ET2), while those with low MAC emit a smaller quantity (ET1). As shown in Figure 2, the total abatement costs in correspondence of a tax (area AET1B and DET2E) are smaller than those in correspondence of a standard (area FESE and CESB). A given emission reduction is achieved at the lowest cost (i.e. it is statically efficient) if and only if different polluters face the same MAC, like in the case of environmental taxes. This necessary and sufficient condition is sometimes called equimarginal principle8.

Figure 2. Abatement costs arising from a standard and of a tax allowing for the same quantity of pollution. The term dynamic efficiency refers to the ongoing incentives to reduce abatement costs. Contrary to what is often mentioned in literature, these incentives are not an exclusive feature of marketbased instruments (MBI) like environmental taxes and tradable permits. As shown in Figure 3, both environmental taxes and standards impose costs on polluters and provide incentives to reduce the MAC or in graphical terms to shift MAC1 to MAC2. The difference is that tax
According to Baumol and Oates (1971) while estimating the current marginal damage is an Herculean task because of the number of persons affected and because of the intangible nature of many components, estimating the marginal damage at the optimal level of activity is even more difficult. 8 As pointed out by Baumol and Oates (1971), the assumption of profit-maximisation is not required for an environmental tax to be statically efficient; only costs-minimisation is needed.
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incentives are stronger than those of standards9. Polluters do not find it economically convenient to reduce emissions below E1 in the case of a standard as they are not charged for the emitted pollution; conversely in the case of a tax. Furthermore, with environmental standards only shifts of the AB portion of the curve are beneficial to polluters.
£ MAC1

MAC2

t*
1

A 2 B E2 E1
Emmisions

Figure 3. Intertemporal incentives in presence of environmental taxes and standards. In the case of ex-ante simulations, environmental taxes can be evaluated using formal models (e.g. linear programming and general equilibrium models), drawing inference from analogous episodes. Many ex-post evaluations use the same methodologies employed in ex-ante simulations; the main difference is the output obtained from the models. In the case of ex-post studies the model replicates the observable behaviour of the system and provides information on some not observable variable10. In the case of ex-ante simulations, the model, which is calibrated on the past observable behaviour of the system, provides information on the future behaviour of both observable and unobservable variables. Some ex-post evaluations borrow methodologies from social sciences other than economics. The advantage of these studies is that they can provide data on a number of issues, which cannot easily be evaluated in economic models. All three approaches (theoretical, ex-ante and ex-post evaluations) are subject to limitations. In the case of ex-post evaluations, as environmental taxes are usually judged through the comparison with what would have happened, had the policy not been implemented, the outcome of the study would be influenced by the construction of this hypothetical situation - called the baseline in literature. Other methodological difficulties of ex-post evaluations are related to: the separation of the effect of the tax from the wider policy package containing it - called disentangling problem in literature; the ability of measuring some effects of the tax. This can be due to limitations of the methodology used, to the data available or to the time window over which the evaluation is carried out11.

Other problems of ex-post evaluations, as pointed out by OECD (1997), are related to the policy making process and to the data available. Ex-post evaluations might uncover the
Incentives to reduce MAC can be considered proportional to the savings obtained by shifting the MAC curve: area 1 and 2 in the case of a tax t*, only area 2 in the case of the equivalent standard E1. 10 For example, the model can replicate the pattern of emissions (observed variable) and has to determine the change in the emissions attributable to the tax (unobserved variable). 11 In early studies short-term effects are easily measured, as it is possible to control for changes in the socio-economic variables. In later studies all effects (long- and short-term) are observable but it is difficult to separate the effect of taxes from those due to other factors.
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implementation details of environmental taxes and if this weakens the position of policy makers, the conclusions of these studies will not be enthusiastically accepted. Finally, the data used in expost studies are usually available in a satisfactory format only since the tax is introduced12. Policy evaluation is not a practice confined to environmental taxes but it is considered particularly important in this sector maybe because of the relative novelty of these instruments. Moreover, as in the past taxes have been advocated only by environmental economists, ex-ante and ex-post evaluations have been employed to persuade the industry and the policy-makers to use this regulatory instrument. As pointed out by OECD (1997) and EEA (2001), assessing current policies is useful to improve their administration, the choice of future policies and instruments. In addition, policy evaluation is needed to perform distance to target analysis (assessment of the path to reach a particular policy target) and to build future scenarios. As should now be clear, evaluation of environmental taxes is rarely a clear-cut exercise but framing the economic instrument within widely accepted frameworks can help focus the analysis and point out the data and information needed in the evaluation13. The three approaches mentioned above - theoretical, ex-ante and ex-post evaluations - should be thought of as parts of a package and not as three separated tools. If on one hand the results of ex-post evaluations are the most interesting for policy-makers, on the other hand only ex-ante simulations and theoretical evaluations can point out the criteria and the methodologies to be used in ex-post studies.

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In many occasions data are not collected systematically and on all variables of interest: this may bias the outcome of ex-post evaluations if only some of the effects of environmental taxes can be measured. 13 For example the DPSIR (driving forces - pressures - state - impact - response) framework, proposed among others by the European Environmental Agency (see EEA, 2001), focuses on the causality chain and narrows down the effects attributable to environmental taxes. This framework points out the information and data needed on the inputs (the resources needed for the policy), outputs (tangible results), outcomes (the response of target groups), and on the impacts (ultimate effect) of a policy.

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3 Criteria and indicators for ex-post evaluations of CO2-based taxes Criteria for the ex-post evaluation of environmental taxes have been proposed, among others, by OECD (1997). Those surveyed here are: - Environmental effect and effectiveness, - Economic efficiency, - Stability and amount of the revenues, and - Distributional effects. As the focus of this review is on ex-post studies quantifying the effect of CO2 taxes, some criteria proposed in literature are not surveyed because they are difficult to measure (e.g. compatibility with the institutional framework, enforceability, political acceptability, and soft effect14), while others (e.g. effect of taxes on prices, innovation and on competitiveness) are not considered as they have never been used in quantitative ex-post studies. As the indicators to implement these criteria are very much influenced by the tax being evaluated, from now onwards the focus is only on CO2-based taxes, as defined in the introduction. 3.1 Environmental effect and effectiveness As the aim of CO2-based taxes is the reduction of pollution, environmental effect is, hardly surprising, one of the most common criteria used in ex-post evaluation studies. CO2 taxes may influence emissions (flow variable), level of greenhouse gases (GHGs) in the atmosphere (stock variable) or their environmental damage (effect of the flow or stock variable). In empirical studies the effect of CO2 taxes on emissions is usually chosen as indicator. Indeed, the effect of the taxes introduced so far on the level of GHGs is marginal, while environmental damage is usually discarded because of the uncertainty about the effects of climate change. In addition, the evaluation of the damage is made difficult by the comparison of different kinds of damage15. It is worth pointing out that many studies confuse the environmental effect of CO2 taxes with their effectiveness: the amount of pollution abated measures the environmental effect, and not its effectiveness, as the latter implies ascertaining the effects of a tax in relation to the expected objectives and targets or to other instruments. 3.2 Economic efficiency According to OECD (1997), economic efficiency refers to the extent to which a CO2 tax enables a more cost-effective achievement of policy objectives. Similarly to the environmental effectiveness, this criterion involves a comparison but here the focus is on costs and benefits and not on abated emissions. Unfortunately, a comprehensive comparison of costs and benefits is complicated by the fact that CO2 emissions or the level of GHGs is likely to be one of the variables in the consumers’ utility function, and by the fact that the tax influences the equilibrium values of many economic variables16. An obvious indicator of economic efficiency is the change
According to OECD (1997) under this heading are grouped various possible effects working through changes in attitude and awareness. 15 One way to solve this issue is recurring to the monetary value but this exposes the study to the criticisms cast to the evaluation techniques, like contingent valuation, used in environmental economics. 16 If a CO2 tax increases the cost of polluting goods, the supply curve will shift to the left and only the elasticities of the demand and supply curves can determine the effect of a tax on equilibrium quantities. It is
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in the consumer and producer’s surplus arising from the tax, relatively to some baseline scenarios. However, this approach has never been used. In empirical studies two strategies have been followed to obtain indicators of economic efficiency. The first adopts a narrower definition of costs and benefits: in section 3.2.1 only abatement and transaction costs are considered17. The second strategy focuses on the effect of CO2 taxes on the abatement options available to firms – see section 3.2.218. Analysing the indicators presented in this section in relation to the tax rate gives a rough estimation of the economic efficiency of the tax. 3.2.1 Cost-effectiveness If only abatement costs are considered, indicators of economic efficiency can be based on the concept of static and dynamic efficiency exposed in the previous section. As the equimarginal principle is a necessary and sufficient condition of a cost-effective emission reduction, differences in the MAC point out that the tax is not working properly. An analysis of the firms with high MAC can suggest the reasons hindering an efficient implementation of the tax and point out remedies. In the case of dynamic efficiency, indicators can be built from data on the temporal evolution of the MAC. Unfortunately, as numerous factors influence the change of MAC, it is generally difficult to ascertain the role of taxes. Usually their influence is estimated through pragmatic approaches such as a rough guess or personal interviews. Transaction costs can be divided into preparatory, enforcement and monitoring, and compliance costs. The preparatory costs are the costs needed to introduce the CO2 tax. On the public sector’s side they include expenses to forecast the effectiveness and the political feasibility of the tax, and to inform the polluters about the policy change. On the firms’ side they include all the expenses, enabling polluters to respond to the tax19, to the extent that they are not justified by costs-saving energy reduction. Enforcement and monitoring costs borne by the public sector include expenses to solve issues (e.g. legal costs) arising during the implementation and to collect the revenues and the data needed to evaluate the tax. Usually, the amount of enforcement and monitoring costs depends on the relationship between policy makers, regulators and polluters, and on how the revenues are collected. Finally, the compliance costs imposed on the firms depend on the complexity of the tax, the number of mitigation measures and on the likelihood of these mitigation measures being granted if regulators are lobbied. As transaction costs are a net loss, taxes should be designed to minimise them. If there are increasing returns20, wider implementation of CO2 taxes will give lower transaction costs per unit of abated pollution. In order to lower these costs various information, monitoring and collecting procedures can be combined with other activities, which would have been undertaken anyway. The amount of money needed to cut a ton of CO2 is generally used as an indicator of the cost efficiency of CO2 taxes. As the allocation of costs imposed on public and private parties is affected by the design of the policy, it is important to analyse the costs on both sides.

worth noting that only when economic agents do not gain rents, the equilibrium values are influenced by the introduction of a CO2 tax; otherwise its effect is only a redistribution of wealth. 17 Costs linked to the tax payments are not considered because they are not a social cost. Clearly, they are important for the competitiveness of industrial sectors. 18 These effects cannot be analysed in the context of Figure 1, as it considers only the relation between MAC and the level of emissions but not how they can be abated. 19 For example the purchase of energy meters or expenses to implement best practice energy management. 20 In the sense that expanding the tax base by a certain percentage will cause a costs increase smaller than that percentage. This is due to the fact that some of the transaction costs are fixed costs.

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3.2.2 Abatement options Ekins and Barker (2001) outline polluters’ abatement options. In the production side of the economy CO2 emissions can be decomposed as follows:

CO2 = (CO2 / E )( E / ES )( ES / I )( I / O )O

(3.1),

where E stays for the energy inputs, ES the energy services, I the production inputs and O the economic output. Analogously, in the consumption side of the economy CO2 emissions can be decomposed into:

CO2 = (CO2 / E )( E / ES )( ES / EIGS )( EIGS / CE )CE

(3.2),

where EIGS is the energy-intensive goods and services and CE the consumer expenditure. Keeping the economic output and the consumer expenditure constant, a decrease in CO2 emissions can be achieved through: - An increase in the CO2-efficiency of the energy use (decrease in CO2/E); - An increase in the energy-efficiency of the economy (decrease in E/ES); - An increase in the substitution of other inputs for energy services (decrease in ES/I) or a decrease in the amount of energy services utilised by energy intensive goods (decrease in ES/EIGS); - An increase in the efficiency of inputs (decrease in I/O) or an increase in the share of nonenergy intensive goods in the consumer’s expenditure (decrease in EIGS/CE). A reduction in CO2 emissions per unit of energy is attainable through the use of renewable energy, CO2-efficient technologies like CHP or any less CO2 intensive fuel. To the extent that these options are exempted from CO2 taxes, their use becomes more economically profitable. An indicator of the economic efficiency of CO2 taxes is the change in the energy demand (or market share) satisfied by the more energy efficient options mentioned above in relation to the tax rate. Indicators for increases in the energy-efficiency (decreases in energy used per unit of energy service) can be obtained from data on energy consumption. As an increase of energy-efficiency usually implies some changes in the production or consumption process, any evidence of these (e.g. the purchase of more energy-efficient equipment and consumption goods, the hiring of qualified personnel, etc.) can be used to build indicators of the economic efficiency of CO2 taxes. A decrease in the third ratio is caused by the substitution process among different inputs in the production and consumption process. In the case of producers, changes in the costs share of energy services can be used to build indicators to evaluate CO2 taxes. In the case of consumers, as the characteristics of the purchased goods determine the need of energy services, changes in the market share of more efficient energy intensive goods and in their efficiency can be the base of the indicators. Finally a decrease in the last ratio implies either an increase in the general resource efficiency of the production process or a pattern of consumption directed to goods with a reduced need for energy services. Data on the overall productivity in the case or from consumption surveys can be the base to build indicators for this ratio.

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Instead of focusing the attention on the ratios in (3.1) and (3.2), the effect of CO2 taxes can be evaluated by estimating the relation between CO2 or energy consumption on one side and other economic variables on the other (e.g. capital, GDP, energy price, etc.)21. Econometric techniques enable to analyse the intertemporal variation of this relation either for the whole system (timeseries analysis) or at the single actor’s level (panel data). If data are transformed into logarithmic, as is usually done, the parameters of the coefficients provide the elasticity between the variables in the model. Generally speaking, the elasticity of variable Y with respect to X describes the percent change occurring in Y when there is a 1% change in the level of X. The most common kinds of elasticity are: - Price elasticity. This refers to the effect of energy price on its consumption; as energy is normally considered an ordinary good22, a negative value of the elasticity is expected. - Cross-price elasticity. This refers to the effect that a change in the price of other inputs has on the consumption of energy; the sign depends on the relationship between energy and other production inputs - the elasticity is positive if they are substitutes, negative if they are complements. - Income elasticity. This refers to the effect of income on energy consumption; as energy is normally considered a normal good23, a positive value of the elasticity is expected. Using the price elasticity to evaluate the effect of CO2 implies an assumption that the response to taxes does not differ from the response to changes in relative prices. However, Barker et al. (1995) and OECD (1997) point out that this assumption is likely not to hold because: Taxes are perceived to be more permanent than price changes and therefore they should give polluters a bigger incentive to reduce CO2 emissions. - The gradual introduction of taxes and their announcement should reduce their disruptive impacts (i.e. reducing the premature scrapping of capital used in the production process). - Difference in the international context. In the case of price increase, displacement of energyintensive sectors is not likely to happen when all countries face the same increase. - Difference in consumer attitude as CO2 taxes can spur energy saving from environmental conscious consumers. One way to take into account the difference between taxes and price changes is to analyse the effect of taxes on the parameters of the relation between energy and its determinants. If the parameters are constant, the coefficients estimated from the observation of price changes can be used to evaluate the effect of the tax. If parameters have changed as a consequence of the tax, it is possible to distinguish the price from the tax effect24. Obviously, a change in the value of the parameters as a consequence of the tax is a clear sign of a more efficient consumption of energy. The magnitude of the parameters or of their change can be considered an indicator of the economic effectiveness of CO2 tax for ex-post studies. A high value implies that there are many opportunities to reduce emissions or energy consumption at a low cost.

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It is worth noting that this is simply another way to look at the same issue, as the parameters of this equation simply condense the adjustment process considered in (3.1) and (3.2) (i.e. the improvement of energy efficiency, the substitution processes among inputs and so on). 22 In other words, the demand for energy increases when the price decreases. 23 In other words, the demand for energy increases with income. However, as certain consumption uses reach saturation the effect of further income increases is likely to be smaller and smaller, although positive. 24 For example, an increase in the price-elasticity from 0.8 to 1 after the announcement of the tax means that energy consumption has been reduced by 0.8% of the tax amount due to the price change, and by 0.2% of the tax amount due to the fact that the tax has increased the responsiveness to price changes.

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3.3 Stability and amount of revenues The stability and amount of revenues from CO2 taxes is perhaps the most important criterion for policy-makers but also the most ambiguous. This is because there is a trade-off between the stability and amount of the revenues and the dynamic efficiency of taxes. As shown in section 2, if the tax is efficient, there will be a continuous decrease of the revenues or at least of the amount of tax per unit of GDP. In efficiency terms, the less stable the revenues, the more economically efficient the tax25. The stability of the revenues is particularly important in the case of a green tax reform. This consists of reducing or eliminating environmentally harmful subsidies and of restructuring the tax system according to environmental criteria (i.e. reducing levies on labour, capital, and income and increasing or introducing environmental taxes). In the case of a green tax reform, the intertemporal decrease in the revenues raised by green taxes is an understandable concern for the Treasury. If the aim is to collect a certain amount, the tax rate has to be periodically increased. In case institutional factors, like industry opposition, make this difficult, the Treasury had better be aware of the long-term risks. Finally, as pointed out by OECD (1997) when evaluating the effect of CO2 taxes, their effects on other already existing taxes should be taken into account26. For example, CO2 tax can reduce the use of cars and therefore cause a reduction of the revenues from fuel excises. Because of the relationship between the stability of revenues and the dynamic efficiency, the indicator mentioned in that setting and those obtained from (3.1) and (3.2) can be used for this criterion. Similarly, a high price elasticity indicates that revenues will decrease soon after the tax is introduced or, similarly, after an increase in the tax rate. In ex-post evaluations, indicators for revenue stability are built from data obtained from the system of national account. In some cases, as the revenues from the CO2 tax are not distinguished from other taxes’ revenues, the figures in the ex-post studies are an estimate rather the exact figures. 3.4 Distributional effects Some authors consider the effects of CO2 taxes on competitiveness and on income distribution as two separate criteria for evaluating CO2 taxes. While this division is appropriate for ex-ante simulations and theoretical evaluations, it is not very meaningful for ex-post studies. The reason is simple: we have not seen any study analysing in a comprehensive way the effect of taxes on competitiveness. What has been analysed is the tax burden on different sectors of society, among them the industry sector. For this reason the effect of taxes on competitiveness and income distribution has been grouped in the same section.

The congestion charge in central London provides a good example. According to official sources, “traffic has been reduced by 20% and delays cut by nearly 30%. Speeds in the charged zone have increased from 9.5 mph to 20 mph. Delays to buses caused by congestion are down by half. As a result, bus passenger numbers are up by 14%. […] So far the only downside for Mr Livingstone [the mayor of London] is that revenues, at £9.5m for the first four weeks, are somewhat lower than expected.” (The Economist, March 22nd 2003, p. 33). 26 This is called the second round effect in literature, as opposed to the first round effect, which indicates the amount of money raised by the tax.

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3.4.1. Income distribution As CO2 taxes increase the energy price, several authors have raised concerns on their regressivity27. However, as pointed out by Smith (1998), the distributional effect of CO2 taxes is quite complicated and depends on the: - Direct distributional impact related to the energy expenditure of different income brackets. Caeteris paribus, the bigger the proportion of household expenditure devoted to energy, the more regressive the tax is. - Indirect distributional effects. As the tax affects the costs of goods according to their CO2intensity, ceteris paribus, the more that CO2-intensive goods fall into the prime line necessity category, the more regressive the tax is. - Incidence of the tax across consumers, producers and across countries. With regard to the effect of CO2 taxes on income distribution, who or which sector carries the tax burden is much more important than the tax rate. For example, if the demand for a good is elastic, the industry will carry the whole tax and the income distribution in the household sector will not be affected. Ex-ante simulations have shown that CO2 taxes are generally regressive28, but less than expected (Barde, 1997), and mildly progressive in some developing countries (e.g. Pakistan) (OECD, 1995). One interesting result is that the overall regressive effect is due to taxation on domestic energy. Indeed, the taxation of transport fuels is weakly progressive for most European Union countries (Barker and Koehler, 1998). The regressivity of CO2 taxes can be evaluated by the change in the income distribution of the population, for example measured by the Gini29 coefficient or by the skewness30 of the distribution. Other indicators are related to the tax burden imposed on different income brackets or on a particular sector of the population, for example the last bracket of income distribution or a geographic region, whose economy relies on CO2-intensive sectors (e.g. production of coal). Barde and Braathen (2002) points out three kinds of alleviation measures to soften the negative effect of CO2 taxes on income distribution: - Mitigation. This is an ex-ante measure, which can take the form of reduced tax rates for lowincome groups or specific goods, manipulation of the tariff structure or tax exemptions. Mitigation can decrease the environmental effect of the tax and increase its administrative costs.

27

In literature, a tax is defined regressive when the proportion of the income paid for the tax by the people with a lower income is larger than the proportion of income paid by more affluent sectors of the population. 28 According to Smith (1992), the United Kingdom is the country where CO2 taxes are most regressive. 29 The Gini coefficient is a number between 0 and 100 measuring the income inequality in a society, where 0 means perfect equality and 100 means perfect inequality, i.e. one person has all the income. The Gini coefficient is calculated using the Lorenz curve - a graph showing the percentage of the total income held by the bottom x% of households.
30

∑ For univariate sample Y , Y , ..., Y , the skewness is
1 2 N

N

i =1

(Yi − Y ) 2

( N − 1) s 3

where

is the mean, s

the standard deviation, and N is the number of observations. The skewness for any symmetric data, for example normally distributed data, is zero. Negative values for the skewness indicate that the number of observations below the average value is higher than the number of observations above it. A decrease of the skewness of income distribution indicates that the CO2 tax has increased the inequality of income distribution.

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Compensation. This ex-post measure can take the form of tax refunds or lump-sum subsidies. The environmental impact of the tax is generally weakened, as the rational agent discounts the tax rate since compensation is announced. However, as pointed out by Agnolucci and Ekins (forthcoming), the compensation measure of the Swedish NOX tax has reinforced the environmental effect of the tax. Tax shifts. This is generally an ex-ante measure introduced in the context of a green tax reform. The idea is to raise the rate of environmental taxes and effect a decrease in the appropriate measure of other taxes. Its final effect depends on the design: for example, if labour taxes are decreased, pensioners and the unemployed - presumably the group of the population with the lowest income - will not be affected by this measure.

3.4.2 Distribution of costs on industrial sectors and competitiveness The effect of CO2 taxes on the competitiveness has received a great deal of attention in exante simulation studies and this may be due to the fact that industry has often resorted to this factor to hinder the introduction of taxes. In the case of a company or industrial sector, competitiveness is the ability to compete in international markets with a satisfactory rate of return. For a country as a whole the definition given by IIMD (1996) - “the ability of a country to create added value and thus increase national wealth” - points out that competitiveness is a manifold concept influenced by relative prices, costs and by the qualitative superiority of products. A country’s competitiveness is related to the general tax level, infrastructures, pay level and quality of the workforce, accessibility to raw materials and to capital markets. Ex-ante simulations (Jaffe et al., 1995) show that environmental regulation is not an important determinant of the global patterns of trade and of plant location decisions. OECD (1996 and 1997) confirm that it has a very small effect on costs and prices levels and that it is difficult to discern the effect of environmental taxes from those due to other economic variables. Indicators of the costs distribution of CO2 taxes among industrial sectors can be built from the accounting sheets of the firms or from surveys. The costs31 on different sectors can be expressed in absolute terms or related to other economic variables (e.g. per unit of profits, value added or revenues, per employee, etc.). As the latter set of indicators is influenced by numerous factors not related to taxation, the former is generally preferable. However, if the focus of the study is on the contribution of the industry to the attainment of certain environmental targets, the former set of indicators might be preferable. In the case of a country, the exchange rate, the wage level, the inflation rate, the balance of payments, the country’s ability to use its resources efficiently and the level of foreign direct investments are all helpful in building indicators of the effect of the tax. As in the case of income distribution, the final outcome will be very much a matter of policy design: the three alleviation measures mentioned in the previous section apply here as well. Major attention should be paid to not watering down the efficiency of the tax. Hence measures not diminishing the firms’ incentive to abate pollution are preferred.

31

It is worth pointing out that, unlike the case of economic efficiency (see note 17), tax payments and not only transaction and abatement costs are used to build these indicators.

14

3.4.3 Criteria to grant alleviation measures From a long-term perspective, as shown in section 2, a constant tax rate for all CO2 emissions is a necessary and sufficient condition to attain an efficient allocation of abatement. While aiming at this equal tax rate, ex-post evaluations can monitor losers and winners and guide the allocation of alleviation measures. These have been often granted because of extremely high MAC, especially if some emissions have already been abated, and because the industrial sector faces competition from countries where CO2 taxes have not been introduced. The rationale of these two arguments is to minimise the costs of economic disruption associated with environmental improvements32. However, on one hand alleviating the burden on sectors with high MAC or enduring high levels of competition is economically sound33, but on the other it is more appropriate to impose the tax burden on subjects increasing their utility through production and consumption of goods causing emissions. Alleviation measures should be granted only when the tax causes massive redundancies or substantially reduces the ability of national firms to compete on foreign markets34. The appropriateness of these measures can be judged only after analysing: - The extent to which the products are traded abroad and the elasticity of exports. If they are inelastic, foreign consumers will pay for the CO2 tax. - The difficulties for workers to find another job. If they will soon find another source of employment, temporary redundancies should not hinder the imposition of the tax. - The level of profits enjoyed by the firms. If these firms enjoy rents, the tax will cause a redistribution of wealth and not a change in output and employment level35. - The likelihood of production moving abroad. As CO2 is a global pollutant, if the imposition of a CO2 tax in one country causes the production to move elsewhere (carbon leakage in literature), the effect of the tax is zero or negative when the environmental legislation in other countries is less severe. As pointed out by Kasa (1999), alleviation measures granted to certain industrial sectors are influenced also by the strength of the ties between these sectors and the public sector, the economics of lobbying, the power distribution among and within representative organisations, and the perception asymmetry between future losses and gains. As the consultation process on CO2 taxes and the allocation of alleviation measures are held against historical relationships between ministries and industrial sectors, it is plausible that some representatives of the public sector will look more favourably on the requests coming from some industries rather than from others. This does not necessarily mean that the public sector representatives are being partisan, as their decisions could be due to the information they have before the consultation. For example, it is not unlikely that the reasons put forward by a sector,

32

When reducing CO2 emissions implies welfare-decreasing changes in the economy, it is convenient to reduce these undesirable consequences, especially if economic actors’ responses are constrained by transaction costs or limited opportunities to decrease energy use. 33 This point is strengthened if there are few opportunities to innovate, as imposing a tax gives the firms no choice but paying. However, the signal sent to the industry and its repercussions in long-term R&D expenditure should be taken into account. 34 OECD (2001) raises the doubt that governments might have been too quick to offer alleviation measures to the industries that pollute the environment the most (p.72). 35 This is because output and employment are determined at least in the short-term by marginal values and not by the size of the rents.

15

whose structure and problems are already known by the representatives, can be better understood and therefore more persuasive36. The economics of lobbing are influenced by the benefits and costs arising in the process: the potential benefits are the ultimate cause of lobbying, while the costs are the factors restraining the industry from exerting pressure on policy-makers. The likely distribution of costs and benefits influences the internal cohesion of the lobbying group and the extent of members changing side during the bargaining process. Finally, also the number of potential beneficiaries is important: a small number of members encourages lobbying because the share of the gains accruing to each of them is bigger. Other important factors influencing the lobbying costs are the structure of the representative organisations and the distribution of power among and within them. The lobbying activity of industrial sectors, which already dominate the existing representative organisations, will be much easier and cheaper. Finally, if future losses are perceived to have a bigger effect than the same amount of future benefits, and if the lobbying activity is influenced by this asymmetric perception, beneficiaries of a policy change will tend not to take part effectively in the consultation process.

36

The relevance of this point is increased by the historical importance of energy-intensive industries as engines of national economic development.

16

4 CO2-based taxes schemes In a theoretical CO2 tax37 the amount of emissions is the only parameter on which the taxation should be based. Because in practice this has never happened CO2-based taxes are defined here as charges, whose rate depends mainly, but not only, on the CO2 content of fossil fuels producing emissions, and which are introduced with the explicit intention of abating these emissions. Examples of other factors influencing the tax rate are the energy carrier, the economic activities carried out by the user or his geographical location. CO2-based taxes differ from energy taxes, as the latter are charges paid on the quantity of energy consumed as specified by some common unit38. For example, while renewable sources and nuclear energy may not be taxable under CO2-based taxes, they will be liable in the case of an energy tax, unless they are given a special exemption. Furthermore, CO2-based taxes and energy taxes are conceptually distinct as the former are levied on an externality while the latter are levied on energy consumption tout court. Consequently, CO2 taxes are a type of pollution tax rather than a subset of energy taxes. Beside CO2 and energy taxes, there are many other taxes on energy products (e.g. VAT, road fuel duty, etc.), whose sum is generally called implicit energy tax. This section surveys CO2-based taxes in selected countries. Some energy taxes and electricity taxes are reviewed because they are charged on the same fuels, because their rate was lowered when CO2 taxes were introduced or because their rate (especially for electricity) influences the treatment of renewable sources. It is worth noting that the survey of taxes below is not meant to be complete but only to provide the reader with enough information to go through the ex-post evaluation studies presented in section 5. For this reason only taxes introduced in Finland, Denmark, Sweden, the Netherlands, Norway and the United Kingdom are reviewed.

37 38

Carbon and CO2 taxes are easily comparable as a ton of carbon is approximately to 3.67 tons of CO2. Not surprisingly, energy taxes are less cost-effective in reducing emissions as the relationship between emission abatement and the tax base is less direct.

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4.1 Denmark Although Denmark can vaunt a long tradition in the use of energy taxes39, the first of these taxes mainly motivated by environmental concerns was the CO2 tax40, announced in 1991 and introduced one year later. The tax, whose rate at the introduction amounted to EUR 13.3/ton CO2, is charged on fuel oils, gas (except natural gas), coal, and electricity. In 1991 the CO2 tax was levied on both the household and industrial sector but only the latter could apply for a 50% refund. Further refunds were granted if the amount of the tax paid exceeded certain thresholds. As a result, the industry paid an average EUR 4.6 per ton CO2 emitted (Enevoldsen, 2003).
Tax load as percent of the value added Less than 1% More than 1% More than 2% More than 3% More than 3% Refund available to the firm 50% 75% 87.5% 95% 100% (1)

Table 1. Refund, as a percent of the tax rate, available to firms in 1991. (1) Total exemption is attainable only if the firm had carried out an energy survey, which formed the basis of a plan for investments in energy-savings. After a new government, which came into power in 1993, declared its intention to increase the tax on the industry, a long period of confrontation followed. A revised CO2 tax was finally passed in 1995 and introduced one year later41. In order to avoid a decrease in the industry’s competitiveness, the tax was differentiated according to the specific use of energy - space heating, heavy processes, and light processes - and was implemented gradually. Furthermore, social security contributions were lowered. As this was not enough to overcome the opposition of the industry, voluntary energy savings agreements for individuals and for groups of companies were introduced. Agreements could be made for both heavy and light processes. Only firms with production processes listed in the appendix of the law could enter heavy processes agreements; only firms with a tax payment exceeding 3 per cent of their value added could enter light process agreements. The stipulation of an agreement with the Energy agency enables firms to pay a reduced tax rate - see Table 2 - but it binds them to undertake certain energy saving measures. Firms not willing to sign an agreement have to pay the full CO2 rate. Firms not implementing the measures agreed upon have to pay the full tax and a sanction for non-compliance. The 1995 reform meant that the effective CO2 tax rate on business rose from EUR 4.6 to more than EUR 13.3 (Enevoldsen, 2003)42.
Using a combination of administrative regulations and economic instruments, Denmark has gone from being nearly totally dependent on imported oil in the early 1970s to the nowadays diversified energy supply based on oil (43%), coal (25%), natural gas (23%) and renewables (9%). 40 As this tax was not intended to raise the burden on energy, basic excise duties were lowered accordingly. 41 In the same year an energy tax of EUR 0.0013 and a CO2 tax of EUR 0.0296 per m3 were imposed on natural gas. This corresponds to DKK 0.01 and DKK 0.22, respectively. Exchange rate of 09/06/03 is used in the conversion (1 Danish Krone = 0.13472 Euros). 42 In these years a SO2 tax was introduced to stimulate the use of energy sources with lower sulphur content. Since these sources have a lower CO2 content, the SO2 tax increased the price of CO2 emissions.
39

18

Use category Households Space heating (industry) Light process With agreement Without agreement Heavy process With agreement Without agreement

1995 13.47 0 6.73 6.73 0.40 0.67

1999 13.47 13.47 7.81 10.88 0.40 2.69

2000 13.47 13.47 9.16 12.13 0.40 3.37

Table 2. 1995 – 2000 CO2 tax rates for different categories of energy use in Denmark (EUROS per tonne CO2). Source: NORDEN, 2002, p. 47. The original tax rates in Danish Krone were converted in EUROS using the exchange rate on the 09/06/03 (1 Danish Krone = 0.13472 Euros). In 1995 individual agreements were based on energy audits, compiled by independent consultants, listing energy savings considered profitable by the Energy Agency; the company had to undertake all these savings to qualify for the reduced tax rate. Payback periods used by the agency were 4-6 years, which are considerably longer than those normally employed by the industry. The outcome of the energy audits was very much influenced by the distribution of information (information asymmetry) between the parties. As consultants lacked specific knowledge on the production process of the firms they had to survey, most of the time the energy savings were proposed by the firms and simply accepted by the consultants. In order to reduce the administrative costs, group agreements were made with companies sharing similar production processes. These agreements were based on an analysis of the whole industrial sub-sector and on an action plan containing specific actions to reduce energy consumption. If individual companies sign this plan, they commit themselves to undertake the listed actions. As the CO2 tax reform was intended to be fiscally neutral for the industry, most of the revenues arising from the business sector in the period 1996-2000 were paid back to the firms. In particular, about 600 million Euros were recycled through a reduction of social security contributions paid by employers, about 160 million Euros through small business special funds43, and about 240 million Euros through earmarked subsidies for investments in energy savings (Enevoldsen, 2003). These subsidies were aimed at funding the implementation of the energy savings listed on the agreements; according to the law, up to 30% of the required investment could be subsidised. In 1999, a further refund of approximately 270 million Euros was granted to compensate for the re-distribution from energy-intensive to labour-intensive firms caused by the reduction of social security contributions. Furthermore, firms were given a rebate on the CO2 tax for space heating if tax payments exceeded 2% of the firms' net production value and if they signed an agreement for this energy use. Other adjustments brought in the same year are the introduction of
Special attention was paid to small firms because they received only a tiny share of the investment subsidies and of the decrease in social security contributions.
43

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joint energy agreements for the whole industrial sector and the increase in the subsidies granted for energy-savings. Finally, energy surveys as a condition to sign an agreement were replaced with a stronger and more detailed focus on energy management in order to address the information asymmetry between the consultants and the firms. It is worth noting, as pointed out by Enevoldsen (2003), that although the agreements were crucial to foster the compromise over the final package, they were designed mainly as an auxiliary instrument to the CO2 tax, which remains the most significant component of the package. As discussed below, the opposite approach is followed by the Dutch policy. 4.2 Netherlands The regulatory energy tax was introduced on the 1st January 1996 as part of the Netherlands’ second National Environmental policy Plan. This tax, imposed on the delivery of energy products to final consumers, is explicitly targeted at small energy users. The regulatory energy is levied on natural gas, electricity, and mineral oils used as substitutes for gas by households or commercial establishments. To keep the focus on small users, a ceiling on consumption was built into the tax: natural gas is taxed up to 1 million m3 per year and electricity up to 10, 000 MWh44. Other policy instruments, like long term agreements and the Benchmark protocol, were introduced to induce large energy consumers to save energy. The main reason for this distinction was to avoid the economic risks resulting from unilateral imposition of taxes on large industrial users facing international competition (VROM, 2000). However, large users are not exempted by the tax but pay for their consumption until the ceiling, as explained below45. As all the revenues from the tax are recycled back to the taxpayers, providing a total exemption to large industrial users was considered a windfall for them. Furthermore, the creation of a threshold would have given a perverse incentive to increase consumption for users close to the threshold. In order to decrease the regressivity of the tax, a free energy allowance was granted for the metered energy sources: the floor was set at 800 m3 for gas46 and 8700 kWh for electricity. With these volume ceilings, the tax covered the gas and electricity use of all households and of about 95% of all Dutch companies. In terms of volumes the tax applies to 40% of non-transport, nonfeedstock energy use. This means that the remaining 5% of industrial users consumes the

44

The tax paid in excess of a certain quantity of mineral oil products not used as propellant may be given back. The annual thresholds are 159,000 litres for light fuel oil, 153,000 litres for heating oil and 119,000 kg for LPG. 45 Horticulture firms are an exception to this. According to the government, as this sector is characterised by a large number of small firms with a very high energy/employee ratio operating in an extremely competitive international market, it was impossible to recycle the revenues back to the firms in a way which would compensate adequately for the burden imposed by the tax. For this reason a zero rate on emissions from natural gas was granted (the electricity is subject to the full rate of the tax). The zero rate was further justified in the government’s point of view by the existence of a long-term agreement to improve their energy efficiency by 65% in the period 1980-2010. As the European Commission allowed a zero rate only until 1999, since 2000 a very low tax on natural gas has been paid. 46 The floor was set at such a level that the energy-conscious citizen living in a new, state of the art, house would not have to pay any tax on her gas consumption for heating, hot water and cooking. Because no yardstick was thought to exist for electricity use, it was decided to set the floor at a level excluding about the same number of electricity users from the tax as are excluded from the natural gas with a floor of 800 m3.

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remainder 60%. In 2001 the volume ceilings were replaced by a fixed tax reduction of Euros 141 per year per electricity connection. The tax rates introduced in 1996 were taken from the first draft of the EU directive for a European CO2/energy tax. Analogously to the European draft, the Dutch system derived rates for specific fuels on the basis of CO2/energy content equivalents. In the case of electricity the rate was calculated by looking at the fuels used in generating electricity in the Netherlands. In order to avoid economic disruption, tax rates have been gradually increased until they reached the rates in Table 3 in 2001. During the first years after the implementation of the tax, the electricity rate was raised more than those of other energy carriers due to the faster growth in the electricity use. The set of levies charged on fuels subjects to the Regulatory Energy Tax are shown below. Excise duties and the Environment Tax are intended to raise revenues, while the aim of the compulsory stock is to finance the maintenance of strategic oil reserves. The tax is fully recycled to the taxpayers on a sector basis: household on one side and industry on the other. Households have received their money back through an increase in the income tax-free allowance and in the standard deduction for senior citizens, and through changes in the personal income taxation (mainly a reduction in the rate charged over the first income bracket). On the business sector, the tax is recycled through a reduction in the wage component paid by employers to cover employees’ social premiums, an increase in the deduction for small independent companies and through a decrease in the corporate tax rate. Other recycling measures are accelerated depreciation for environmental investments and tax deductions for investments in energy efficiency. The Dutch tax scheme contains exemptions for natural gas used in combined and power installations, heat supplied via district heating, and special arrangements for green electricity. The energy distribution companies do not pay the regulatory energy tax to the central government on electricity generated from renewables and biogas. This incentive was extended in the 1998 for renewable electricity, which is now zero-rated provided that this discount is passed on to consumers with special contracts to buy green electricity. This provision has been dubbed double exemption: energy companies can pay their green electricity suppliers more than what they pay to suppliers of standard electricity and can charge their green consumers less. The 1998 tax plan also introduced special arrangements for electricity generated by waste incineration. The energy distribution companies pay half of the rate of the tax provided they pass this advantage on to the suppliers.

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Excises Light fuel oil Diesel (heating oil) LPG Natural gas 0-5,000 m3 5,000-170,000 m3 170,000 - 1,000,000 m3 1 million – 10 million m3 More than 10 million m3 Electricity 0-10,000 kWh 10,000 – 50, 000 kWh 50, 000 – 10 million kWh More than 10 million kWh 1000L 1000L 1000 Kg m3 m3 m3 m3 m3 KWh KWh KWh KWh 46.58 46.58 0

Environmental taxes in fuels 13.29 13.29 15.86 0.0104 0.0104 0.0104 0.0104 0.0068

Compulsory stock levy 4.99 4.99 0

Regulatory Energy taxes 126.5 127.6 150.1 0.1203 0.0562 0.0104 0 0 0.0583 0.0194 0.0059 0

Total taxes 191.23 192.39 166.75 0.1307 0.0665 0.0208 0.0104 0.0068 0.0583 0.0194 0.0059 0

Table 3 Environmental tax rates and excise duties on selected fuels in the Netherlands (Euros per unit)47. Source: VROM (2000), our conversion. The importance of the regulatory energy tax in the energy policy is bivalent. Among big users the role of the tax is considered subordinate and complementary48 to the long-term agreements, called covenants. Among small users the tax has a keystone function, as it enhances the effectiveness of other instruments like energy performance norm for new housing and sectororiented programs (VROM, 2000, p. 7). The idea is that raising the price on energy increases the effects of supply-side conservation programs. The covenants, which were introduced in 1992, have been accepted by the industry because many of the energy-saving investments agreed are subsidised or receive tax breaks, and because they are informal and have not any sanction attached. Recently, the covenant approach has been developed further with the introduction of the socalled “benchmarking” covenants. According to these covenants, signed in July 1999, Dutch energy intensive industries are obliged to take part or remain among the best in the world in terms of energy efficiency by no later than 2012. This vague target can be reached through the use of flexible instruments like CDM or Joint Implementation (JI). In exchange energy intensive industries have been granted future exemptions from taxes. Enevoldsen (2003) concludes that as a climate policy tool covenants have been largely ineffective.

47

Heavy fuel oil is subjected to the Excises and to the Environmental Tax but not to the Energy Tax. Gasoline, and light fuel oil, diesel, and LPG for motor use are subjected to Excises, Environmental Tax and the Stock Levy but not to the Energy Tax. Rates for the Regulatory Energy tax are those applied by the tax collection agency while rates for all the other items on the table are a conversion from the rates expressed in Guilder, using the fixed exchange rate between Guilder and Euros 1 Dutch Guilder = 0.45378 Euros. 48 See for example Kasa (2000) and Enevoldsen (2003).

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4.3 Finland Finland introduced the first CO2 tax in Europe, alongside the fuel duty in 1990, at a rate of Euros49 4.12 per ton of carbon or Euros 1.13 per ton of CO2. In 1994, this taxation was amended so that all primary energy sources (except wood, wind power and waste fuel) were taxed according to their energy content. In addition, a component of the fuel duties, called additional duty, was levied on all fossil fuels according to their carbon (60% of the component) and energy content (40%). Since September 1998 the basis for levying the additional duty has been only their carbon dioxide content; the tax is Euros 17.16 per ton of CO2. Additional duty levied on natural gas is 50 per cent lower than the full rate in order to make it more competitive. Other components of the fuel duties are the basic duty, which is essentially a fiscal tax, and the strategic stockpile fee50. The Basic duty on transport fuels is differentiated to promote environmental protection: due to this differentiation, grades with better environmental characteristics have fully displaced the normal grades. The Finnish system incorporates the following exemptions: - Aviation fuel and kerosene used in aviation, - Methane, liquid petroleum gas, and light fuel oil used by vessels, - Fuels used as a source of energy in oil refining processes, and - Fuels used in industrial production as raw materials or auxiliary materials or consumed as intermediate inputs in the industrial manufacturing process of goods. When the energy tax legislation was modified in September 1998 a refund scheme for energy-intensive firms, defined as companies that have paid more than 3.7 per cent of their value added in energy excise duties as a whole, was introduced. These firms can apply for a refund of 85% of the tax paid, provided that they have paid more than 50,000 in taxes. Yearly, some 15 million Euros is refunded to energy-intensive firms. In 1999, 12 companies received these tax refunds. The electricity tax, introduced in 1992 on purely fiscal grounds and levied at the consumption level falls into two classes: a higher rate (0.007 Euros per kWh) for households and the service sector and a lower rate (0.004 Euros per kWh) for the remaining sectors. As electricity taxation does not depend on the CO2 content of the used fuel, the government made the tax on electricity produced by wind, wood and wood-based energy refundable51.

The rate in Finnish Markka was 24.5 and 6.7 respectively. This currency was replaced by the Euro in 2001: one Finnish Markka corresponds to 0.16819 Euros. 50 The purpose of this component is to transfer to the users of these commodities the costs incurred by the state for the maintenance of a strategic stockpile for the economy as a whole. 51 In particular, electricity produced with wood or peat in heat power plants producing less than 40 Mega Volt Ampere, in small water power plants (less than 1 Mega Volt Ampere), and from waste gases from metallurgical processes was given a tax subsidy of 0.004 Euros per kWh (lower rate of the electricity tax) while electricity produced with wind power was given a tax subsidy of 0.007 Euros per kWh (higher rate of the tax).

49

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Basic duty Unleaded gasoline - normal grade - reformulated Leaded gasoline - normal grade - reformulated Leaded-unleaded blend - normal grade - reformulated Diesel oil - normal grade - low sulphur content Light fuel oil Heavy fuel oil p/kg Coal Natural gas 0.52 0.52 0.60 0.59 0.56 0.55 0.28 0.26 0.02

Additional duty

Strategic stockpile duty 0.01

Unit Litre Litre

0.04 0.04 0.04 0.04 0.05 0.05 41.37 0.023

0.01 Litre 0.01 Litre 0.01 0.01 0.01 0.01 0.01 Litre Kilogram Ton m3

Table 4: Finnish duties, expressed in Euros on selected fuels since 1.9.1998. Source: Finnish Prime Minister Office, 2000, p. 37. 4.4 Norway The CO2 charge on mineral oils, natural gas and petroleum combusted during production on the continental shelf has been in effect since 1991, while a CO2 charge on coal and coke used for energy purposes was introduced in 1992. The tax on mineral oils contained a basic rate per litre but since it was removed in 1993 the fuel charges have been based exclusively on environmental characteristics (CO2 and SO2). This is also the case for coal, coke and natural gas. Table 5 shows the sectors exempted and the sectors with a reduced tax rate in 1995.
Energy carrier Petrol Light mineral oil Heavy mineral oil Natural gas Oil used on the Continental Shelf Coal Coke Tax level $US/t CO 56.7 24.7 21.2 56.2 49.4 27.1 20.6 Coal used as a reducing agent or as raw material in industrial processes and for energy purposes in the production of cement and LECA (light-expanded clay aggregate). Exemptions as for coal Sectors exempted and sectors with reduced tax rates Practically no use exempted. Certain sectors exposed to international competition, such as air transport and ships engaged in foreign trade, the supply fleet in the North Sea, fishing, and coastal goods transport, are exempted. Wood conversion and the herring meal industry pay 50% of the tax rate. Exemptions and tax reductions as for light mineral oil. Onshore use of natural gas

Table 5. The Norwegian carbon tax regime 1995. Source: Ministry of Environment (1997), quoted in Godal and Holtsmark, p. 656.

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Since a CO2-tax was introduced in Norway in 1991, several commissions have been appointed with the purpose of investigating how to extend the use of economic instruments in environmental policy and how to shift the tax burden from labour towards activities using natural resources or producing harmful emissions. The 1998 Green tax commission proposed the expansion of the CO2-tax base to exempted industries, and the appointment of an official commission to explore a domestic system for GHGs emissions trading. As a result, in 1998 a tax of NOK 100 per CO2 ton was levied on the supply fleet in the North Sea, and on air and coastal transport of goods for domestic trade. The sectors still exempted from taxation are ships engaged in foreign trade, the international aviation sector, coastal fishing, fishing and hunting in distant waters. Natural gas utilised on the Norwegian mainland, and coal and coke used as raw material or as reducing agent in the cement and LECA industries are exempted too. Furthermore, new and amended taxes on heating oil were proposed in the budget for 2000. Tables 5 and 6 show the current rate and the rates in the 1995-2002 period for selected fuels.
Petroleum sector, per litre Gasoline, per litre Mineral oil, coal and coke per litre (a) Reduced rate mineral oil, per litre Reduced rate gasoline, per litre Fuel Tax rate NOK 0.73 0.73 0.49 0.28 0.26

Table 6a. CO2-tax in Norway in 2002. (a) the pulp and paper and the fishmeal industry pay half rate. Source: NORDEN, 2001, p. 85.
Fuel/applicable duties Fuel oils Coal/Coke Emissions from the continental shelf Unit NOK/litre NOK/Kg NOK/litre Sm3 1995 0.415 0.415 0.83 1999 0.46 0.46 0.89 2000 0.47 0.47 0.70 2002 0.49 0.49 0.73

Table 6b. CO2 taxes applicable to selected fuels in Norway from 1995 to 2001. The figures NOK/litre do not include VAT of 24 per cent. Source: NORDEN, 2001, p. 87. The excise tax on electricity is not differentiated according to the energy sources used in the production of electricity. This tax has probably contributed to the slow-down in further development of hydropower, and thus to less disruption of the natural environment. The tax rate in 2002 was NOK 0.093/kW. 4.5 Sweden When in 1991 the Swedish government carried out an extensive reform of the tax system, energy taxes were cut by 25-50%, income and capital tax were reduced, and a CO2 tax, a SO2 tax, a VAT charge on energy, and differentiation of taxation on fuels used as propellants and for heating purposes were introduced. The last two columns in Table 7 show the effect of this reform on selected fuels. The differentiation of tax rates on the basis of fuel use (propellant and other use) and the geographical location is not shown.

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Fuel

Unit

Total Tax 2002 Ind./other 539/2505 619/2015 404/1575 567/2028 0/198

Total Tax 1993 Ind./other 230/1460 200/1030 170/855 240/1065 0/35-85

Oil Coal Natural Gas LPG Electricity

m3 Tons 1000 m3 Tons MWh

Energy tax 1993 Ind./other 0/5-290540 (1) 0/230 0/175 0/105 0/35-63-85

Carbon Tax 1993 Ind./other 230/920 200/800 170/680 240/960 0

Total Tax 1991 (1) Ind./other 1260 850 710 855 50/72

Tax 1990 (2) Ind./other 1078 460 350 210 70/92

Table 7. Comparison of energy and CO2 tax rates, measured in SEK, on selected energy carriers. VAT and other environmental taxes on nuclear power, gasoline, etc. are additional. SO2 tax is additional on oil and coal. (1) Including carbon and energy tax (2) Including only energy tax (3) Energy tax is differentiated according to the environmental quality of oil. Source: Sterner (1995), p. 144 and Norden (2001). Tax reductions were given to some firms, especially from the horticultural and energy intensive-sector. The fact that they were granted by the government for a specific company and for periods of one year subject to renewal has caused inefficiency (i.e. because of the uncertainty in planning investments) and nepotism. Finally, in response to pressure from the industry and because such reductions would have been very likely sanctioned as illicit subsidies by European institutions, the government appointed the Committee on Industrial Energy Taxation to look further into this matter. As a result, a reform introduced in January 1993 abolished the energy tax on the industry and reduced the carbon tax on the industrial sector by the 75%. As pointed out by Sterner (1995) this reform meant that energy and carbon taxes on private consumers had to be raised to finance the reduction of revenues from the industry, whose tax levels after the reform were down to a much lower level than before the 1991 reform. The rates for the industry and the household sector are shown in Table 7. A new tax strategy for alternative fuels will come into effect in 2003. This implies that alternative fuels should not be subject to carbon dioxide tax if their net contribution to greenhouse gas emissions is limited. Furthermore, the government will continue granting exemptions from both energy and CO2 tax for alternative fuels produced within the framework of development projects. The current exemptions are as follows: - Biofuels are not subject to any of the taxes mentioned above, - Industry, agriculture, forestry and fisheries are exempt from energy tax and pay 30 per cent of the carbon dioxide tax, - Energy-intensive industry is entitled to a tax reduction (76%) for the amount of the CO2 tax exceeding 0.8 per cent of the value of sales. The number of firms entitled to this reduction is around 50, - Energy-intensive industry is entitled to a complete exemption for the amount of the CO2 tax exceeding 1.2 per cent of the value of the industry’s sales. This applies only to a handful of firms, and - Fuels used for electricity production are exempt from taxation.

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4. 6 United Kingdom During the late 1980s and 1990s environmental policy makers in the UK were gradually convinced by the evidence and arguments for economic instruments. Lower taxation of unleaded petrol contributed to a dramatic shift away from the leaded variety. Environmental arguments started to be advanced for such taxes as VAT on household energy use and the annual increase in road fuel duty, which started in 1993. The landfill tax was introduced in 1996. One of the first actions of the new Labour Government on its election in 1997 was the issuing of its Statement of Intent on Environmental Taxation, which embraced both the idea of using taxes to make environmentally damaging activities more expensive and the general principle of shifting the base of taxation over time from ‘goods’ like labour to ‘bads’ like pollution. In 1998 the Government commissioned Lord Marshall to investigate the case for a tax on the business use of energy. Lord Marshall reported a year later that he considered that there “probably” was such a case (HM Treasury, 1998; p.19); the Government announced that it would act on this recommendation. The result, after several rounds of consultation, was the climate change levy (CCL), which was introduced in April 2001 at the rates set out below.
Fuel Electricity Gas LPG Solid fuels Rate 0.43 p/kWh 0.15 p/kWh 0.96 p/kg (equivalent to 0.07 p/kWh) 1.17 p/kg (equivalent to 0.15 p/kWh)

Table 8. Climate change Levy rates on fuels. The CCL is tax applied on the consumption of energy in the business sector. The Marshall Report acknowledged the attractiveness of an ‘upstream’ carbon tax on all energy use, including that for the generation of electricity, but also that this could conflict with Government policy not to impose taxes on the domestic use of energy. It would also have made less attractive the use of coal for power generation (because of its higher carbon intensity), an outcome that the Government also wished to avoid. The Marshall Report therefore recommended, and Government implemented, a relatively inefficient ‘downstream’ tax on the business use of energy, the rates of which were set to reflect the primary energy wasted in power generation, but which gave no incentive to make this primary energy itself less carbon intensive. The CCL consultation process resulted in a whole package of measures around the CCL, both to increase its environmental effectiveness and to address concerns about the impact of the tax on competitiveness. Full exemptions from the CCL were granted to electricity generated from ‘new’ renewable sources and (in two stages) from ‘good quality’ Combined Heat and Power (CHP) plants. Agreements, called Climate Change Agreements (CCAs) were also concluded with 44 energy-intensive sectors. The CCAs constitutes if two components: an Umbrella Agreement, fixing a target improvement in energy efficiency for the whole industrial sector, signed by the Government and the relevant sectoral trade associations, and underlying agreements between the Government and the individual sites listed in the Umbrella Agreement. A site qualifies for an 80% reduction in the CCL if it meets its energy efficiency target in its underlying agreement. If the sectoral target in the Umbrella Agreement is achieved, then all sites listed in the Umbrella Target qualify for the reduction, even if some sites missed their individual targets.

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Other elements of the CCL package were: - Allocation of £100m from CCL revenues over three years to the Carbon Trust, to stimulate improved energy efficiency in business through a programme now called ActionEnergy. - The Enhanced Capital Allowance Scheme (ECA): 100% first year capital allowances for investments in eight designated energy-saving technologies (motors, refrigeration, lighting, boilers, variable speed drives, thermal screens, pipe insulation, good quality CHP). This is estimated to cost around £100m per year in the first two years. - Rebate to business of the balance of the revenues from the CCL through a 0.3% reduction in the rate of employers’ National Insurance Contributions (NICs). The introduction of the CCL was strongly opposed by business organisations, especially the Confederation of British Industry (CBI), which argued that it would have a serious effect on the competitiveness of British industry. This opposition has not diminished with time. A recent briefing, (CBI, 2002; p. 2), argued that “[t]axation often appears a blunt and complicated instrument to achieve environmental benefit”. Several recent surveys, published by London Electricity, SGS Consulting and the Federation of Small Businesses (FSB)52, give some early insights into the effect of the CCL on businesses. The London Electricity survey of energy managers found that half considered the CCL a valid way to motivate firms to improve energy efficiency, 45% felt that it had improved their company’s attitude to energy efficiency and 36% said that it had given rise to new energy management initiatives. However, for small and medium sized firms (SMEs) the FSB and SGS surveys found that many were not even aware that they are paying the CCL, and many more were unaware that their NICs have been reduced as part of the CCL package. Not surprisingly, therefore, some perceived the CCL as a cost whereas in fact they were net beneficiaries from the CCL package (3 of the 9 case studies carried out by FSB fell into this category) (FSB, 2002). Presumably these companies would say that they supported the FSB campaign to repeal the CCL even though this would in reality make them worse off. In fact, the FSB research shows that 66% of all SMEs will benefit from the CCL package, mainly because most SMEs are micro-firms with 0-9 employees (who nevertheless account for 30% of all employment nationally), whose energy use is too low to attract the CCL but who nevertheless benefit from the NIC reduction. Repeal of the CCL package would clearly impact negatively on this large majority of SMEs.

52

The surveys are reviewed in ENDS 2002 ‘Climate Change Levy making limited impact on business energy management’, ENDS Report 330, July, p.9.

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5 Ex-post evaluation studies This section surveys ex-post evaluation studies, grouped according to the criteria discussed in section 3. The choice of the studies has been much constrained by the fact that ex-post evaluations, usually commissioned or undertaken by government departments, are usually published in the national language and are not widely available. For these reasons in some cases only the survey of studies made by other authors could be seen. This had a particularly strong effect on studies analysing the amount and stability of the tax revenues. However, considering the obvious importance of the revenues, this criterion has not been dropped from the theoretical discussion in section 3. 5.1 Environmental effect and effectiveness Larsen and Nesbakken (1997) evaluates the environmental effect of the Norwegian CO2 tax. The study uses three partial models to analyse emissions from stationary sources in the manufacturing and service sectors, and stationary and mobile sources in the household sector53. The use of partial models enables the authors to focus on specific characteristics of each sector but it forces them to consider large parts of the economic system exogenous. The total figure of CO2 reduction is simply the sum of values obtained in the three partial models. Running the models after removing the CO2 tax from the price generates the baseline case. In the case of stationary sources from the manufacturing and service sector, the short-term substitution elasticities are not statistically different from zero, except for the pulp and paper and the metal product, machinery and equipment sectors54. However, the long-term elasticities are significantly bigger. This model analyses only the switch from oil to electricity; the effect of the tax on the total energy consumption is not considered. In the case of stationary sources from the household sector the study uses a two-step model: on the first consumers choose the heating technology while on the second they determine the energy consumption. As only the effect of the tax on oil consumption is modelled, only households having chosen a heating technology based on kerosene or oil are influenced by the tax. Another limitation is that the model does not take into account the effect of the tax on the choice of equipment and energy type. Finally, energy prices do not influence the total energy consumption. The influence of these assumptions on oil consumption is undetermined. On one hand the effect of the tax is underestimated because the consumer cannot reduce oil and replace it with electricity; on the other it is overestimated because the consumer can adjust to a change in relative prices only through switching away from oil consumption. The third model55 enables the author to study the effect of the tax on the households’ use of transport, the choice of means of transport and on fuel consumption.

53

Emissions from mobile sources in the industry and commercial sector are not analysed while emissions from processes industry are not taxed in Norway. 54 The authors use a different functional form for the energy demand in the pulp and paper industry as there was evidence of numerous fuels substitution opportunities in this sector but not elsewhere. In all the other sectors a CES (constant elasticity of substitution) demand of electricity and fossil fuels is used. 55 The model is an utility tree with some of the branches modelled through a linear expenditure system and others through a constant elasticity of substitution.

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According to the three models used: - the tax had a strong effect on the paper and pulp industry, on the production of other intermediate products, and on other government services: in 1993 oil consumption would have been 14% higher without taxes (basic tax and CO2 tax)56, 11% higher without CO2 tax and 10% without CO2 tax , respectively. - the effect of the CO2 tax on the stationary sources in the household sector has not been dramatic. Perhaps this is due to the fact that the share of oil (the only fuel being modelled) in the energy consumption of this sector is rather low. - the CO2 tax has been responsible for a 2-3% reduction of petrol in the transport sector due to the increased use of public transport. The conclusion of the authors is that for the sectors studied CO2 emissions would have been 3-4 % higher for the period 1991-93, had the CO2 tax not been introduced. ECON (1994) and (1997) focuses on the effects of energy saving measures undertaken by the oil and gas extraction sector in the Norwegian continental shelf. It is worth pointing out that this sector was not included in Larsen and Nesbakken (1997). ECON (1994) shows that emissions per unit of oil/gas fell approximately by 8% from 1991-93 as a result of the measures implemented. The tax was considered responsible for ca. 20% of this. ECON (1997) extends the analysis to 1996: the emissions fell by 8% because of the energy-saving measures; ca. 40% of which were due to the CO2 tax. Bjorner and Jensen (2002) analyses the effect of the Danish package (tax, subsidies and agreements) on the industrial companies’ energy demand. Several models are estimated in this study: in model 1

LE it = α + β 1 LFVAit + β 2 LPE it + β 3 AGit + β 4 SUBit + λt + vit

(5.1),

where LE is the logarithm of energy consumption, LFVA the logarithm of the value added in real prices, LPE of the relative price of energy57, AG the agreement58 dummy variable (1 if the firm has signed an agreement, 0 otherwise), SUB the cumulative amount of subsidy obtained by the companies59 and λ time dummies included to control for the effect of changes in unobserved variables like temperature. Subscript it denotes a company i at time t. Model 2 shares the same functional form but it uses the data60 in a different way: while in model 1 all the data are pooled together and the information linking the observations to a certain firm is lost, model 2 takes this into account through the use of a fixed effect coefficient. In this model the difference among firms not explained by the dependent variables - unobserved heterogeneity in econometric terms - is accounted by different intercepts αi. In a pooled model,
As mentioned in section 4, the tax on mineral oils contained a basic rate per litre until 1993. Since then the fuel charges are based exclusively on environmental characteristics (CO2 and SO2). 57 PE is the ratio between the energy price and the price deflator. The energy price is calculated taking into account the cost (including taxes) of different energy carriers and their energy content. As the energy price depends on the composition of firms’ energy consumption, PE varies across firms in a given year. 58 The agreements in this study are those based on an energy audit. Since 1999, as mentioned in section 4, agreements have been based on the implementation of energy management guidelines. 59 The authors choose cumulative figures as the effect of investments in energy efficiency can be expected to last longer than one year. SUB is the amount of subsidies as a percent of the value added in the company. 60 The data are mainly based on eight energy surveys carried out by Statistics Denmark between 1983 and 1997, and on surveys from the Energy Agency. The data are measured at the firm level for the time period covered by the study: in econometrics this kind of data are called panel data.
56

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like the (5.1), the unobserved heterogeneity is assumed to be constant across firms. The estimators of the coefficients are biased if this assumption does not hold; in a fixed effect model the estimators are biased only if the unobserved heterogeneity is time-variant61. In models 3, 4 and 5 second order terms (of both LPE and LFVA, only LPE, and only LPVA, respectively) are inserted in a fixed-effect model based on equation (5.1)62. The comparison between model 1 and 2 shows that the use of a fixed-effect model dramatically influences the estimation of the parameters: - The fixed effect accounts for a large part of the variation of the dependent variable, as measured by R2. - The elasticity of energy consumption with respect to the value added goes from nearly 1 constant returns to scale - in model 1 to 0.55 in Model 2, which indicates increasing returns to scale63. - The price elasticity of energy is - 1.4 in model 1 while only - 0.5 in the model 264. - The value of the parameter related to the agreements is 1.33 in model 1 and - 0.17 in model 2, while the value of the parameter related to the subsidy is 0.60 in model 1 and not significantly different from zero in model 265. The analysis of parameters is slightly more complicated when second-order effects are considered, like in models 3, 4 and 5, as the value of the elasticity depend on the level of the variables. The authors fix three levels of the value added and energy price, corresponding to the 10%, 50% and 90% deciles, and compute the elasticities. As the second order term of value added does not add much explanatory power, the authors decide to continue only with model 4 – the only one without this term. In model 4 price-elasticity is highly influenced by the second order term of price66: companies facing higher energy prices are much more reactive than companies facing lower price levels. Because non energy-intensive companies normally face higher prices, they are more price reactive than companies from energy-intensive sectors. In model 4 the value of parameters related to the agreements and subsidies is -0.13 and not statistically different from zero, respectively67.

If it is time-invariant, it will be incorporated in the intercept αi for the i-th firm. In the pooled model this is not possible as the intercept is both time- and firm-invariant. Interested readers should have a look at Heckmann and Robb (1985). 62 As pointed out by the authors, these 5 models do not capture interfuel substitution. However, another study by the same authors proves that this substitution has been very limited and had only a marginal influence on the parameters’ estimation. 63 According to the authors, a coefficient smaller than one indicates decreasing returns to scale. But if the change of one percent in the output causes an increase smaller than one percent in the energy consumption, increasing the energy in the firm’s production function by a certain factor t raises the output by a factor larger than t. This is exactly the definition of increasing returns to scale. 64 Because in model 1 all observations are pooled together, the price elasticity is likely to reflect differences in energy prices across companies. This does not happen in a fixed effect model where the value of the parameter β2 is influenced only by price variation across time. 65 The fact that a pooled model does not take into account the kind of firms applying for an agreement is very likely the cause of the positive sign of β3. It is not that signing an agreement increases the consumption of energy, as implied by the model 1, but rather only energy-intensive companies are allowed to sign an agreement. An analogous explanation applies to the subsidy. 66 Elasticity ranges between - 0.42 for companies facing a low price and - 0.73 in the case of high price. 67 These parameters are remarkably stable in models 3-5, ranging between - 0.13 and - 0.17 in the case of the agreements and being always non statistically different from zero in the case of subsidies.

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The assumption that coefficients do not vary across economic sectors, incorporated in the models 1-5, is released in a model where the parameters of the value added and of the first and second order price terms are estimated for 13 sub-sectors. The results confirm the findings about the different price-elasticity for energy-intensive and not energy-intensive sectors mentioned above. The parameter related to the agreements slightly decreases to - 0.09 and is statistically different from zero only at a 10% level68, while the parameter related to the subsidy is once again not statistically significant. Using this last model Bjorner and Jensen (2002) calculates the effect on energy consumption: The effect of all taxes in 1997 was a 10% reduction in companies’ energy consumption. The effect of the agreements is a further 4-8% reduction in the energy consumption of the firms having signed one69. - The effect of subsidies is considered null, as the parameter is not statistically different from zero.

The difference between the effect of agreements and subsidies on energy consumption is puzzling, as subsidies were employed to fund the energy-savings listed in the agreements (see section 4). However, as pointed out by the authors, the coefficients of the agreements and subsidies’ variables should be interpreted with some caution because only a fairly limited number of companies with agreements were observed. An announcement effect might contribute to explain the subsidies being statistically insignificant when agreements have a positive effect on the reduction of energy consumption. The Announcement effect of subsidy refers to the adoption of the policy being subsidised irrespectively of the amount paid. The logic is that subsidies draw the attention on measures, which being already economically profitable, would be adopted independently of the financial incentive. For example, according to Koomey (2000), the percentage attributable to the Announcement Effect of the purchase of high efficiency central air conditioners and heat pump water heaters as a result of tax credits is respectively 30% and 24%. Evidence of this effect in energy policy has been found in the Norwegian oils and gas industry70. Coming back to Bjorner and Jensen (2002), it is reasonable to assume that the AE is picked up by the agreement variable and not by the amount of subsidy. However, it is unlikely that the Announcement Effect is responsible for all of the measures listed in the agreements. Agreements are found to be more environmentally effective than taxes because of the priceelasticity of energy-intensive companies. As these companies have lower price-elasticity, a policy reducing the tax on this sector and decreasing energy consumption through the agreements is economically rational. Even without considering different elasticities, agreements can achieve bigger reductions in energy consumption than taxes because of the different costs imposed by the two instruments. If the tax OA is levied on the firm with MAC shown in Figure 4, the firm abates the quantity DC and pays the tax for the rest. If signing an agreement to abate a fixed quantity of
However, as the P-value is 0.058, this parameter is very close to being statistically different from zero at a 5% level. 69 More specifically, a company signing an agreement decreases its energy consumption by 9%. The 4 - 8% figure is obtained taking into account that the reduction of energy price brought about by the agreements causes the energy use to increase by 1-5% compared to level if companies had been charged with the full tax rate. 70 According to ECON (1997), the CO2 tax drew attention to measures that would have been financially viable with or without the tax. The implementation of those viable without the tax is not influenced by the tax rate but simply by its announcement.
68

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emissions (say EC in Figure 4) allows the firm to obtain a reduced tax rate (say OH), the firm may agree to abate more emissions than those abated under the tax provided that the discounted rate compensates for the further abatement costs71.

Figure 4. Costs imposed on a representative firm by a carbon tax and an energy saving agreement. Source: Bjorner and Jensen (2002). Johannsen and Togeby (1998) conducts personal interviews to analyse the energy consumption of 30 companies (21 individual companies and one group of nine companies) which signed heavy process agreements in 1996. The study concludes that savings are very unevenly distributed - 75% of the energy was saved in 5 of the 30 companies - and that the overall consumption decreased by about 1.4%72. This reduction is not impressive but the authors point out that these companies are energy intensive and presumably were already energy efficient before signing the agreements. Danish Energy Agency (1999) highlights the lagged effect of agreements73: ex-post evaluations show that agreements signed in 1996-97 are responsible for a 1.7% fall in the 1999 energy consumption while ex-ante simulations show that these agreements will cause a 2.7% reduction in the 2005 consumption. The reduction in 2005 caused by the 1996-2000 agreements is estimated to be 6.3%. In this study the effect of agreements signed after 1999 is bigger because of the bigger discounts offered to firms (see Table 2). However, Danish Energy Agency (1999) does not say anything about the extent to which agreements are more effective than taxes. Shopley and Brasseur (1996) (quoted by Andersen et al., 2001) analyses the effect of subsidies from the 1993 Danish Energy Grant on five large and two small companies, which had invested between 25,000 and 500,000 Euros in these projects and received a subsidy of approximately 30%. The effect of the scheme is not clear: six of the seven companies had reduced energy consumption by more than 20% but, as far as CO2 emissions are concerned, one of the companies had reduced them by more than 4,500 tons/year, another by approximately 800
In Figure 4 the costs of the tax is ABCO while the cost of the agreement is FCE + HGEO. The increase in abatement costs due to the agreements is FBDE while the decrease in tax payments is ABLH. 72 This value is actually a forecast obtained by data on the agreements but, as only one of the companies did not fully implement the agreements, ex-post values should not be very different from this ex-ante figure. The 30 companies taking part in the agreements have a total energy consumption of 41 PJ per year corresponding to 21% of the total energy consumption in trade and industry in Denmark. 73 In Bjorner and Jensen (2002) only the lagged effect of subsides is modelled.
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tons/year, while the other five had made very moderate reductions, despite the energy savings. Unfortunately, Andersen et al. (2001) does not give any further information about the discrepancy between energy reduction and CO2 abatement. The results from the studies above strongly contrast with the effect of economic instruments on households’ energy consumption in Denmark. Boom (1998) (quoted by Andersen, 2001) found that subsidies granted in the 1970s and 1980s substantially decreased residential energy consumption, reducing the amount of energy expended on heating by 20% in 1975-91, while energy taxes caused a reduction of 15% in 1977-1991. The two instruments taken together are responsible for energy savings of 560,000 TJ. According to NUTEK (1994) (quoted in SEPA, 1997) CO2 emissions in Sweden in 1994 were 3-5% percent lower (2-4 Million tons in absolute terms), had the 1990 instruments been in place. This study, carried out with the help of a MARKAL model, shows that the 1993 reform, see section 4, was environmentally effective. However, the shift of the tax burden from the industry to the household sector raises doubts on its equity. According to an ex-ante simulation in NUTEK (1994), industry finds it convenient to substitute fossil fuels for biofuels because of the 1994 tax rates; the opposite occurs in the district-heating sector. SEPA (1997) found out that CO2 emissions were 10% lower in 1994 (5 million tonnes in absolute terms) than they would have been with the 1990 tax rates; the CO2 tax was responsible for two thirds of the mentioned reduction. As pointed out by Andersen at al. (2001), the difference between SEPA (1997) and NUTEK (1994) is due to the fact that the transport sector, which is not affected by the tax, is excluded in the former study but included in the latter. SEPA (1997) shows also that both the housing and the industrial sectors, which enjoyed a massive tax reduction in 1993, were in 1995 relatively insensitive to the tax. In the United Kingdom Green Alliance (2002) interviewed individuals from 24 companies74 to analyse the environmental effectiveness of the CCL. Firms claimed that the CCL levy was a blunt instrument and that they were already implementing energy management. Regarding the CCAs, firms pointed out that the trade organisations negotiating them had not had any incentive to agree to stringent targets for their members. Some of the larger firms interviewed claimed that agreements based on single firms would have achieved greater CO2 reductions as firms might have been willing to take more stringent targets to increase their environmental reputation. EEF and CBI (2002) studies the effect of the CCL package in 4 sectors of the British economy - Mining, Manufacturing, Utilities and Services75 - and concludes that firms’ response is very much influenced by whether they can take part in a CCA scheme. Overall 87% of the firms taking part in CCAs had either taken action to reduce energy consumption or were planning to do so. The figure for firms not being offered CCA is slightly more than 40%. Table 9 shows the percentage of respondents actioning, planning or considering to use CHP, ECA, Action Energy or Emission Trading.
The sample incorporates different sectors and company sizes (7 SMEs and 17 large companies, and 12 from the service sector and 12 from manufacturing sector). Also one representative from the Confederation of British Industry (CBI), one from the Federation of Small Businesses (FSB) and a tax accountant were interviewed. The aim of the survey, conducted by phone or in person, is to provide insights into the CCL package. 75 It is worth noting that the composition of the sample is rather biased in favour of the manufacturing industry as firms from this sector constitute 87% of the sample; services, utilities and mining are 9%, 2% and 1%, respectively.
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CHP ECA Action Energy Emissions trading

CCA vs. non CCA firms Non-CCA firms 12 21 24 6

CCA firms 27 59 64 56

Table 9 Effect of CCA schemes membership on the impact of the CCL package as measured by the percentage of respondents actioning, planning or considering use of support measures. For example, the total of firms using CHP, planning to do so or still considering this issue in response to the tax amounts to 12% of the non-CCA firms and to 27 of the CCA firms. Source: EEF and CBI, 2002, p. 6. According to the table above, the CCA seem to be environmentally effective if compared to the CCL. However, it is worth noting that the table does not compare the two instruments on the same firms. Therefore, CCA are more effective only if non-CCA firms had as many opportunities to decrease energy consumption as CCA firms. Another explanation of the difference could be linked to the available information. In the case of CCA, information diffused by the energyefficiency organisations is supplemented by trade organisations signing the umbrella agreements; this source of information is missing in the case of non-CCA firms. If the outcome presented in those tables is influenced by these two factors it is not possible to conclude that CCA have been more economically efficient than the tax. The argument proposed by Bjorner and Jensen (2002), see Figure 4, obviously applies also in this instance. However, it is unlikely that the different per cents in the two columns of Table 11 are only due to the factors mentioned above. Taking a different methodologically approach76, Danish Energy Agency (1999) concludes that companies with agreements were significantly more active in implementing energy efficiency schemes than companies without. However, the activity rate is also influenced by the size of companies and by the production sector77. 5.2 Economic efficiency As mentioned in section 2, ex-post studies of CO2 taxes using the criterion of economic efficiency are particularly difficult to implement due to the complexity of evaluating the costs and benefits. However, some partial evaluations have been seen in literature and are surveyed here. The first section presents some consideration on administrative costs in Denmark, Sweden and the UK, and a very partial analysis of the effect of Danish energy saving subsidies on employment; the second section focuses on the effect of CO2-based taxes on emission abatement options available to firms.

This study uses a regression model with energy efficiency activity as the dependent variable. A target for this variable was calculated using factor analysis and the companies were ranked on a scale from 1 to 5. 77 Big companies are more active than smaller ones. Independently from their size, energy intensive, food companies and companies prioritising research and development are significantly more active.

76

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5.2.1 Cost-efficiency Enevoldsen and Brendstrup (2000) estimates the transaction costs of the CO2 tax package in Denmark and compares them with the figures from a mid-term government evaluation78. In terms of section 2.2.1, Enevoldsen and Brendstrup (2000) analyses the costs on both the public and private sector; it acknowledges the benefits to the firms in terms of better energy management and analyses most of the transaction costs involved. Administrative costs in the public sector are related to employees’ time needed to implement and monitor the package (especially for the subsidies and agreements) and to collect revenues. The figure estimated in the government study, accepted by Enevoldsen and Brendstrup (2000), amounts to DKK 45 million79 per year. The private companies’ administration costs are estimated for each of the three instruments in the CO2 package: tax, agreements and subsidies. With regard to the tax, private companies face administrative costs related to the measurement of energy consumption80 due to the fact that tax rates vary according to the energy use, see Table 2. While the government study estimates these costs in DKK 7-40 million per year, Enevoldsen and Brendstrup (2000) points out the benefits due to the improved management of energy flows, and that many of the companies would have met these costs anyway. Therefore, the authors scale down the government’s figure to DKK 7-15 million per year. With regard to the agreements, the author concludes that annual private administrative costs are DKK 12-25 millions, compared to the DKK 7-15 million estimated by the government. The difference is due to the fact that the government study considered only the costs related to the preparation and reporting of the agreements, while Enevoldsen and Brendstrup (2000) considers also the costs imposed by the energy survey requested by the agreements and by its verification. With regard to the subsidies, private companies face administrative costs for the preparation of the applications and for the final account requested by the scheme. The figure estimated by the government, accepted by Enevoldsen and Brendstrup (2000), is DKK 5-15 million per year. Finally, enforcement costs borne by the public sector and by the private companies in case of disputes are estimated to be DKK 5-10 million annually. The government study considered only costs on the public sector and estimated them in DKK 5 million per year. Summing these figures, the total administration and enforcement costs varies between DKK 69–120 million per year according to the government study and DKK 74-110 according to Enevoldsen and Brendstrup (2000). As the estimated reduction of CO2 is 1.5 million tons/year, the total administrative costs amount to DKK 46 –80 per ton per year.

78

This study was carried out by Danish official bodies like the Danish Court of Auditors. The data in Enevoldsen and Brendstrup (2002) are obtained from personal interviews and from the government study. 79 More precisely, public administrative costs were estimated in DKK 29.5 million for the Energy Agency and in DKK 15.1 million for the Ministry of Taxation. 80 In particular, separate energy meters must be installed and readings must be made periodically.

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Government study Public administrative costs Private administration costs related to the CO2 tax Private administration costs related to the agreements Private administration costs related to the subsidies Private and public sector enforcement costs Total 45 7-40 7-15 5-15 5 69-120

Enevoldsen and Brendstrup (2000) 45 7-15 12-25 5-15 5-10 74-110

Table 10. Public and private administration and enforcement costs of the Danish scheme in DKK million per year. Enevoldsen and Brendstrup (2000) considers the Danish package cost-efficient, as the transaction costs are much lower than expected. This may be due to the fact that the design of the agreements does not leave much room for bargaining. As mentioned in section 4, firms could influence only the energy savings being listed on the agreements but not the implementation of these measures - they had to implement all the measures with a payback of 4-6 years. In contrast to Enevoldsen and Brendstrup (2000), Danish Energy Agency (1999) states that the energy surveys conducted by consultants were rather expensive. The conclusions of Enevoldsen and Brendstrup (2000) on the cost-effectiveness of subsidies contrast with the findings from Johannsen and Togeby (1998). In this survey some firms mentioned that the administrative effort to receive subsidies dissuaded them from applying. Indeed, after the first one and a half years it was difficult to fund relevant projects and the amount available for subsidies had not been completely used81. Johannsen and Togeby (1998) is also concerned about the effect of the taxonomy of energy use on administrative costs. SEPA (1997) analysed the administrative costs of the Swedish CO2 tax. The National Board had estimated a figure of SEK 2-3 million SEK per year on the public sector. The study concludes that if the administration costs for the ca. 7000 taxpayers (manufacturers, importers of fuels and major users) are approximately the same, the total costs are less than 0.1 per cent of the system’s turnover. The tax is considered cost-efficient.
81

The difference between these studies should not be due to different time periods: Togeby and Johannsen analysed data from 1996-97 while the data from Enevoldsen and Brendstrup (2002) are obtained from studies published in 1998 and 1999, which very likely refers to the same period. In 1997, the Danish Energy Agency changed the conditions under which companies can obtain subsidies so that more subsidies were granted. In addition, more energy-savings investments became profitable as the tax rate increased. It is unclear if this has influenced the transaction costs.

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According to Green Alliance (2002) most firms are satisfied that CCA were negotiated by the trade organisations even if some big firms pointed out that they paid a lot of money for something they could have done better themselves. Issues related to the administrative costs involved in so many single-company negotiations were not generally taken into account by the firms. SMEs pointed out that it was difficult to take part in the CCA due to high transaction costs and suggested the introduction of group agreements. EEF and CBI (2002) confirms the importance of transaction costs in the SMEs’ responses to the tax. As shown in Table 11, these firms have found it rather difficult, compared to big firms, to take any of the actions to reduce energy consumption.
SMEs vs. larger firms 1-249 employees 11 22 29 13

CHP ECA Action Energy Emissions trading

250+employees 28 54 51 40

Table 11 Effect of firms’ dimension on the impact of the CCL package as measured by the percentage of respondents actioning, planning or considering use of support measures. Source: EEF and CBI, 2002, p. 6 Finally, Shopley and Brasseur (1996) analyses the effect of the Danish investment subsidies scheme on employment through interviews with firms, consultancies and government agencies. The study detected almost no change in the firms and moderate increases in the consultancies and at the Danish Energy Agency. These projects involved replacing low-technology equipment with more efficient ones, which did not imply major changes in manufacturing: this explains the marginal effect on the employment.

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5.2.2 Abatement options Togeby et al. (1997) investigates the factors influencing the start and the successful implementation of energy management in Denmark82. The CO2 tax had been a motivating and supporting factor for all firms but only in one of the companies was it mentioned as a decisive factor83. According to the result of the study the tax influenced the choices of the energy carrier used for space heating because of the high tax rate on this energy use. However, IEA (1998) concludes that the Danish taxation policy, in common with several countries, is inconsistent because of the different price of carbon from different energy use – contrary to the static efficiency in section 2. In addition to problems related to data manipulation, firms may invest too much (too little) in reducing energy used in space heating (heavy processes) compared to the economically efficient level. The same point is raised by NOU (1992) for Norway. Because of this reason, Danish tax is very unlikely to be economically efficient in terms of emission abatements. However, in a wider sense the efficiency of the tax is more uncertain as the differentiation of the tax rates has helped the industry to stay internationally competitive. The economic efficiency of agreements is also uncertain. As shown in Figure 4, the agreements are theoretically more environmentally effective than taxes because firms can agree to more binding emission reductions if compensated by a tax discount. This does not say anything about economic efficiency because the payment of the tax is not a social cost. However, if tax payments cause other economic costs (e.g. closure of firms) agreements can be much more economically efficient. In Denmark the economic efficiency of agreements is put in doubt by a study conducted by AKF84, quoted in Johannsen and Togeby (1998). According to this study, the measures listed in the agreements were generally proposed by the firms and simply accepted by the consultants because of the information asymmetry between the parties. Agreements are not cost-efficient as firms were given a tax reduction in exchange for abatements, which they would have undertaken anyway85. This backs the results from Bjorner and Jensen (2002) on the statistical insignificance of subsidies. According to Danish Energy Agency (1999), only one third of the energy reduction brought by the agreements would have been achieved without their introduction. The information asymmetry was addressed in 1999 (see Section 4). Finally, according to Danish Energy Agency (1999), the energy surveys did not contribute new ideas on energy savings but they helped to increase the attention of firms on this issue. As mentioned in Section 2, this is an example of “soft effect”. SEPA (1997) focuses on the effect of the Swedish energy taxes (CO2, sulphur and energy tax) on the substitution between heavy oil and biomass fuel used at large heating plants. Although the
The author conducted semi-structured interviews with respondents from different professional backgrounds and with different affiliation to the firms. The interviewees were followed during a period of time spanning from the start-up of the scheme until its successful implementation. 83 This company also mentioned these other decisive factors: energy prices, subsidies, the anticipation of upcoming regulations and an advantageous contract with the local electricity utility. 84 In this study consultants, civil servants, and representatives from private companies were interviewed. According to the participants, few meetings (often one or two) between firms and the agency were held, and time was used constructively. 85 The authors claim that “most of these projects [contained in the agreements] would probably have been realised anyway- just later” (p.5). Unfortunately, no other information to support this claim is provided.
82

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use of biofuel, which doubled in absolute terms86 between 1990 and 1995, had begun to rise prior to 1990, its growth rate accelerated when the CO2 tax was introduced in 1991. Biofuels dominated in new investments made in heating plants. If the proportion of fuels in the district heating production had remained the same as when the CO2 tax was introduced, emissions in 1997 would have been about 1.5 million higher. Energy taxation is considered the main cause of the shift from heavy oil to biofuel and therefore considered environmentally effective. However, the economic efficiency is much more dubious because the taxation imposed on heavy oil was almost twice its market price – see Table 12 – and strongly increased the costs of energy generation. In the case of large factories because of the small difference between ordinary fuels and biofuels the tax can be considered efficient, as the additional costs are small. It is worth pointing out that the price difference needed to induce economic actors to switch fuels depends on the fixed costs; if they are substantial, a big and long-term price difference among fuels is required.
Large heating plants Large factories Heavy oil Biomass fuel Heavy oil Biomass fuel [SEK/100 [SEK/100 kWh] [SEK/100 kWh] [SEK/100 kWh] kWh] 7.9 5.2 8.8 1.0 22.9 10.9 7.5 2.2 1.0 10.7 9.8

Price before the tax Energy tax CO2 tax Sulphur tax Total

10.9

9.8

Table 12. Fuel prices for heavy oil and biomass fuel for large heating plants and large factories in 1994. Source: SEPA (1997), p. 49. The effects of the tax on CO2 emissions due to fuel substitution (first ratio in 3.1 and 3.2) are confirmed in Carlsson and Hammar (1996) (quoted in SEPA, 1997), which focuses on the industrial emissions in the Alvsborg County in Sweden. The study found out that emissions in the county rose by approximately 21% between 1992 and 1994; 13% per cent of the increase was due to the 1993 fall in tax rates paid by the industry. Almost the whole increase is a result of the rise in the heavy oil use. This study found, confirming the results of Larsen and Nesbakken (1997) for Norway that the pulp and paper sector could switch between biomass fuel and oil in a fairly quick way. In this case taxes are likely to be very economically efficient as small price increases have a big effect. Green Alliance (2002) reports that according to firms the CCL is a blunt instrument as it focuses on energy rather than CO287 and because it does not give enough positive incentives to reduce energy consumption88. Because of its explicit discount, the CCA scheme is welcome but its efficiency is put in doubt as business volumes and therefore energy consumption can be difficult to predict. The Enhanced Capital Allowance (ECA) is criticised, as it would have been
86 87

In relative terms, this means a change from 25% to 42% of the output (total district heating) supplied. Firms claimed that even if there was differentiation among fuels, the main message sent by the tax was about energy reduction and not about carbon dioxide. 88 This is bound to be puzzling for environmental economists. Savings on the tax arising from reduction in energy consumption are not considered a “positive” incentive by the firms.

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better to specify guidelines or rules for the equipment allowed in the scheme instead of listing them. Notwithstanding these criticisms, the CCL package is having some effect on the reduction of the CO2/E and E/ES ratios (see section 3.2.2). A third of the respondents had implemented some changes after the CCL was announced; in particular, four companies (one sixth of the sample) changed the mix of energy fuels, while others were still considering these changes. Some other companies had signed long-term energy contracts and therefore were constrained. Finally, some companies had looked into CHP and had concluded that it was not an option due to the recent changes in gas and electricity prices. Almost all companies appreciated that the tax was part of a package allowing some flexibility for firms. ECON (1994) and (1997) analyse the economic efficiency of the CO2 tax on the oil and gas extraction on the Norwegian continental shelf. The two studies found out that the tax caused a 1.6% reduction in the emissions in 1991-93 and of 3% in 1991-96. In the first case the tax made 25% of the implemented CO2 reduction measures financially viable. ECON (1994) admits a certain economic efficiency of the tax (or at least it reckons its incentive function) but it points out that after 1993 the oil and gas industry should have become exempted, as no potential was left for further reductions per unit of oil/gas extracted. Indeed, ECON (1997) found that in 1991-96 ca 50% of the CO2-savings measures would not have been implemented if the tax had not been in force. It is interesting to note that this study confirms the results from SEI (1999) about the industry’s tendency towards over-estimating predicted compliance costs especially when opposition to regulations can be based on such cost estimates89. Dragsund et al. (1999) builds cost abatement curves for the oil and gas industry and compares the emission abatement costs in this sector to those from the rest of the economy. The cost of the measure in ECON (1994) and (1997) was estimated to 190–350 NOK per CO2 ton. The report questions the economic efficiency of the tax, as the costs of future measures would be very high in relation to the opportunities in the exempted sectors. The concept of static efficiency (see section 2) obviously supports this claim.

89

As noted by Andersen et al. (2001), firms interviewed in NUTEK (1994) and (1996) have an incentive to underplay the significance of the CO2 tax on investments and overplay the costs of past investments to influence the future decisions on the tax rate.

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5.3 Stability and Amount of Revenues According to Andersen et al. (2001) in 1987 the revenues from the general energy tax amounted to SEK 13 billion, while in 1994 the revenues from both the energy and the CO2 tax were approximately SEK 15 billion, which corresponded to SEK 9 billion in 1987 values. More specifically, according to SEPA (1997), the revenues from the CO2 tax have increased from 1991 to 1995 by approximately 20%90 Unfortunately, the causes of these changes (e.g. different tax base and rates, dynamic efficiency of the tax, etc.) were not explored by the study. 5.4 Distributional effects Svendsen et al. (2001) compares the rates for the household and industrial sectors in Sweden, Denmark, Finland, the Netherlands and Norway. As pointed out by the authors, the figures are a rough estimate - a lower bound - of the real figures, due to the fact that the nominal rates and not the effective rate (in other words including the alleviation measures mentioned in 3.4.1) are used to build the ratios. The ratio 1 in Table 13 excludes the tax advantage granted to the industry91, which is factored into ratio 2.
Sweden Denmark Finland Netherlands Norway Average ratio Ratio 1 1:4 1:9 1:2 1:1 1:2 1:4 Ratio 2 1:6 1:14 1:3 1:2 1:3 1:6

Table 13. Differentiated lower bound CO2 tax rates for industry and households (rounded figures). Source: Svendsen et al., (2001), p. 494. It is worth pointing out that some of these ratios are very dubious - especially that for the Netherlands. As shown in Table 3, the tax rates on gas and electricity strongly decreases with consumption. While households certainly pay the most expensive rate, consumers from the business sector are offered a substantial (from ca 50% to tenfold) discount. Furthermore, if Kasa (2000) and Enevoldsen (2000)’s point of view on the effectiveness of the covenants is correct (see section 4) the difference between the effective rates applied on household and energyintensive sectors is even bigger. Needless to say, it would have been better to compare effective rates, rather than nominal ones. However, Svendsen et al. (2001) shows that policy-makers in most countries have been concerned more about the effect of CO2 taxes on the industry sector than on households92. Kasa (2000) analyses the importance of the economic and political factors in the exemptions granted in Norway, Denmark and the Netherlands. In the case of the Netherlands and Denmark, economic factors seem to be extremely explanatory. In the Netherlands the energy-intensive
The revenues from CO2 tax in 1995 prices were 9210 SEK millions in 1991, 9950 in 1992, 10950 in 1993, 11440 in 1994 and 11040 in 1995 (SEPA, 1995: p. 45). 91 Firms can deduct the CO2 tax when paying taxes on profits and this implies a further discount of the nominal rate offered to the industry. 92 The aim of the paper is to corroborate the thesis that the economics of lobbying can explain the different burden imposed on different sectors. If the privileged treatment granted to the industry can be detected by a comparison of the nominal rate, the use of the effective rate will simply emphasise it, as exemptions have been almost exclusively granted to the industry sector.
90

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chemical sector, by far the main CO2 polluter (58% of energy consumption), is an important exporter (16% of Dutch exports), employer and GDP contributor (16.5% of industrial production). Conversely, the Danish industrial structure is not characterised by an economically important energy intensive sector93 and the total CO2 industrial emission is rather modest (10.1% of the total). The chemical sector in Denmark is more focused on knowledge-intensive products; energy-intensive products dominate neither the Danish exports nor the economy. Thus, as shown in section 3.4, economic factors hint to the exemption of the Dutch chemical sector and to the taxation of the whole industry in Denmark. In addition, the economics of lobbying favour the Dutch industry: the chemical sector in the Netherlands is very concentrated while in Denmark the presence of many small firms is likely to have hindered the co-ordination in the lobbying processes94. However, economic factors do not explain the allocation of alleviation measures in Norway. In this country the exempted sectors are neither the most economically important sectors nor the biggest employers. For example, the metallurgical sector’s contribution to exports (9.6%) and GDP (1.1%) is relatively small and its role as employer almost insignificant - 20,000 employees in the early 1990s or 1% of the total labour force. Other sectors with a higher contribution to exports and to GDP - e.g. the petroleum exploration industry with 37.8% and 15%, respectively are taxed. Before surveying the importance of political and institutional factors in the allocation of alleviation measures in Norway, it is worth pointing out that economic factors, if analysed at the local level, can be more explanatory than suggested by Kasa (2000). Indeed, the metallurgical sector is concentrated in a scarcely populated area, relying heavily on this industry. Should the imposition of a tax on this sector have implied bankruptcies (as not surprisingly stated by the industry representatives), dismissed workers would not have found another source of employment easily. The whole local economy could have been badly affected by the tax and borne huge costs for abating national emissions. This is a situation where high transaction costs (i.e. relocation costs of workers) makes granting alleviation measures a welfare-improving policy. However, when between 1994 and 1998 the Norwegian government proposed a fiscally neutral extension of the CO2 tax by eliminating the exemptions and decreasing the tax on labour, the economics of lobbying explained very well the final outcome of this attempt. Conflicting point of views on the proposal existed both in the industrial organisation (NHO) and in the confederation of trade unions (LO). Within the NHO the labour intensive industries - the beneficiaries - supported the policy change, while the energy-intensive sector - the losers lobbied for the maintenance of the status quo. At the end, the point of view of the much better organised and less numerous energy-intensive sector prevailed. Even if the number of workers in the labour-intensive sector is higher than in the energyintensive sector, there are more members in the LO from the latter than from the former. Consequently, the LO lobbied against the reform even if it implied a cut in the taxes on labour. When it was clear that failing to eliminate the exemptions could have meant an increase in the current CO2 tax rate, the second largest employers’ union – the federation of Norwegian Commercial and Service Enterprises (HSH) – stepped into the lobbying process. The profits of the members of these organisations are heavily dependent on the fuel price, which would have
The companies with an agreement for their heavy process – virtually the total of the energy-intensive sector in Denmark - have only 20% of the industrial energy consumption. 94 The fact that industry in Denmark pays a lower rate of CO2 tax compared to the general public does not deny, rather it corroborates, the economic insights into lobbying.
93

43

increased, had the tax rate been raised. In the meantime the lobbying process was extended to single MPs through the local branches of NHO; other pro-reform organisations could not exploit such a capillary presence in the Norwegian countryside. This disadvantage was compounded by the fact that scarcely populated areas - the areas where energy-intensive industries are located enjoy a disproportionate representation in the parliament. Finally, the HSH was a relatively young organisation with no strong ties with the government. Not surprisingly, the proposed change to the CO2 tax was defeated in the Parliament, where a majority voted in favour of establishing an expert committee to look into the set up of a tradable permits system. This proposal was put forward by the energy-intensive sector and opposed by the HSH. Godal and Holtsmark (2001) investigates the effect on industrial sectors of the current tax rate in Norway and simulates 3 alternative scenarios. As the approach of the study is completely static the figures obtained can be interpreted as a rough estimate of the real cost redistribution95. In addition, the costs used by the author comprise only the amount of the tax paid by each sector and not the abatement or the administrative costs. Notwithstanding, these figures provide some information about the incentives of different industries to lobby for the maintenance of - or against - the status quo. The authors estimate the tax paid by each sector by applying the tax rate to the actual emissions96, simulating three fiscally neutral regimes97 and comparing the outcome of the simulations with the current tax rate. In particular, figures on the change of costs, profits and of the tax paid per employee in different sectors are obtained98. The most interesting comparison is between the uniform tax on CO2 (corresponding to the reform defied in Parliament in 1998) and the current regime. The opposition to the reform of the tax from the metallurgical sector is economically rational, as the costs imposed on this sector would have been much higher under a uniform rate per ton of CO2. However, it is somehow surprising that the produces of oil and gas the biggest loser from the current tax rates - did not take a more active role in the lobbying process. Other net losers from the current tax rate are the services sector and the private households. The process industry, fishing, and the transport sector are the net beneficiaries. Analogously to the previous study, the EEF (2001) performs an ex-ante evaluation (until 2010) of the CCL (scenario 1) and of other 3 alternative scenarios: extension of CCA to all manufacturing sectors (scenario 2); CCA granted to any manufacturer but only if the energy bill is bigger than £ 100,000 (scenario 3); CCL scaled down (60% of its current rate), abolition of NICs reduction and use of revenues from CCL to increase incentives in energy-saving equipment

As the elasticities of emissions and the emission abatement curves are unknown, the author assumes that the emission quantities of the different sectors stay constant when the tax regime changes. 96 Revenues from the CO2 tax don’t appear separately in official tax documents but they are part of the figures of fossil fuel taxes. In Norway the percent of CO2 emissions subjected to taxation is 57% while the percent of GHGs (in CO2-equivalent terms) is 38%. 97 Namely, they are a uniform tax on CO2, a uniform tax on all GHGs, a uniform tax on all GHGs but without tax on CH4 emissions from agriculture and waste, N2O emissions from agriculture and evaporation emissions from crude oil and solvents. In these simulations the tax rate is found by dividing the current tax burden by the CO2-equivalent emissions taxed in each scenario. 98 Because the authors do not provide details on how these last two figures are obtained, because of the limitation due the static approach of the study, and because of the issues related to relating tax payments to other economic variables (see section 3), the effect of the tax on profits and on the amount of tax paid per employee is not discussed here.

95

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(scenario 4). According to this study scenario 4 is both more economically efficient and environmentally effective99 than the current scheme. It would be interesting to ascertain the effect of the following assumptions, incorporated in the model, on the conclusions of EEF (2001): - Labour supply is fixed; - CCL is a negative productive stock100; - The role of technological change and more generally of the input productivity is ambiguous101; - The structure of the economy is fixed102. While all of these assumptions undoubtedly influence the outcome of this model, assumption 1) is maybe the most explanatory of why the scenario 4 is a win-win solution compared to the current scheme. In scenario 1 when the NICs reduction decreases the cost of labour, firms’ labour demand increases. As the supply is fixed, the real wage increases until, in the long run, the workers have clawed back the whole NIC reduction. In other words according to this study, the CCL consists in a workers’ wage rise paid by the increase of energy prices on the industry. In scenario 4, the reduction in the industrial added value caused by the tax is halved, as the tax rates are lower while the energy consumption slightly decreases as all revenues from the CCL are used to decrease industrial energy consumption. EEF (2001) also conducts a survey to estimate103 the impact of the CCL package on the engineering sector and on the rubber and plastics sector. As the CCL is supposed to raise £1 billion a year, Table 14 shows that engineering is paying 17% of that amount, well above its 8% share of the economy. As it was found out that companies could not pass the increase in costs, the
In particular, in scenario 4 the energy usage is slightly minor, the decrease in the UK GDP caused by the introduction of the tax is halved, and almost all sectors are better off. In this study the effect of the four scenarios are measured on the value added, employment, discounted profits, and energy usage. 100 The authors note that previous oil price spikes (e.g. in 1974) have been a relative price shock, as the economy has substituted less expensive energy for oil. In the CCL case, claim the authors, this is not possible, as all non-renewable sources are taxed. The role of CO2-free energy sources is acknowledged but considered marginal in the medium term (20 years period). Considering that the tax rate varies across fuels and that the tax is much smaller than the past price spikes, this assumption is open to discussion. 101 The authors seem to use an exogenous technological change approach where the coefficient Ai is the total factor productivity. If this interpretation is correct, the authors do not make explicit the change rate, if any, of Ai, which in this kind of models is one of the most important parameters. Furthermore, a model with one parameter for each input (or at least for energy) would have been preferable to analyse the effect of the tax. Finally, the whole treatment of productivity in the study is confusing. For example: on p. 17 the investments needed to increase the energy efficiency raises the productivity of labour due to the increase in the capital stock. While energy-saving investments may have a positive effect on the labour productivity, this is not always true and, most of all, it is secondary to the aim of increasing energy-efficiency. 102 Firms can simply adjust their inputs demand according to the price but any other change, (i.e. new products) is ruled out from the model. As the forecast period is 10 years, this assumption can be very constraining on the validity of the conclusion of this study. 103 EEF - the Engineering Employers’ Federation - posted a questionnaire and received ca.550 responses from its members. The firms were asked about the impact of the CCL in April-June 2001. The annual effect on energy costs was obtained by grouping the responses by sector, scaling up the figures from the questionnaire and multiplying them by four. The figures for the decrease of NICs were obtained using official data on employment levels and average earnings by engineering sectors, as many companies could not quantify the change in the NICs either because they were unaware of it or because significant changes in their workforce were occurring at the same time (EEF 2001, p.4)
99

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squeeze on margins caused by the strong pound and by the competition in this sector is further exacerbated by the CCL.
Increase in energy costs Metals Metal products Machinery & equipment Electrical & electronics Motor vehicles Other transport Total engineering Rubber & plastics 30.1 29.4 34.1 28.9 18.5 32.6 173.6 53.2 National insurance rebate 5.9 17.6 17.3 23.5 10.5 9.6 84.4 9.4

Net impact 24.2 11.8 16.8 5.4 8.0 22.9 89.2 43.8

Table 14. Table 1 Engineering shoulders the burden, full year impact of climate change levy, £m. Source: EEF 2001, p. 5. EEF and CBI (2002) extends the previous study to 4 sectors of the economy (Mining, Manufacturing, Utilities and Services). The figures obtained confirm that the manufacturing sector is the big loser of the scheme. As in the previous case, the figures in Table 15 are simply a snapshot of the costs imposed on the 4 industrial sectors.
Impact of levy 11.4 328.2 23.8 356.1 719.5 NIC cut 5.1 185.6 6.8 417.7 615.2 Net change in costs 6.3 142.6 17.0 - 61.6 104.3

Mining Manufacturing Utilities Services Total

Table 15. Net costs arising from CCL in 4 sectors of the economy. Source: EEF and CBI, 2002, p. 2. The perception of the effect of the CCL on the firms’ ability to compete reflects the net cost borne by the sector they belong to. Most firms from the manufacturing sector reckon that their competitiveness in the UK and abroad has been worsened – 53% and 47% respectively – while the figures for the service sector are remarkably lower, namely 28% and 8%. These figures on the firms’ perceptions are influenced by the facts that: - Costs are distributed unevenly across sectors; - The service sector is less exposed to international competition as most services have to be produced in locus; - Some firms do not export and therefore the CCL does not affect their international competitiveness;

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With regard to the competitiveness among UK firms, not all sectors are offered the opportunity to sign CCAs104. Although, most of the surveyed firms have absorbed the increased costs through reduced margins, some of them (17 from the manufacturing and 1 from the mining sector) had already moved or are considering moving production abroad as a result of the CCL105. Malaska et al. (1997) and Karas (1995) analyse how the costs imposed by taxation are allocated among industrial sectors in different countries. Malaska et al. (1997) compares energy taxes106 in Sweden, Denmark, Norway and Finland. The author selected three Finnish companies (a CHP plant, a paper mill and a forest company107) and calculated the tax rate they would have to pay in each of these countries108. When the study was conducted Finland had the reputation of having especially high-energy taxation; Malaska et al. (1997) completely denies this claim, as all three firms would be worse off in any of the other countries109. The methodology used in this study presents some drawbacks even for its limited aim, which is to illustrate the difference in the levels and structure of environment-based taxes in the Nordic countries in 1996110. Indeed, applying Swedish, Norwegian and Danish tax rates to energy consumption occurred in Finland implies a zero price-elasticity in the firms’ energy demand. This is compounded by the fact that the consumption was observed in 1994 while the tax rates are from 1996. The importance of this criticism depends on the fuel substitution possibilities and energy savings available to the firms, and can be evaluated only empirically111. To the authors’
For example, firms manufacturing plastic bottles compete with firms producing glass, paper and can, many of which can sign CCAs. Granting exemptions to some these sectors only has distorted competition (EEF and CBI, p. 3). 105 A recent EEF survey (quoted in EEF and CBI, 2002) showed that 1/3 of the firms taking part were already considering relocating part of their activity abroad as a result of the increase of NICs. Estimating the exact contribution of CCL to this trend is rather difficult. 106 The taxes considered in this study are energy, CO2, and SO2 taxes. Swedish NOX tax is not considered. 107 The CHP plant is a district and process heating company, which also produces electricity, the paper mill is a company producing, among other things, tissue products mainly for export markets, and the forest company is a large wood-processing group. 108 Other issues analysed in this study are the tax levels on different energy carriers (coal, natural gas and heavy fuel), on different sectors, and on electricity generation in the four countries. These comparisons are not exposed as considered out of date. Because of the frequent changes in the legislation, enumerating the figures in Malaska et al. (1997) would not be informative of the current tax level. The interested reader can have a look at Malaska et al. (1997) pp. 21 - 9. 109 In some cases the difference between Finland and the country with the highest taxes is substantial: only increasing eleven times the taxes charged on the CHP plant makes taxation in Finland comparable to the taxes in Sweden. In the case of the paper mill and of the forest company a fourfold and a 50% increase is needed. The CHP plant and a paper mill paid far less taxes in Finland than in Denmark, Norway or Sweden while the company in the timber sector got off a bit more lightly in Denmark and in Finland. The interested reader should have a look at Malaska et al. (1997) pp. 29-38. 110 The author, correctly, does not pretend to perform a best location analysis of different industrial sectors: “[w]hen companies plan to direct their investments abroad, they have to consider energy taxes and many other cost factors which are not discussed here. It can be noted, however, that for private companies, total energy costs are more important than differences in tax levels” (p. 75). And again, “[t]he considerably higher level of electricity prices in continental Europe is a much more significant competition factor than the differences in energy taxes” (p. 38). 111 In some studies (e.g. NUTEK, 1995) the effect of fuel substitution is remarkable while in others (e.g. Bjorner and Jensen, 2002) it is fairly marginal. NUTEK (1995) pointed out that there were huge fuel substitution possibilities in the Norwegian pulp and paper industry. If this is also the case in Sweden, the figure obtained by Malaska et al. (1997) for the forest company can be extremely inflated.
104

-

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justification it must be said that using different companies in different countries would have been extremely problematic, because of the difficulty in taking all factors influencing energy consumption into account. Other limitations of Malaska et al. (1997) are due to the information and data available112. The results from Malaska et al. (1997) strongly contrast with Karas (1995) (quoted by Andersen et al., (2001)), which compares energy taxes in Finland and 18 OECD countries (including Sweden, Norway and Denmark). Karas analyses the tax burden on the paper, metal and chemical sectors and on the whole industrial sector by relating the amount of tax paid to the added value. The study concludes that energy taxation in Finland was one of the heaviest for the three sectors and the heaviest for the whole industrial sector. The different results from Malaska et al. (1997) and Karas (1995) could be due113 to the limitation of the datasets used by the authors114, to the tax rate115, to the sectors analysed in the studies, and to the methodology employed116. Finally, the outcome of Karas (1995) are influenced, as mentioned at the end of section 4, by any factor, other than the taxation levels, influencing the value added by the firms. Analogously to Malaska et al. (1997) and Karas (1995), Ministry of Taxation (1999) compares the taxes that Danish business would have paid, if subjected to five other countries’ tax on energy117. The Danish taxation is the most expensive118. However, the factor responsible for this result is the electricity tax paid by the business rather than the CO2 tax; without the electricity tax the Danish scheme would be cheaper than those in Sweden and Norway. In Green Alliance (2002) several companies raised the issue of the distribution of the tax across different sectors. The link between reduction of NICs and the tax was either not understood or not accepted. A recycling scheme supporting the aim of CCL, earmarking in economic jargon, was preferred. In some cases they pointed out that the decrease in the NICs was too low to be noticed and that the signal sent by the government was ambiguous as the NICs were subsequently raised in March 2002. Firms with limited information, especially SMEs, were not aware if they were receiving or paying money from the change introduced by the CCL. Others pointed out that companies looked at the overall tax rate. Paradoxically, the effect of the CCL recycling mechanism on some firms
For example, when applying the Danish scheme, the amount of the energy used in light and heavy processes by the three Finnish firms was unknown; analogously, in Norway there was no clear practice with regard to the taxation of natural gas used on the mainland. In both cases rough estimates were used. 113 Unfortunately, as Karas (1995) could not be seen, the reasons responsible for the difference in the conclusion of the two studies cannot be ascertained but only deduced. 114 For example, in the case of Malaska et al. (1997), some guesses had to be used in order to apply the Danish and Norwegian tax rate. See note 109. 115 Andersen et al. (2001) does not mention which year’s tax levels are applied in Karas (1995). 116 In some instances the methodology used in Malaska et al., (1997) is very rigorous. For example see the computation of tax on electricity (p. 32 and following tables). As Karas (1995) could not be seen, the methodology used is ignored. 117 The study does not take into account the revenue recycling but it considers exemptions and other alleviation measures. Like in Malaska et al. (1999), this study applies foreign tax rates to the Danish industry, without considering that the different composition of industry among countries and the importance of different fuels in energy composition. 118 The Swedish system would be a bit cheaper, the Norwegian much cheaper, while the tax burden imposed by the British system would be almost insignificant.
112

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had been the reduction of money for the energy department and a windfall for the human resource. Firms were also concerned that losers and winners of the reform were identified by the economic sectors and not the by single firm’s behaviour119. Many said that an excessive burden was being put on the energy-intensive small firms. Finally, the choice of the eligibility for CCA was perceived to be unfair as some energy-intensive sectors (e.g. refrigeration) were left out.

119

In some occasions the tax shift was called perverse subsidy.

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6 Conclusions From the brief survey in section 4, it must be clear that the CO2-based taxes introduced so far are quite different from the textbook example of Pigouvian tax. Because of the numerous alleviation measures granted, because of the different tax rates applied on different energy fuels or uses, and because of the frequent and sometimes sudden changes introduced by the legislation, ex-post evaluations of these taxes are a particularly difficult exercise. A good example of this is provided by Malaska et al. (1997) and Karas (1995), section 5.4, which drew opposite conclusions on the tax burden imposed by CO2 tax in Finland compared to the other countries. When analysing the results from ex-post evaluations, readers should bear in mind the methodological issues described in section 2 (baseline, disentangling, measurement effect, and data used) and should pay attention to how these issues have been tackled by the study. Generally speaking, all the studies surveyed here can be grouped into two categories: studies using formal models (econometric or partial economic models) and studies using interviews with a sample of firms. In the former approach, the model itself provides the baseline and enables researchers to distinguish the effect of the tax from other policy instruments. However, the viability of this approach is constrained by the amount of data available and by the model used. Bjorner and Jensen (2002) shows how different models give very different results in the case of the Danish Energy tax. In the case of interviews with a sample of firms, respondents are generally asked to provide data to solve both the baseline and the disentangling issue. The problem with this approach is related to the reliability of the information provided by the respondents. In some cases they may not have enough knowledge to respond accurately to the question: for example some firms in Great Britain were not aware of the reduction of National Insurance Contributions as a consequence of the Climate Change Levy (CCL) – see Green Alliance, 2002 or EEF, 2001. In other cases strategic behaviour, in the sense of SEI (1999), cannot be ruled out and will very likely bias the analysis - for an example see ECON, 1994 and ECON 1997. The survey of ex-post evaluation studies has shown that all CO2 taxes, either on their own or as a part of wider package, have generally contributed to reduce emissions. This result confirms that the theoretical arguments backing the use of environmental taxes (see section 2) apply also in the case of relatively low tax rates introduced with numerous alleviation measures. While the whole package of the CO2-based tax has generally had an effect on emissions, the environmental effect and effectiveness of some of the components is more uncertain, as shown in the case of subsidies and agreements in Denmark. Using a fixed-effect model Bjorner and Jensen (2002) concludes that the agreements are environmentally effective compared to the full tax rate because of the relatively low price elasticity of the sectors signing them. However, there are doubts on the ability of the econometric model to discern the effect of the agreements from that of other factors like other regulatory instruments120. Danish Energy Agency (1999) and EEF and
In the microeconometric approach used by Bjorner and Jensen (2002) the effect of the agreement is captured by a dummy variable (see section 5.1). If for example the firms signing an agreement are subject to other regulatory instruments whose aim overlaps with the target of agreements, it is not clear if the dummies capture the effect of the agreements only. The importance of overlapping regulatory instruments has been shown with respect to the UK Emission Trading System in Allott (2003).
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CBI (2002) conclude that firms signing the agreements are significantly more active in abating emissions. However, in the former study this “activity” rate is also influenced by the size of the company and by the production sector. The effectiveness of agreements is questioned by results obtained from personal interviews121 with firms signing them (see Johannsen and Togeby, 1998) while Danish Energy Agency (1999) points out that the changes brought about by the agreements may need some time to influence emissions. Bjorner and Jensen (2002) points out that the bigger environmental effect of agreements compared to taxes might be due to the different costs imposed on polluters. Shortly, the firms will be willing to cut more pollution than they would have under the full tax rate, if the discount brought about by the agreements compensates them for the increase of abatement costs. In this instance, the environmental effectiveness of agreements critically depends on the ability of the enforcement agency to set up and monitor challenging targets. This does not seem to have the case with the schemes introduced so far. According to Green Alliance (2002) trade organisations negotiating the Climate Change Agreements (CCA) had not any incentive to agree to stringent targets for their members. Indeed, in 2002 the British industry cut carbon emissions into the atmosphere by a massive 10.5 million tonnes of CO2, slightly more than three times above the target signed under CCA122 (2.5 million ton per year). While many governmental officials have praised the environmental effectiveness of agreements, such a big industry’s over-performance hints at the eventuality that the regulator may have been too generous in the targets agreed with the industry. Information asymmetry as mentioned in the context of the Danish scheme (see section 4) may have played an important role. However, as pointed out by ACE (2001) the government has shown some naivety in the bargaining process leading to the CCA, namely the baseline on which the targets are based is very conservative, the trade organisations were allowed to chose the baseline year123 and the treatment of closed facilities is ambiguous. Because of all these reasons serious doubts on the effectiveness of the scheme arises. Furthermore, because of the very big emission reduction already achieved, it is likely that energy conservation will drop down the agenda of the industry in the coming years.

It is worth noting that the firms’ response contrasts with the strategic behaviour, which would give an incentive to state that agreements have been effective in abating emissions. 122 This figure is taken from Department for Environment, Food and Rural Affairs’ (DEFRA) website: www.defra.gov.uk. 123 The first point refers to the measures being implemented in a business as usual (BAU) scenario, independent from the introduction of the CCL. The model used by ETSU to compute BAU reductions is surprisingly conservative compared to the model in the DTI Energy Paper 68 and in the European Union Energy Outlook. Doing so, energy-efficiency measures which would have been implemented anyway have been transformed into energy savings being brought about by the government’s energy policy. The second point refers to the fact that leaving the choice of the baseline year to the trade organisation has implied that abatement measures carried out in the past have been rewarded under the CCL scheme. For example the aluminium sector chose 1990 as the baseline year. This means that it has received taxpayers’ money in the form of foregone revenues (80% of the tax rate on the current emissions) for abatement measures, which were almost certainly economically convenient for the firms without any public sector’s “subsidy”. If the aluminium sector achieves its CCA target, only 14.9% of the reduction will occur in the period 2002-2010. It is easy to see how the emissions “abated” by the industry in the first year of the agreements can be caused by factors very different from the supposedly environmental effectiveness of the CCA scheme.

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The environmental effectiveness of the Dutch covenants has been also put in doubt by some studies (see section 4). However making international comparison is problematic because each scheme is influenced by the specific design of the policy. For example, while in Denmark and in the UK the agreements are formal, binding and carry a specific penalty (application of full tax rate and a fine), this is not the case of those introduced in the Netherlands. Furthermore, the effect of completely identical agreements applied in two different countries is influenced by the information asymmetry among the parties and by the relationship between policy makers, regulators and polluters. The environmental effectiveness of subsidies is even more uncertain than in the case of agreements. With respect to the Danish case, in only one of the six models used in Bjorner and Jensen (2002) the parameter of the subsidies is statistically different from zero124, while in Johannsen and Togeby (1998) the subsidies have a conspicuous effect on the energy consumption but apparently much less on CO2 emissions. However, according to Boom (1998), subsidies have been extremely effective during the 1970s and the 1980s in decreasing the amount of energy used by households. The conclusions of Bjorner and Jensen (2002) and Johannsen and Togeby (1998) about the subsidies are relevant also to the agreements, as the former were granted to the firms signing the latter. Some reasons to explain this difference have been introduced in section 5.1 but this issue is far from clear and deserves more attention in future empirical studies. In the case of economic efficiency, ex post evaluations have so far taken a partial approach either focusing on a narrow definition of costs (i.e. administrative costs – see section 4.2.1) or analysing only some effects of the taxes, from which a judgement on the economic efficiency of the scheme can be formed (see section 4.2.2.). With regard to the first approach the studies reviewed in this survey conclude that CO2-based taxes are cost-efficient, as the transaction costs arising from the tax are generally marginal. The only exception is Johannsen and Togeby (1998), according to which several firms had been dissuaded from applying for subsidies, as the administrative effort was judged cumbersome. It is worth pointing out that transaction costs can affect differently firms of different size, as shown by the energy abatement measures implemented by SMEs and larger firms in EEF and CBI (2002). More generally, the taxes introduced so far cannot be said to have achieved an economically efficient abatement of emissions because of the very different marginal abatement costs imposed on different polluters, as pointed out among others by IEA (1998). The wider economic efficiency of such taxes is more uncertain as the different rates and the several alleviation measures granted have helped national industries to remain internationally competitive. Several studies in section 5.2.2 show that (see for example NUTEK, 1994 and 1995) taxes have stimulated firms’ efforts in abating CO2-emissions. However, the efficiency of taxes is influenced by the cost of these measures125. If they are moderate the taxation will be very likely efficient as in the case of biofuels used by large factories in Sweden. If additional costs are substantial, the economic efficiency of the scheme is more uncertain - like in the case of biofuels used by large heating plants in Sweden - as the tax may substantially decrease the competitiveness of the industry. Carlsson and Hammar (1996) shows that imposing tax on the Swedish pulp and paper industry would have been efficient, as the firms could quickly switch among different fuels. Unfortunately, this was found out when the tax on industry was radically decreased. As mentioned in section 3.2.2, the price-elasticity of energy consumption or of CO2 emissions is a
However, the conclusions drawn from this model are extremely dubious because of the way the data are pooled together. 125 It is worth reminding that tax payments, being simply a transfer of wealth from firms to the public sector, are not taken into account when evaluating the economic efficiency.
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good indicator of the tax efficiency: the higher the elasticity, the bigger amount of pollution can be cut, given a certain tax rate. Despite these doubts, the call of Royal Society (2002) and ECCM (2003) for a CO2-based tax with a uniform rate across sectors is shared by the author of this paper. Explicit subsidies could help to administer an eventual transition period where some industries can be shielded, but not exempted, from the tax. The economic efficiency of agreements is even more difficult to judge. The fact that agreements appear to be more environmentally effective than taxes (see Bjorner and Jensen, 2002, EEF and CBI, 2002 and Danish Energy Agency, 1999) is quite puzzling considering environmental economic theory. Even more surprising, as mentioned in Trade and Committee (1999), is to see firms calling for a command and control126 approach in the Climate Change policy when the usual mantra is that “the market does it better”. An important point influencing the economic efficiency and environmental effectiveness of agreements and taxes is the amount of information privately owned by the firms. As often noted in studies on the Danish scheme (see for example Johannsen and Togeby, 1998 and Danish Energy Agency, 1999), information asymmetry makes it likely that in the case of agreements taxpayers’ money is given to firms for abatements they would have undertaken anyway. On the one hand, it is quite likely that firms can more efficiently abate pollution if the choice of the measure to implement is left to them. On the other hand information stated by the firm cannot be uncritically “trusted” as firms have an incentive to overstate the abatement costs and underplay the effect of economic instruments, if this may persuade the regulator to lower the burden on the polluter - see ECON (1994) and (1997) for a likely example of this. Furthermore, instruments raising revenue (like a tax) allow the regulator to implement supply-side measures (e.g. subsidising renewable energy), which cannot be financed in the case of agreements. Finally, taxes are likely to be more efficient in the long-term as the higher burden on the firms constitutes a bigger incentive to cut pollution, as shown in section 2. Having all this in mind, the recommendation put forward by the Parliamentary Renewable and Sustainable Energy Group (PRASEG) to introduce “a business carbon reduction commitment […] to replace the climate change levy and work alongside emission trading” (PRASEG, 2003: p. 4) is judged a bit hasty, especially after considering the doubts about the effectiveness of the CCA mentioned above. Studies analysing the stability and amount of revenues collected by the tax has been particularly difficult to survey, as they are not usually published for an academic audience. SEPA (1997), remarkably the only exception, contains some figures on the revenues arising from the CO2 tax; unfortunately, the causes behind the changes are not analysed. With respect to how the tax burden has been allocated among different sectors of society, there is no doubt that industry has obtained a much better treatment so far than the household sector, as shown by Svendsen et al. (2001). The British CCL, where only the business use of energy is taxed, is indeed a very peculiar anomaly. Kasa (2000) shows that factors related to the economics of production can very well explain the allocation of alleviation measures in Denmark and in the Netherlands, but not in Norway. In the latter, economic and institutional factors related to the lobbying process are more explanatory. It is worth pointing out that selecting the sectors allowed to sign CCA in the British scheme on the basis of the IPCC coverage could have been partially motivated by the intention to make the allocation process difficult to be influenced by the lobbying. However, as not all the energy intensive sectors are covered by the IPCC legislation, sectors being left outside have fiercely lobbied to be included in the scheme.
Agreements are a type of command and control approach in the sense that the government specifies energy efficiency or emission reduction targets, which has to be implemented by the firms.
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Godal and Holtsmark (2001), EEF (2001) and EEF and CBI (2002) show that the distribution of taxation costs is helpful in pointing out which sectors are more interested in lobbying against or supporting the status quo. Limitations of the approach used in these three studies have been pointed out in the survey. Furthermore, in the case of EEF (2001), the firms could have had an interest in downplaying the effect of the CCL. Finally, Malaska et al. (1997) and Karas (1995) are a very good example of how different methodologies influence the conclusion of ex-post evaluations, as the Finnish CO2 tax is considered respectively the least onerous and the most burdensome instrument for the industry among those so far introduced.

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The trans-disciplinary Tyndall Centre for Climate Change Research undertakes integrated research into the long-term consequences of climate change for society and into the development of sustainable responses that governments, business-leaders and decision-makers can evaluate and implement. Achieving these objectives brings together UK climate scientists, social scientists, engineers and economists in a unique collaborative research effort. Research at the Tyndall Centre is organised into four research themes that collectively contribute to all aspects of the climate change issue: Integrating Frameworks; Decarbonising Modern Societies; Adapting to Climate Change; and Sustaining the Coastal Zone. All thematic fields address a clear problem posed to society by climate change, and will generate results to guide the strategic development of climate change mitigation and adaptation policies at local, national and global scales. The Tyndall Centre is named after the 19th century UK scientist John Tyndall, who was the first to prove the Earth’s natural greenhouse effect and suggested that slight changes in atmospheric composition could bring about climate variations. In addition, he was committed to improving the quality of science education and knowledge. The Tyndall Centre is a partnership of the following institutions: University of East Anglia UMIST Southampton Oceanography Centre University of Southampton University of Cambridge Centre for Ecology and Hydrology SPRU – Science and Technology Policy Research (University of Sussex) Institute for Transport Studies (University of Leeds) Complex Systems Management Centre (Cranfield University) Energy Research Unit (CLRC Rutherford Appleton Laboratory) The Centre is core funded by the following organisations: Natural Environmental Research Council (NERC) Economic and Social Research Council (ESRC) Engineering and Physical Sciences Research Council (EPSRC) UK Government Department of Trade and Industry (DTI) For more information, visit the Tyndall Centre Web site (www.tyndall.ac.uk) or contact: External Communications Manager Tyndall Centre for Climate Change Research University of East Anglia, Norwich NR4 7TJ, UK Phone: +44 (0) 1603 59 3906; Fax: +44 (0) 1603 59 3901 Email: tyndall@uea.ac.uk

Recent Working Papers Tyndall Working Papers are available online at http://www.tyndall.ac.uk/publications/working_papers/working_papers.shtml Mitchell, T. and Hulme, M. (2000). A Country-byCountry Analysis of Past and Future Warming Rates, Tyndall Centre Working Paper 1. Hulme, M. (2001). Integrated Assessment Models, Tyndall Centre Working Paper 2. Berkhout, F, Hertin, J. and Jordan, A. J. (2001). Socio-economic futures in climate change impact assessment: using scenarios as 'learning machines', Tyndall Centre Working Paper 3. Barker, T. and Ekins, P. (2001). How High are the Costs of Kyoto for the US Economy?, Tyndall Centre Working Paper 4. Barnett, J. (2001). The issue of 'Adverse Effects and the Impacts of Response Measures' in the UNFCCC, Tyndall Centre Working Paper 5. Goodess, C.M., Hulme, M. and Osborn, T. (2001). The identification and evaluation of suitable scenario development methods for the estimation of future probabilities of extreme weather events, Tyndall Centre Working Paper 6. Barnett, J. (2001). Security and Climate Change, Tyndall Centre Working Paper 7. Adger, W. N. (2001). Social Capital and Climate Change, Tyndall Centre Working Paper 8. Barnett, J. and Adger, W. N. (2001). Climate Dangers and Atoll Countries, Tyndall Centre Working Paper 9. Gough, C., Taylor, I. and Shackley, S. (2001). Burying Carbon under the Sea: An Initial Exploration of Public Opinions, Tyndall Centre Working Paper 10. Barker, T. (2001). Representing the Integrated Assessment of Climate Change, Adaptation and Mitigation, Tyndall Centre Working Paper 11. Dessai, S., (2001). The climate regime from The Hague to Marrakech: Saving or sinking the Kyoto Protocol?, Tyndall Centre Working Paper 12. Dewick, P., Green K., Miozzo, M., (2002). Technological Change, Industry Structure and the Environment, Tyndall Centre Working Paper 13. Shackley, S. and Gough, C., (2002). The Use of Integrated Assessment: An Institutional Analysis Perspective, Tyndall Centre Working Paper 14. Köhler, J.H., (2002). Long run technical change in an energy-environment-economy (E3) model for an IA system: A model of Kondratiev waves, Tyndall Centre Working Paper 15. Adger, W.N., Huq, S., Brown, K., Conway, D. and Hulme, M. (2002). Adaptation to climate change: Setting the Agenda for Development Policy and Research, Tyndall Centre Working Paper 16. Dutton, G., (2002). Hydrogen Energy Technology, Tyndall Centre Working Paper 17. Watson, J. (2002). The development of large technical systems: implications for hydrogen, Tyndall Centre Working Paper 18. Pridmore, A. and Bristow, A., (2002). The role of hydrogen in powering road transport, Tyndall Centre Working Paper 19. Turnpenny, J. (2002). Reviewing organisational use of scenarios: Case study - evaluating UK energy policy options, Tyndall Centre Working Paper 20. Watson, W. J. (2002). Renewables and CHP Deployment in the UK to 2020, Tyndall Centre Working Paper 21. Watson, W.J., Hertin, J., Randall, T., Gough, C. (2002). Renewable Energy and Combined Heat and Power Resources in the UK, Tyndall Centre Working Paper 22. Paavola, J. and Adger, W.N. (2002). Justice and adaptation to climate change, Tyndall Centre Working Paper 23. Xueguang Wu, Jenkins, N. and Strbac, G. (2002). Impact of Integrating Renewables and CHP into the UK Transmission Network, Tyndall Centre Working Paper 24 Xueguang Wu, Mutale, J., Jenkins, N. and Strbac, G. (2003). An investigation of Network Splitting for Fault Level Reduction, Tyndall Centre Working Paper 25

Brooks, N. and Adger W.N. (2003). Country level risk measures of climate-related natural disasters and implications for adaptation to climate change, Tyndall Centre Working Paper 26 Tompkins, E.L. and Adger, W.N. (2003). Building resilience to climate change through adaptive management of natural resources, Tyndall Centre Working Paper 27 Dessai, S., Adger, W.N., Hulme, M., Köhler, J.H., Turnpenny, J. and Warren, R. (2003). Defining and experiencing dangerous climate change, Tyndall Centre Working Paper 28 Brown, K. and Corbera, E. (2003). A MultiCriteria Assessment Framework for CarbonMitigation Projects: Putting “development” in the centre of decision-making, Tyndall Centre Working Paper 29 Hulme, M. (2003). Abrupt climate change: can society cope?, Tyndall Centre Working Paper 30 Turnpenny, J., Haxeltine A. and O’Riordan, T. (2003). A scoping study of UK user needs for managing climate futures. Part 1 of the pilotphase interactive integrated assessment process (Aurion Project), Tyndall Centre Working Paper 31 Xueguang Wu, Jenkins, N. and Strbac, G. (2003). Integrating Renewables and CHP into the UK Electricity System: Investigation of the impact of network faults on the stability of large offshore wind farms, Tyndall Centre Working Paper 32 Pridmore, A., Bristow, A.L., May, A. D. and Tight, M.R. (2003). Climate Change, Impacts, Future Scenarios and the Role of Transport, Tyndall Centre Working Paper 33 Dessai, S., Hulme, M (2003). Does climate policy need probabilities?, Tyndall Centre Working Paper 34 Tompkins, E. L. and Hurlston, L. (2003). Report to the Cayman Islands’ Government. Adaptation lessons learned from responding to tropical cyclones by the Cayman Islands’ Government, 1988 – 2002, Tyndall Centre Working Paper 35 Kröger, K. Fergusson, M. and Skinner, I. (2003). Critical Issues in Decarbonising Transport: The Role of Technologies, Tyndall Centre Working Paper 36 Ingham, A. and Ulph, A. (2003) Uncertainty, Irreversibility, Precaution and the Social Cost of Carbon, Tyndall Centre Working Paper 37

Brooks, N. (2003). Vulnerability, risk and adaptation: a conceptual framework, Tyndall Centre Working Paper 38 Tompkins, E.L. and Adger, W.N. (2003). Defining response capacity to enhance climate change policy, Tyndall Centre Working Paper 39 Klein, R.J.T., Lisa Schipper, E. and Dessai, S. (2003), Integrating mitigation and adaptation into climate and development policy: three research questions, Tyndall Centre Working Paper 40 Watson, J. (2003), UK Electricity Scenarios for 2050, Tyndall Centre Working Paper 41 Kim, J. A. (2003), Sustainable Development and the CDM: A South African Case Study, Tyndall Centre Working Paper 42 Anderson, D. and Winne, S. (2003), Innovation and Threshold Effects in Technology Responses to Climate Change, Tyndall Centre Working Paper 43 Shackley, S., McLachlan, C. and Gough, C. (2004) The Public Perceptions of Carbon Capture and Storage, Tyndall Centre Working Paper 44 Purdy, R. and Macrory, R. (2004) Geological carbon sequestration: critical legal issues, Tyndall Centre Working Paper 45 Watson, J., Tetteh, A., Dutton, G., Bristow, A., Kelly, C., Page, M. and Pridmore, A., (2004) UK Hydrogen Futures to 2050, Tyndall Centre Working Paper 46 Berkhout, F., Hertin, J. and Gann, D. M., (2004) Learning to adapt: Organisational adaptation to climate change impacts, Tyndall Centre Working Paper 47 Pan, H. (2004) The evolution of economic structure under technological development, Tyndall Centre Working Paper 48 Awerbuch, S. (2004) Restructuring our electricity networks to promote decarbonisation, Tyndall Centre Working Paper 49 Powell, J.C., Peters, M.D., Ruddell, A. & Halliday, J. (2004) Fuel Cells for a Sustainable Future? Tyndall Centre Working Paper 50

Agnolucci, P., Barker, T. & Ekins, P. (2004) Hysteresis and energy demand: the Announcement Effects and the effects of the UK Climate Change Levy Tyndall Centre Working Paper 51 Agnolucci, P. (2004) Ex post evaluations of CO2 –based taxes: a survey Tyndall Centre Working Paper 52

The trans-disciplinary Tyndall Centre for Climate Change Research undertakes integrated research into the long-term consequences of climate change for society and into the development of sustainable responses that governments, business-leaders and decision-makers can evaluate and implement. Achieving these objectives brings together UK climate scientists, social scientists, engineers and economists in a unique collaborative research effort. Research at the Tyndall Centre is organised into four research themes that collectively contribute to all aspects of the climate change issue: Integrating Frameworks; Decarbonising Modern Societies; Adapting to Climate Change; and Sustaining the Coastal Zone. All thematic fields address a clear problem posed to society by climate change, and will generate results to guide the strategic development of climate change mitigation and adaptation policies at local, national and global scales. The Tyndall Centre is named after the 19th century UK scientist John Tyndall, who was the first to prove the Earth’s natural greenhouse effect and suggested that slight changes in atmospheric composition could bring about climate variations. In addition, he was committed to improving the quality of science education and knowledge. The Tyndall Centre is a partnership of the following institutions: University of East Anglia UMIST Southampton Oceanography Centre University of Southampton University of Cambridge Centre for Ecology and Hydrology SPRU – Science and Technology Policy Research (University of Sussex) Institute for Transport Studies (University of Leeds) Complex Systems Management Centre (Cranfield University) Energy Research Unit (CLRC Rutherford Appleton Laboratory) The Centre is core funded by the following organisations: Natural Environmental Research Council (NERC) Economic and Social Research Council (ESRC) Engineering and Physical Sciences Research Council (EPSRC) UK Government Department of Trade and Industry (DTI) For more information, visit the Tyndall Centre Web site (www.tyndall.ac.uk) or contact: External Communications Manager Tyndall Centre for Climate Change Research University of East Anglia, Norwich NR4 7TJ, UK Phone: +44 (0) 1603 59 3906; Fax: +44 (0) 1603 59 3901 Email: tyndall@uea.ac.uk

Recent Working Papers Tyndall Working Papers are available online at http://www.tyndall.ac.uk/publications/working_papers/working_papers.shtml Mitchell, T. and Hulme, M. (2000). A Country-byCountry Analysis of Past and Future Warming Rates, Tyndall Centre Working Paper 1. Hulme, M. (2001). Integrated Assessment Models, Tyndall Centre Working Paper 2. Berkhout, F, Hertin, J. and Jordan, A. J. (2001). Socio-economic futures in climate change impact assessment: using scenarios as 'learning machines', Tyndall Centre Working Paper 3. Barker, T. and Ekins, P. (2001). How High are the Costs of Kyoto for the US Economy?, Tyndall Centre Working Paper 4. Barnett, J. (2001). The issue of 'Adverse Effects and the Impacts of Response Measures' in the UNFCCC, Tyndall Centre Working Paper 5. Goodess, C.M., Hulme, M. and Osborn, T. (2001). The identification and evaluation of suitable scenario development methods for the estimation of future probabilities of extreme weather events, Tyndall Centre Working Paper 6. Barnett, J. (2001). Security and Climate Change, Tyndall Centre Working Paper 7. Adger, W. N. (2001). Social Capital and Climate Change, Tyndall Centre Working Paper 8. Barnett, J. and Adger, W. N. (2001). Climate Dangers and Atoll Countries, Tyndall Centre Working Paper 9. Gough, C., Taylor, I. and Shackley, S. (2001). Burying Carbon under the Sea: An Initial Exploration of Public Opinions, Tyndall Centre Working Paper 10. Barker, T. (2001). Representing the Integrated Assessment of Climate Change, Adaptation and Mitigation, Tyndall Centre Working Paper 11. Dessai, S., (2001). The climate regime from The Hague to Marrakech: Saving or sinking the Kyoto Protocol?, Tyndall Centre Working Paper 12. Dewick, P., Green K., Miozzo, M., (2002). Technological Change, Industry Structure and the Environment, Tyndall Centre Working Paper 13. Shackley, S. and Gough, C., (2002). The Use of Integrated Assessment: An Institutional Analysis Perspective, Tyndall Centre Working Paper 14. Köhler, J.H., (2002). Long run technical change in an energy-environment-economy (E3) model for an IA system: A model of Kondratiev waves, Tyndall Centre Working Paper 15. Adger, W.N., Huq, S., Brown, K., Conway, D. and Hulme, M. (2002). Adaptation to climate change: Setting the Agenda for Development Policy and Research, Tyndall Centre Working Paper 16. Dutton, G., (2002). Hydrogen Energy Technology, Tyndall Centre Working Paper 17. Watson, J. (2002). The development of large technical systems: implications for hydrogen, Tyndall Centre Working Paper 18. Pridmore, A. and Bristow, A., (2002). The role of hydrogen in powering road transport, Tyndall Centre Working Paper 19. Turnpenny, J. (2002). Reviewing organisational use of scenarios: Case study - evaluating UK energy policy options, Tyndall Centre Working Paper 20. Watson, W. J. (2002). Renewables and CHP Deployment in the UK to 2020, Tyndall Centre Working Paper 21. Watson, W.J., Hertin, J., Randall, T., Gough, C. (2002). Renewable Energy and Combined Heat and Power Resources in the UK, Tyndall Centre Working Paper 22. Paavola, J. and Adger, W.N. (2002). Justice and adaptation to climate change, Tyndall Centre Working Paper 23. Xueguang Wu, Jenkins, N. and Strbac, G. (2002). Impact of Integrating Renewables and CHP into the UK Transmission Network, Tyndall Centre Working Paper 24 Xueguang Wu, Mutale, J., Jenkins, N. and Strbac, G. (2003). An investigation of Network Splitting for Fault Level Reduction, Tyndall Centre Working Paper 25

Brooks, N. and Adger W.N. (2003). Country level risk measures of climate-related natural disasters and implications for adaptation to climate change, Tyndall Centre Working Paper 26 Tompkins, E.L. and Adger, W.N. (2003). Building resilience to climate change through adaptive management of natural resources, Tyndall Centre Working Paper 27 Dessai, S., Adger, W.N., Hulme, M., Köhler, J.H., Turnpenny, J. and Warren, R. (2003). Defining and experiencing dangerous climate change, Tyndall Centre Working Paper 28 Brown, K. and Corbera, E. (2003). A MultiCriteria Assessment Framework for CarbonMitigation Projects: Putting “development” in the centre of decision-making, Tyndall Centre Working Paper 29 Hulme, M. (2003). Abrupt climate change: can society cope?, Tyndall Centre Working Paper 30 Turnpenny, J., Haxeltine A. and O’Riordan, T. (2003). A scoping study of UK user needs for managing climate futures. Part 1 of the pilotphase interactive integrated assessment process (Aurion Project), Tyndall Centre Working Paper 31 Xueguang Wu, Jenkins, N. and Strbac, G. (2003). Integrating Renewables and CHP into the UK Electricity System: Investigation of the impact of network faults on the stability of large offshore wind farms, Tyndall Centre Working Paper 32 Pridmore, A., Bristow, A.L., May, A. D. and Tight, M.R. (2003). Climate Change, Impacts, Future Scenarios and the Role of Transport, Tyndall Centre Working Paper 33 Dessai, S., Hulme, M (2003). Does climate policy need probabilities?, Tyndall Centre Working Paper 34 Tompkins, E. L. and Hurlston, L. (2003). Report to the Cayman Islands’ Government. Adaptation lessons learned from responding to tropical cyclones by the Cayman Islands’ Government, 1988 – 2002, Tyndall Centre Working Paper 35 Kröger, K. Fergusson, M. and Skinner, I. (2003). Critical Issues in Decarbonising Transport: The Role of Technologies, Tyndall Centre Working Paper 36 Ingham, A. and Ulph, A. (2003) Uncertainty, Irreversibility, Precaution and the Social Cost of Carbon, Tyndall Centre Working Paper 37

Brooks, N. (2003). Vulnerability, risk and adaptation: a conceptual framework, Tyndall Centre Working Paper 38 Tompkins, E.L. and Adger, W.N. (2003). Defining response capacity to enhance climate change policy, Tyndall Centre Working Paper 39 Klein, R.J.T., Lisa Schipper, E. and Dessai, S. (2003), Integrating mitigation and adaptation into climate and development policy: three research questions, Tyndall Centre Working Paper 40 Watson, J. (2003), UK Electricity Scenarios for 2050, Tyndall Centre Working Paper 41 Kim, J. A. (2003), Sustainable Development and the CDM: A South African Case Study, Tyndall Centre Working Paper 42 Anderson, D. and Winne, S. (2003), Innovation and Threshold Effects in Technology Responses to Climate Change, Tyndall Centre Working Paper 43 Shackley, S., McLachlan, C. and Gough, C. (2004) The Public Perceptions of Carbon Capture and Storage, Tyndall Centre Working Paper 44 Purdy, R. and Macrory, R. (2004) Geological carbon sequestration: critical legal issues, Tyndall Centre Working Paper 45 Watson, J., Tetteh, A., Dutton, G., Bristow, A., Kelly, C., Page, M. and Pridmore, A., (2004) UK Hydrogen Futures to 2050, Tyndall Centre Working Paper 46 Berkhout, F., Hertin, J. and Gann, D. M., (2004) Learning to adapt: Organisational adaptation to climate change impacts, Tyndall Centre Working Paper 47 Pan, H. (2004) The evolution of economic structure under technological development, Tyndall Centre Working Paper 48 Awerbuch, S. (2004) Restructuring our electricity networks to promote decarbonisation, Tyndall Centre Working Paper 49 Powell, J.C., Peters, M.D., Ruddell, A. & Halliday, J. (2004) Fuel Cells for a Sustainable Future? Tyndall Centre Working Paper 50

Agnolucci, P., Barker, T. & Ekins, P. (2004) Hysteresis and energy demand: the Announcement Effects and the effects of the UK Climate Change Levy Tyndall Centre Working Paper 51 Agnolucci, P. (2004) Ex post evaluations of CO2 –based taxes: a survey Tyndall Centre Working Paper 52