NOX Taxation

A sample review of examples of NOx taxation systems

January 2009
 

Acknowledgements
This piece has been compiled by AP EnvEcon as part of the IMP Ireland project. The IMP
Ireland project is funded by the Environmental Protection Agency with co-funding from AP
EnvEcon. The Environmental Protection Agency funding is provided as part of the Science,
Technology, Research and Innovation for the Environment (STRIVE) Programme 2007-2013.
The programme is financed by the Irish Government under the National Development Plan
2007-2013. It is administered on behalf of the Department of the Environment, Heritage and
Local Government by the Environmental Protection Agency which has the statutory function of
co-ordinating and promoting environmental research.

The authors are extremely grateful to the Environmental Protection Agency and the Department
of Environment, Heritage and Local Government for their support, without which this work
would not be possible.

Views expressed are those of the authors alone.

 
 NOX Taxation
A sample review of examples of NOx taxation systems

January 2009

AP EnvEcon IMP Ireland Team

Dr Andrew Kelly Dr Luke Redmond Dr Fearghal King

Table of Contents

1.  Introduction ................................................................................................................................ 2 

2.  Norway – Nitrogen Oxide Charge .............................................................................................. 3 

3.  Sweden – Nitrogen Oxide Charge .............................................................................................. 6 

4.  France – Nitrogen Oxide Charge (including SO2/VOC) ......................................................... 14 

5.  Spain – Nitrogen Oxide Charge ............................................................................................... 19 

6.  Spain (Galicia) – Nitrogen Oxide Charge ................................................................................ 20 

7.  Italy – Nitrogen Oxide Charge ................................................................................................. 22 

8.  United States – Nitrogen Oxide Budget Trading ..................................................................... 23 

9.  Conclusions ............................................................................................................................... 27 

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 1. Introduction

Introduction

The following document draws together information on existing examples of Nitrogen Oxide
charging instruments. This document was drawn up by request of the Department of
Environment Heritage and Local Government. The document draws on the Economic
Instrument database developed and maintained by UCD Geography Planning and
Environmental Policy as well as additional research by AP EnvEcon. Louise Dunne of GPEP
maintains the source database and is primarily responsible for the updates. References for the
information presented are listed for each example, however, further updates on the taxes have
not been sourced for this piece. At a later point it may be worthwhile to generate a review
document of the more relevant and valuable examples of successful economic instruments in the
field of emissions to air policy.

Within some of the examples presented, the measures had not been implemented at the time the
information was added to the database and thus the instrument description may present
material released prior to the introduction of the charging system.

The purpose of this document is to give an overview from the database records of the type and
structure of Nitrogen Oxide charging instruments.

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 2. Norway – Nitrogen Oxide Charge

Introduced

1st January 2007

Aims

The tax will be brought in to assist in Norway’s efforts to meet NOx emissions ceiling limits as
agreed to under the Gothenburg protocol. Their target stands at 156,000 tonnes in 2010.

Design

The tax is to be levied on certain businesses in Norway at a rate of €1.80 (NKr15) per kilogram of
nitrogen oxides emitted. Exact details of the affected businesses were unavailable at this point
(Oct 2006). The quoted tax rate is expected to suffice as the introductory tax level only, with the
government stating that sufficient 2010 reductions would require a marginal cost of €5.95
(NKr50) per kilogram of nitrogen oxides emitted. However, the introduction of the proposed tax
is to be paired with compensation for affected businesses.

The Government stated that it believes “that it is necessary to consider the introduction of a NOx
tax in the context of compensations paid to certain affected industries. The Government is
proposing, inter alia, to increase grants for funding measures to reduce the NOx emissions of
ships and fishing vessels. The proposal is estimated to yield net tax revenue of NKr 520 million
accrued in 2007.”

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Expectation

Some industry representatives such as the Norwegian oil industry association (OLF) claim the
tax will only make a very small contribution to meeting emission commitments in a cost-
effective manner. They believe that a cost-effective solution would require a flexible charge
spanning multiple business and industrial sectors.

In a press release regarding objectives for 2006 to 2008 the OLF favoured the abandonment of
the CO2 tax by 2008 – in return for entering the emissions trading system and made a similar
proposal for NOX. They suggested that emission reductions should not and would not be met by
new disproportionately large taxes and favoured the development of a (national) emissions
trading system for NOX.

An additional concern with regard to NOX emissions is measures taken in an effort to address
CO2 emissions. In the 2007 budget, engine size will be replaced in the vehicle tax system with a
CO2 emission parameter. This may provide an incentive for users to purchase diesel vehicles
which may lead to increases in NOX and PM emissions from the road transport sector. Whilst
an earlier government white paper mentioned considering the differentiation of “road tax for
vehicles of maximum total weight up to 12 tonnes according to their NOX emissions”, no
mention was made in the recent budget of such a change in the road transport sector.

White Paper Measures

The following is cut from the white paper on Environmental Policy and State of the
Environment – Section 9.

http://odin.dep.no/md/english/doc/white_paper/022001-040026/dok-bn.html

The Government will:

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• Introduce the necessary measures and instruments needed to ensure that Norway meets
its commitment to reduce emissions of nitrogen oxides (NOx) under the Gothenburg
Protocol by 2010. The most important of these will be as follows:

• Lay down emission limits to air pursuant to the Seaworthiness Act for national
sea traffic and the fishing fleet, to apply to both new and existing vessels.
• Lay down new emission limits pursuant to the Pollution Control Act for
manufacturing industries in mainland Norway and electricity generation on the
continental shelf.
• Facilitate flexible solutions for the implementation of stricter requirements than
those that follow from the rules on integrated pollution prevention and control
(IPPC Directive) and emission limits for national sea traffic and the fishing fleet.
This will ensure that the NOx target is achieved as cost-effectively as possible.
Further review a system that is as cross-sectoral as possible, including tax levels
differentiated according to the level of NOx emissions and/or third-party
emission reductions. Design policy instruments to ensure that Norway’s
commitment is achieved by 2010, to provide a predictable framework, and to
provide good incentives across sectors.
• Consider whether to provide grants towards measures to reduce NOx emissions
from national sea traffic and the fishing fleet.
• Consider whether to differentiate the road tax for vehicles of maximum total
weight up to 12 tonnes according to their NOx emissions.

• Play an active part in revision of the Gothenburg Protocol, with a view to achieving
further environmental improvement in Norway.
• Take the initiative vis-à-vis the International Maritime Organisation (IMO) for the
development of international rules that will effectively reduce emissions to air from ships
in cases where critical loads for ecosystems and human health are exceeded partly as a
result of these emissions.

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 • Follow up the new strategy adopted by the EMEP programme (Cooperative Programme
for Monitoring and Evaluation of the Long-range Transmission of Air Pollutants in
Europe).

References

Norwegian ministry of the Environment http://odin.dep.no/md

ENDS Europe DAILY edition number 2181, 10/10/06

Norwegian Oil Industry Press release www.olf.no

American Chamber of Commerce in Norway

3. Sweden – Nitrogen Oxide Charge

Background

Together with sulphur dioxide (SO2), airborne emissions of nitrogen oxides (NOx) are one of
the main precursors of acid rain, which causes widespread damage to vegetation and animal life
in forests and lakes in Sweden. Emissions of airborne NO2 are also a main cause of
eutrophication of forestland and seabeds. (Hőglund 2000, pp.4). Sweden is subject to a high
degree of transboundary nitrogen pollution with only 20% of nitrogen depositions from
domestic sources (Lovgren, 1993 in OECD, 1997, pp43). Sweden is especially vulnerable to
acidification due to the specific granite bedrock covering most of the country. This has made the
precursors of acid rain, nitrogen oxides (NOx) and sulphur dioxide (SO2) important
environmental policy targets in Sweden (and Norway), although deposition in Sweden of acid
precursors often results from emissions elsewhere. In 1985 the Swedish Parliament established
a target to reduce nitrogen oxide emissions to 30% below their 1980 level by 1995. By 1991
emissions had been reduced by over 70% (OECD 1997, pp43), but the objective was not met
until 1998 (Hőglund 2000, pp4) Existing regulatory policy was not deemed sufficient to meet

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the target, thus the NOx charge was introduced. The main sources of nitrogen oxides were: road
transport 41%; industrial machinery and processes 27% ; power generation 11% (OECD 1997,
pp43).

Introduced

Introduced in 1991, and enforced in 1992.

Aims

The charge aimed to ‘accelerate and stimulate investment in advanced combustion and
pollution-abatement technologies and as a supplement to existing regulatory measures,’ (Barde
& Smith, pp24) and ‘to allow cost-effective implementation of measures to reduce emissions
below the levels required under the permit procedure’ (OECD 1997, pp43). The nitrous oxides
charge has been directed at reducing emissions from the power generation sector and large
combustion plants in industry, and is thus aimed at a relatively small proportion of total
emissions. (OECD 1997, pp43).

Scope

The design mechanism was partly chosen due to the fact that only large combustion plants are
obliged to pay the charge. The decision to exclude smaller plants was based partly on the high
costs of metering which (together with abatement costs) were considered unreasonable for
smaller plants. If a tax without refunds had been applied to only a subsection of some industry
then this would have been unfair compared to other firms in the same industry. In this case, if
the tax were applied only to the large plants, companies like Gothenburg Energy would have an
incentive to set up several small combustion plants instead of one big one and this is typically
not desirable (from any viewpoint including emissions of NOx and other pollutants). As the
system developed and turned out to be effective, costs for abatement and metering have fallen
and the criterion for inclusion has been lowered twice: in 1996 plants producing at least 40 GWh
useful energy per year were included and in 1997 the boundary was lowered to 25 GWh. In 1992,
only 200 plants were subject to the charge, compared to 400 plants in 1998.

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Tax Rates

Large/medium sized boilers taxed at SEK 40 [4.54 euro] per kg NOx [Ekins 1999, pp48] (4,500
Euro/tonne of NOx emitted [OECD 1997, pp44]). ‘Initially about 200 combustion plants
producing at least 50 GWh useful energy per year were targeted. Later the system was extended,
first in 1996 to comprise all plants producing at least 40 GWh of useful energy per year, and
then in 1997 to comprise all plants producing at least 25 GWh of useful energy per year. Today
almost 400 plants are subject to the charge.’ (Hőglund 2000, pp6).

The charge is assessed directly on emissions or presumptive emissions – firms can select their
preferred method and since measured emissions usually results in lower charges it is generally
selected (OECD 1997, pp44).

Refunds

The charge is very high - more than 200 times higher than the French charge. However, it is
distributed back to the polluting companies in relation to the amount of energy produced by the
specific plant. This means that the polluting industry as a whole does not pay anything to society
– and it is presumably this fact that has made the charge politically feasible. The charge is
limited to a small number of large emissions sources due to the high monitoring costs (OECD
1997, pp44) and is refunded to plants in relation to the quantity of useful energy produced, i.e.
incentive not to waste energy and aims to avoid distortions in competition between those firms
which are charged and those which are not, ‘thus sources with high emissions relative to their
energy output are net payers to the scheme, whilst sources with low emissions relative to energy
output are net recipients’ (OECD 1997, pp44).

The refund mechanism also acts as an incentive to prevent the larger plants switching to
smaller, less environmentally friendly plants in order to avoid the charge (Hőglund 2000, pp6).

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Institutional Arrangements

The administration of the charge is carried out by the Swedish Environmental Protection Agency
(SEPA), and has been kept at a very low cost, approximately 0.3% of revenues collected. The
metering costs are estimated at approximately 3% of total charges paid.

Monitoring and Enforcement

The emissions are measured by equipment approved by SEPA. If the firm does not measure its
emissions, a standard assessment is used. All plants are obliged to fill in a form regarding their
energy production and NOx emitted. SEPA audits the firms and randomly selects a number of
firms each year for inspection. The goal is to make an inspection of each firm every fifth year. In
the beginning of each calendar year the plants send in the form declaring their respective
emissions and energy produced. The firms have to pay their net charge before October 1st and
SEPA refunds the plants before December 1st each year. Each firm can have several production
units, which are monitored separately. This two-month period keeps cash flow problems to a
minimum. Firms adapted quickly to this economic policy instrument, and emissions were even
reduced before the introduction of the charge (incentive effect) (Sterner, 2003).

Expectations (Ex ante Analysis)

Charges were set at a level ‘reflecting a balance between the need to ensure that the tax was high
enough to have a clear incentive effect, and the potential costs to high emitters of an excessive
charge level,’ (OECD 1997, pp44).

Revenue was expected to fall due to a reduction in emissions resulting from charge and permit
conditions – a tightening of permits was expected to reduce emissions by 9000 tonnes/year by
1995, and the charge was expected to encourage abatement measures in the cases where boilers
were not covered by the permit regulations, leading to a 3-5000 tonnes reduction in
emissions/year by 2000, the combined effect ‘"should lead to reductions in emissions of the
order of 5000 to 7000 tonnes per year,"’ (Swedish Ministry of Environment 1991, pp112-3, cited
in OECD 1997, pp45).

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Performance

The charge has been regarded as a relative success, since it appears to be a prime cause for
extensive emission reductions from targeted plants. On average, the group of targeted plants
since 1992 has reduced emissions per unit of useful energy by about 40% since the charge
introduction. (Hőglund 2000, pp6). NOx emissions fell by 35% in 20 months (Barde & Smith,
1997, pp24). The announcement of the charge stimulated a rapid reduction prior to
implementation (Ibid.). Innovation and incentive to use more efficient technology caused the
costs of lowering emissions to fall from 20-80 crowns/kilo to a possible 10 crowns/kilo (Ibid.).

Emission levels between 1992-3:

· Fell by 42% from waste incineration

· Fell by 23% from energy production plants

· Fell be 17% from the pulp and paper industry

· Fell by 13% from the metal industry (Lovgren 1993, Table 3 cited in OECD 1997, pp46).

Emissions per energy unit fell by about 60 per cent between 1990 and 1996, whereas total
emissions fell by approximately 50 per cent, from about 24 500 tonnes to 12 500 tonnes, and
‘the tax reduced NOx emissions from combustion plants in the energy sector by about 25 per
cent (10 000tons) which is about 3 per cent of total NOx emissions in Sweden,’ i.e. greater than
the 5-7000 predicted (EEA 1999, pp70). The refund nature of the charge provides incentive for
plants to ‘minimise its NOx emissions per unit of energy output,’ which has caused in part an
increase in energy output, whilst emissions have fallen (Ekins 1999, pp48). Emissions from
boilers would have been 80% higher without the NOx Charge (EEA Draft Report 2000, pp6).

The refund system is an incentive to minimise NOx emissions per energy unit and thus a
incentive for monitoring and abatement measures (EEA Draft Report 2000, pp88). ‘Today
about 80% of NOx emissions originate from mobile sources and about 20% from stationary

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sources.’ (Hőglund 2000, pp5). The positive environmental effect was biggest in the beginning
of the period, but there are still improvements going on, although at a decreasing rate. This is
somewhat obscured by the fact that the new smaller plants have been brought into the system
since 1996/7. These have higher emissions per unit of output. The average for the original
(larger) plants actually fell to 0.26 and 0.25 for 1997 and 1998 respectively. Compared to the
costs of production, the charge is small.

The refundable charge system was designed to be as neutral as possible regarding aggregate
competitiveness. Still, there are some possible effects on individual producers. The sectors
affected by the charge are the food and beverages industry, wood and wood products industry,
paper and paper products industry, metal products - machinery and equipment industry,
chemicals industry, energy industry and waste combustion industry (Ecotec, 2001).

In 1998, the paper and paper products industry was subject to a total net payment of the charge
of approximately SEK 47 million, while the power industry had a positive net revenue of SEK 49
million. The net revenues, both positive and negative, for the other industries were significantly
smaller, less than SEK 10 million - in absolute terms - except for the waste combustion industry
in 1992-93 (SEPA, 1999). The total cost differential between firms should also take into account
the different costs of abatement investment. As it happens, the abatement cost plus the refunded
charge (positive or negative) is for each sector less than 1% of the total production value of each
respective sector. Assessments of potential impact on competitiveness indicate that the pulp and
paper industry is the sector that pays the most due to the NOx charge. There are however
“winners” and “losers” at the firm level as well. The general pattern is that the “winners” are
found in the energy sector (e.g. the firm which receives most gets SEK 10 millions back), while
losers are found in the pulp- and paper sector (e.g. the firm which pays most pays SEK 6
millions) (Ecotec, 2001).

Total revenue from the Swedish NOx charge (which is refunded to the plants) was the equivalent
of between US$50 million and US$100 million between 1992 and 1998 (Naturvardsverket, 2002
in Sterner, 2003). The charge is administered by SEPA and administration costs have been kept
low - to approximately 0.3% of revenues collected. Metering costs are estimated to be

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approximately 3% of total charges paid. NOx emissions are measured hourly by SEPA-approved
equipment (Sterner, 2003). The SCNE-systems for nitrogen oxides reductions have also been
developed as a direct effect of the nitrogen charges (Johansson, 2000).

Drawbacks

‘The relatively limited reduction depends largely on technical difficulties to reduce emissions
from mobile sources. These emissions were reduced by about 13% between 1980 and 1997, while
the stationary sources were more successful with over 50% reduction on average (Statistics
Sweden, 1998).

The larger plants have generally been more successful in reducing their emissions per unit of
useful energy. ‘The smaller plants that have entered the charge system at a later time, have
started from about the same level (i.e. about 400 kg/GWh) as the large plants, but are still in
1998 on average emitting more per GWh of useful energy produced than the larger plants.’
(Hőglund 2000, pp6) In addition to the NOx charge, many plants are subject to local
regulations. Hence, people argue that the reduction in NOx has been due to both the refunded
charge, and standards. According to one study, approximately two thirds of the total reduction
in NOx can be attributed to the charge, and the rest to the standards (ÅF-Energikonsult AB,
1996).

The methodology for this division is however shaky and typically it seems that almost all the
plants are operating below their legal requirements. It might be the case that the standards
alone would achieve 1/3 of the reduction but that the charge alone would give almost the same
effect as the charge plus the standards! According to SEPA it is reasonable to assume that if the
NOx charge had not come into effect in 1992, the NOx emissions would have been 25% higher
from combustion in 1995. It is also of importance to take into account possible side effects of the
reduction in NOx. Ammonia, laughing gas (N2O), and particularly carbon monoxide may
increase due to increased abatement. These increases were (in total) less than a quarter of the
reduction in NOx (SEPA 1997b). It is however not easy to compare the associated environmental
damage as against the benefits of NOx reduction, each of which may depend on a number of

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ambient factors, as well as on the underlying exposure-response functions which characterise
these other emissions.

Another potential drawback with refunding the charge is that the instrument no longer satisfies
the 'polluter pays' principle and does not give an optimal resource allocation. An ordinary
environmental tax would increase production cost and raise the market price of the final good,
eventually inducing structural changes (Sterner, 2003).

References·

‘Do Economic Instruments Help the Environment?’ Barde & Smith, The OECD Observer, No.24,
Feb/Mar 1997, pp22-26

http://www.oecd.org//publications/observer/209/ART_IDXE.HTM

Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of
Environmental Taxes and Charges in the European Union and its Member States. In association
with CESAM, CLM, University of Gothenburg, UCD, IEEP
http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

‘European environmental taxes and charges: recent experience, issues and trends,’ Ekins, P.,
1999, Ecological Economics 31 (1999) 39-62, pp48

Environmental Taxes, EEA Draft Report, February 2000, pp6, 88 Essays on Environmental
Regulation with Application to Sweden,

Lena Hőglund, 2000 Evaluating Economic Instruments for Environmental Policy, OECD 1997,
pp43-46 (order form at http://www.oecd.org//env/policies/publications.htm#eistrpub) Review
Meeting First Draft Update Taxes Report: Agenda Updated

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EEA Report on Environmental Taxes (Draft 16th June 1999), Schepelmann, Schegelmich &
Luhmann, EEA 18.06.1999, pp70 The Potential Benefits of Integration of Environmental and
Economic Policies in the European Periphery, Convery, pp7

Sterner, T. 2003. Policy Instruments for Environmental and Natural Resource Management.
RFF

Johansson, B., 2000. The Carbon Tax in Sweden. in OECD 2000. Innovation and the
Environment, Paris.

4. France – Nitrogen Oxide Charge (including SO2/VOC)

Background

In France, a tax on air pollution (“taxe parfiscale sur la pollution atmospherique”, la TPPA) was
introduced in 1985 for sulphur dioxide (SO2) emissions. In 1990 it was extended to encompass
nitrogen oxides (NOx) and hydrochloric acid (HCI) and then in 1995 also emissions of volatile
organic compounds (VOC) (Milock, 2004).

Introduced

1985 for SO2 emissions, 1990 for NOx and 1995 for VOC and HCI.

Design

From 1990, two criteria determined whether the tax was imposed: a maximum combustion
capacity equal to or exceeding 20MW or annual emissions of more than 150 tonnes of SO2, NOx

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,VOC or HCI (Millock et al., 2004, 30). Therefore those liable for taxation are power stations
and waste incineration plants, which have capacity that exceed 20 MW and a combustion
potential of three tonnes per hour or production plant that emit more than 150 tonnes of
emissions. Household waste incineration plants with a capacity exceeding 3 tonnes an hour were
also subject to the tax.

Tax Rates

In 1985 France started to apply the ’polluter pays principle’ by taxing SO2 emissions (at 130
FF/tonne). In 1990, the tax rate was set at approximately EUR 23/tonne for SO2, NOx and HCI
emissions. In 1995 the rate was increased to EUR 28/tonne and again in 1998 to EUR 38/tonne
for NOx and VOC only. If the total tax due was less than EUR 153 for a unit, no tax was levied.
The number of firms/plants/entities paying air pollution taxes ranged from 1200 in 1990 to
nearly 1500 in 1999. The transport sector was not targeted by the tax, the system only
considered air pollution from fixed sources (Millock et al., 2004).

Allocation of Revenues

The revenue from the NOx charge has accounted for roughly 30% of the revenue from all air
emission taxes between 1991 and 1996. ADEME, the French Agency for Environment and
Energy Management, was in charge of administering the tax. They received 6% of the tax
revenue towards administration costs, another 2.5% for research and 17% is for monitoring.
Self-reporting of previous years’ emissions was the system that ADEME used. A high level of
enforcement was reported with over 90% of taxes due actually paid.

Of the total tax revenue received, 75% were earmarked for subsidies to abatement investments
or for research and development. Any firm paying the air pollution tax were eligible to apply for
the subsidy. The subsidy was awarded based on the level of the additional fixed capital
investment the firm invested to reduce emissions. The rates were 15% for standard abatement
technologies, 30% for particularly innovative technologies with an additional 10% subsidy for
small and medium sized companies.

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Exemptions

Almost any firm that applied received a tax rebate. In this sense there was to a certain extent an
automatic refunding of the tax revenues to the aggregate population of companies. This
distributional impact, however, depended on whether a plant took the initiative to ask for an
abatement subsidy (Millock et al., 2004).

In 2000, a general pollution tax replaced the TPPA, levied by the customs authority and no
longer administered by ADEME, but ADEME continued to handle requests for abatement
subsidies paid out of the general government budget. (Millock et al., 2004).

Performance

In most cases, industries do not actually measure NOx emissions but use “rule of thumb”
emission coefficients. An assessment of the tax showed that NOx emissions were reduced by
27,000 tonnes per year which, compared to emissions in the mid 90s, corresponds to a
reduction of roughly 6% of the total. According to ADEME, estimated emission reductions for
the abatement equipment installed were about 9% in 1995 and 56,000 tonnes or 13% in 1997.

Results from a study by Millock et al. et al., 2004, on the effectiveness of air pollution taxes in
France, indicate that the overall effectiveness of a revenue rebating scheme is negative. The
study reviewed the French air pollution tax system during the 1990s, where the rebate is tied to
abatement subsidies. They estimated that this tax had a significant negative impact on VOC and
SO2 emissions but not on NOx emissions (Millock et al., 2004). They attribute this difference to
the regulatory system of monitoring real emissions. The poor emissions monitoring system
implied that the link between the tax base and the actual emissions was unreliable and therefore
the incentive effect of the tax was diluted for particular pollutants. In general though, Millock et
al., (2004) conclude that the higher the tax rate the higher the probability that the firm applied
for an abatement subsidy. The combined subsidy, however, generally increased emissions
significantly and to an extent that dwarfed the negative impact of the tax. Their results show that
this is not uniform across sectors and disaggregated analysis is necessary to analyse the full
impact.

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The study by Millock et. al, 2004 shows the subsidy seemed to have increased emissions to an
extent that dwarfed the negative impact of the tax. The authors explain this by output effects
(which were, however, not directly measured) so that even if emission coefficients were reduced
by the abatement subsidy, the installation of modern end of pipe abatement appeared to have
increased total production enough to reverse the effect on absolute emission levels (OECD,
2005: 26).

Another conclusion drawn from their research is that the combined tax/subsidy biased the
technology adoption decision towards investing in end-of-life pipe measures rather than clean
technology in the sense of a reorganisation of production, input use, etc. In fact, the proportion
of end-of-pipe investment in their sample varied from 62% in the sector of plastic and rubber to
almost 90% for SO2 and NOx emissions in the chemistry sector (ADEME). They draw
comparisons between the French and Swedish tax system on air pollution and note that the
French tax system is likely to be too low to warrant the adoption of effective abatement
technologies by companies. In Sweden the system fully rebates those firms who invest in
abatement technology, and at the same time set a sufficiently high tax rate such that recouping
costs is the best option.

In summary Millock et al., 2004 note that the French regulation concerning abatement leads to
(a) firms receiving subsidies for investments that they would have undertaken anyway, (b) there
is no built in check on the ex post efficiency or proper use of subsidized abatement equipment
(c) if the French system included an automatic refund scheme, like that used in Sweden, there
are continuous incentives for firms to reduce emissions and become more efficient in terms of
emissions per energy unit (Millock et al., 2004: 34). These points are also noted in a study by
the OECD (2005).

Drawbacks

The proceeds are to a very large extent returned to the polluting industries (and paradoxically,
this could lead to a reluctance to make adjustments which are not funded by revenues). This
mechanism is not as transparent as in the case of the Swedish NOx charge, but still the revenue

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is used to subsidise abatement. The net effect is that industry bears some (small) abatement
costs, which will not have any measurable effect at the macro level of prices and employment.

References

Ecotec, 2001, Study on the Economic and Environmental Implications of the Use of
Environmental Taxes and Charges in the European Union and its Member States. In association
with CESAM, CLM, University of Gothenburg, UCD, IEEP
http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

French Agency for Environment and Energy Management (ADEME), 1998, Taxe parafiscale sur
la pollution atmosphérique – Rapport d’activité 1997.

Millock, K., C. Nauges and T. Sterner, 2004, “Environmental Taxes: A Comparison of French
and Swedish Experience from Taxes on Industrial Air Pollution.” CESifo DICE Report, Spring
2004, Vol. 2, No.1. Available at: www.cesinfo-group.de.

OECD, 2005, The French Tax System, Recent Developments and some consideration for reform.
OECD Economics Department Working Paper No 439, July 2005 ECO/ WKP 2005 (26).
Available at:

http://www.olis.oecd.org/olis/2005doc.nsf/43bb6130e5e86e5fc12569fa005d004c/0f132fa4452
da208c125704d002c92e4/$FILE/JT00187984.DOC

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 5. Spain – Nitrogen Oxide Charge

Tax structure

• The first 1 000 tons of NOx are exempted.

• Between 1 001 and 50 000 tons of NOx the cost is 5 000 Ptas/ton
• Every ton over 50 000 tons of NOx costs 5 500 Ptas.
• The tax has remained constant over the years.
• There are plans to introduce a fourth tier in the future (Ecotec, 2001).

Allocation of Revenues

Approximately 5% of total revenues are dedicated to a fund for environmental restoration to

deal with the negative effects of the emissions. The rest goes to the regional budget.

Monitoring and Enforcement

The amount to be paid is calculated through direct measurement of emissions or through the
use of emission factors supplemented by some form of inspection.

Performance

According to an Ecotec study, the tax is seen mainly as a means of raising revenue for the region.
Little is known about what effects it has had, if any, on emission coefficients. It is not possible to
say whether the tax has had any abatement effect. The fact that the NOx fees collected are rising
quite fast and thus that emissions must be rising too (almost 20% in four years) suggests that
there is no significant abatement activity yet.

References

Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of
Environmental Taxes and Charges in the European Union and its Member States. In association
with CESAM, CLM, University of Gothenburg, UCD, IEEP
http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

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 6. Spain (Galicia) – Nitrogen Oxide Charge

Background

Galicia is the only Spanish region to have this particular structure of NOx tax. Diversity in tax
systems is in itself not necessarily surprising since the regions are autonomous with respect to
fiscal policy and hence each region has to make its own decisions. Diversity in tax systems in
Spain is not necessarily surprising since the regions are autonomous with respect to fiscal policy
and hence each region has to make its own decisions. Some years ago Galicia experienced SO2
emissions levels of 738 tonnes, i.e. 34% of the Spanish total SO2 emissions while Galicia's NOx
emissions were 83 tonnes, i.e. 10% of the Spanish total. Galicia is a centre of industrial activity
and thus of pollution but not the only one in Spain.

Introduced

1995

Coverage

The tax on atmospheric contamination (Impuesto de Contaminación Atmosférica Ley 12/1995,

de 29 de Diciembre) covers both NOx and SOx.

Tax Rates

The tax level is basically 5000 Pesetas/tonne of NOx or about EUR 30/tonne. However its
detailed design is somewhat more complex with, currently, three different tiers: The first 1 000
tonnes of NOx are exempted. Between 1 001 and 50 000 tonnes of NOx the cost is 5 000
Ptas/tonne Every tonne over 50 000 tonnes of NOx costs 5 500 Ptas. The tax has remained
constant over the years. There are plans to introduce a fourth tier in the future (Ecotec, 2001).

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Allocation of Revenues

Approximately 5% of the total revenues are dedicated to a special fund for environmental
restoration to deal with the negative effects of the emissions while the rest goes to the main
regional budget.

Monitoring and Enforcement

The amount to be paid is calculated through direct measurement of emissions or through the
use of emission factors supplemented by some form of inspection.

Performance

According to an Ecotec (2001) study, the tax is seen mainly as a means of raising revenue for the
region. Little is known about what effects it has had, if any, on emission coefficients. It is not
possible to say whether the tax has had any abatement effect. The fact that the NOx fees
collected are rising quite fast and thus that emissions must be rising too (almost 20% in four
years) suggests that there is no significant abatement activity yet.

References

Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of
Environmental Taxes and Charges in the European Union and it’s Member States. In association
with CESAM, CLM, University of Gothenburg, UCD, IEEP
http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm

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 7. Italy – Nitrogen Oxide Charge

Introduced

1998

Aims

The EU National Emission Ceiling directive imposes to Italy a maximum emission level of 990
kt of NOx by 2010 (Gracceva et al., 2006).

Expectations (Ex ante Analysis)

The rate is ITL 203,000 per tonne (over 104 EUR/ton) which is quite high (compared to Spain
and France) but it only covers combustion plants whose capacity is over 50 MW and emissions
exceeding the standards specified in the EU Large Combustion Plant Directive. This seems to
suggest it is only applied in special cases as a form of penalty.

References

Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of
Environmental Taxes and Charges in the European Union and its Member States. In association
with CESAM, CLM, University of Gothenburg, UCD, IEEP

Gracceva, F., A. Colosimo, I D’Elia, T. Pignatelli, C Salgo, G. Vialetto, 2006, Economic Efficient
Instruments to Reduce NOx Emissions in Italy: An Assessment through an Integrated
MARKAL-RAINS Analysis, Paper presented at the International Energy Workshop, June 2006,
Cape Town, South Africa. Available at: www.iiasa.ac.at/Research/
ECS/IEW2006/docs/2006A_Gracceva.pdf

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 8. United States – Nitrogen Oxide Budget Trading

Background

On December 17, 1999 the EPA finalised the Findings of Significant Contribution and
Rulemaking on Section 126 Petitions of Reducing Regional Transport of Ozone (commonly
referred to as Section 126 Final Action). This rule grants petitions filed by four north eastern
States (Connecticut, Massachusetts, New York and Pennsylvania) seeking to reduce ozone
pollution (smog) through reductions in nitrogen oxide (NOx) emissions from other States. The
Section 126 Final Action requires 392 facilities in Delaware, the District of Colombia, Indiana,
Kentucky, Maryland, Michigan, North Carolina, New Jersey, Ohio, Pennsylvania, Virginia and
West Virginia to reduce annual NOx emissions. The Federal NOx Budget Program is a cap-and-
trade programme.

Introduced

The Federal NOx Budget Trading Program was introduced on May 1, 2003.

Aims

The aim of this programme is to get 392 facilities in Delaware, the District of Colombia, Indiana,
Kentucky, Maryland, Michigan, North Carolina, New Jersey, Ohio, Pennsylvania, Virginia and
West Virginia to reduce annual NOx emissions by a total of nearly 510,000 tonnes from 2007
levels.

Design

The EPA requires that large electric utilities and large industrial boilers in States whose
emissions have been shown to significantly contribute to downwind non-attainment to control
their NOx emissions in response to the Section 126 Final Action rulemaking. Fossil fuel boilers
or combustion turbines that serve an electric generating unit with rated output of greater than
25 MW or that have a maximum rated heat input capacity of greater than 250 mm Btu/hr are

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included in the trading programme. Units that no longer operate or units that have a permitted
limit to emit less than 25 tonnes of NOx during an ozone season (which runs from May 1 through
to September 30) are exempt from most requirements of the programme. Individual units
located in the affected States that are not otherwise subject to the programme may choose to opt
into the trading programme. However, once a unit opts into the programme, that unit is subject
to the same compliance, monitoring and reporting requirements as the units originally subject
to the programme. The Federal NOx Budget Trading Program sets emissions limits for the
affected sources in the form of NOx "allowances". One allowance authorises the emission of one
tonne of NOx emissions. The EPA will allocate each source a specific number of allowances per
year. Allowances may be bought, sold or traded between the affected sources and other private
parties

This trading programme applies to 392 facilities in Delaware, the District of Colombia, Indiana,
Kentucky, Maryland, Michigan, North Carolina, New Jersey, Ohio, Pennsylvania, Virginia and
West Virginia.

Units and Allocation

The unit of the Federal NOx Budget Trading Program is the “NOx Allowance”. One allowance
authorises its holder to emit one tonne of NOx emissions.

The EPA projected total uncontrolled ozone season NOx emissions for the year 2007 for the
participating sources in each State. A state-wide emissions trading budget was then established
by applying highly cost effective control measures to the named sources in each State. The EPA
determined that a control level of 0.15 lbs/mm Btu for electric generating units and a 60%
reduction in NOx emissions for industrial boilers were highly cost effective. To set emissions
limits for individual sources, the EPA apportions the State emissions trading budgets among the
participating sources. An individual source's emissions limit is expressed as the number of NOx
allowances it is allocated for a given year. In the December 1999, the EPA allocated the state-
wide budgets for 2003-2007 to sources based on their heat input and listed each unit's heat
input. The EPA will update these allocations every five years in five year blocks.

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Updated allocations will be based on output for electric generating units and will probably be
based on heat input for industrial boilers. Just fewer than 290,000 NOx allowances will be
allocated in total region-wide to sources every year. Sources that retire will continue to receive
allocations until the next allocation update. If the retired sources are brought back on line after
the allocation up-date, they are not considered new sources and will not receive an allocation
until the subsequent allocation update.

During the initial two years of the programme, the EPA is also making additional allowances
available to participating sources through a compliance supplement pool. These allowances will
be distributed among sources which made early reductions during the 2001 and 2002 ozone
seasons. Sources may use these allowances for compliance purposes as they would other
allowances for the 2003 and 2004 compliance periods. However, the EPA will retire all
remaining pool allowances from the allowance tracking system after the 2004 ozone season
compliance determination process is completed.

New sources entering into the programme will be allocated allowances from a portion of the
State budget that is set aside for new sources. A new source is eligible to receive allowances from
the new source set-aside until it has sufficient operating data to receive an updated allocation as
an existing source. Each new electric generating unit will be allocated allowances based on the
product of either a NOx emissions rate of 0.15 lbs/mm Btu or the unit's permitted limit,
whichever is less, times their actual utilisation for the control period. Each new non-electric
generating unit will be allocated based on the product of either a NOx emissions rate of
0.17lbs/mm Btu or the unit's permitted limited, whichever is less, times their actual utilisation
for the control period.

Sources that are not currently subject to the programme but undergo major modifications and
are subsequently required to participate in the programme are initially treated as new sources
and therefore are eligible to receive allowances from the new sources set-aside. After compliance
has been determined, any allowances remaining in the new source set-aside will be redistributed
to existing sources.

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Monitoring and Enforcement

The affected sources were required to begin monitoring on May 1, 2002. Full compliance with
the Federal NOx Budget Trading Program is required starting May 1, 2003. Sources demonstrate
their compliance by holding enough allowances in their accounts to cover their ozone season
emissions. If sources do not have enough allowances to cover their emissions based on their
initial allocation, they may take advantage of the flexibility provided by the allowance market
and buy allowances. Sources have until November 30 each year, two months after the end of the
ozone season, to ensure that they hold adequate allowances. The EPA verifies that sources hold
adequate emissions allowances through standardised monitoring and reporting procedures.

In order to demonstrate compliance, budget sources must monitor and report their actual
emissions to the EPA. Under the trading programme, sources with large NOx emissions must
monitor their emissions using continuous emissions monitoring systems. Sources with lower
NOx emissions may use simpler estimation methods. Regardless of the method used to
determine emissions, the data used to support these determinations is reported to the EPA
electronically (by July 30 for the months of May and June, and by October 30, for the months of
July, August and September).

Banking and Borrowing

Banking allowances for future use is permitted in this programme.

Additional Information

The Federal NOx Budget Trading Program is very similar to the NOx Budget Trading Program
under the NOx SIP Call. Both programmes assume the same level of control for large electric
generating units and industrial boilers and require the same compliance data. Sources trading
under the Federal NOx Budget Trading Program and sources trading in the NOx Budget Trading
Program under the NOx SIP Call, may trade allowances freely with each other. However, under
the NOx SIP Call, States have the option of reducing their NOx emissions through a mechanism
other than the NOx Budget Trading Program. Therefore, only States that choose to control their

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emissions through the NOx Budget Trading Program can trade with sources in the Federal NOx
Budget Trading Program.

Phase II of the Ozone Transport Commission's NOx Budget Program began in 1999. Phase III
assumes similar control levels as the Federal NOx Budget Trading Program and the NOx Budget
Trading Program under the NOx SIP Call and is scheduled to begin in 2003. Because of these
similarities, the EPA is working with the affected States to ensure appropriate integration of the
programmes in 2003.

Sources

http://www.epa.gov/airmarkets/fednox/

http://www.epa.gov/airtrends/2005/ozonenbp/

http://www.rff.org/rff/Documents/RFF-DP-05-05.pdf

http://www.centre-cired.fr/perso/quirion/Boemare_Quirion_Econ_Ecol.pdf

9. Conclusions

This brief has synthesised some of the available information relating to NOx taxation
instruments in use around the globe. This is not an exhaustive list, nor has the current position
of all taxes been researched for 2009. However, the piece does provide examples of NOx
taxation implementation and the specific structures established.

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