Thursday, 14 October 2010

Environmental taxation can spur innovation, says OECD

Governments could make better use of environmental taxes to discourage polluting activities and boost innovative ‘green technologies.’

 “To achieve a greener future we need new technologies that can lower the cost of saving the planet,” says OECD Secretary-General Angel Gurría. “Shifting part of the tax burden onto pollution makes it more attractive to develop and adopt these clean technologies and promotes green growth.”

OECD and many other governments already apply a range of taxes to energy, air and water pollutants and waste. Environmental taxes, along with tradable permit systems, are the most cost-effective and efficient environmental policy tool available. Citizens and industry react to green taxes by changing their behaviour, especially if government gives a strong signal that they intend to maintain tax rates and the price of carbon at high levels in the long-term.

Composition of environmentally related tax revenues by country: 2008
Note: In Mexico, fluctuations of consumer prices on motor vehicle fuels are smoothed out. In 2008, when world market prices were particularly high, the excise tax on fuels turned into a subsidy - equalling 1.8% of GDP.

The relationship between environmentally related taxes and innovation is complex.  How do ‘green’ taxes prompt businesses to innovate? What types of innovation result, and with what benefits?  Does the design of the taxes play a critical role?

OECD’s new Taxation, Innovation and the Environment answers these questions, drawing on case studies:
  • Sweden's charge on NOx emissions
  • Water policies in Israel
  • A cross-country study of fuel taxes and vehicle emission standards
  • Switzerland's tax on Volatile Organic Compounds
  • R&D and Environmental Investments Tax Credits in Spain
  • Korea's emission trading system for NOx and SOx
  • UK firms' innovation responses to public incentives
  • The UK's Climate Change Levy and Climate Change Agreements
  • Japan's tax on SOx emissions

The report finds, for example that UK firms which pay the full Climate Change Levy come up with more new patents than firms that pay a reduced rate. And putting a price on pollution results in more innovative ideas than regulations or standards.

In Israel, high water prices and taxes have prompted innovation. In Sweden, introduction of a tax on smog-causing NOx emissions prompted companies to patent new clean technologies, and reduce emissions by one-third. The Swiss case study on Volatile Organic Compounds illustrates that taxes can also trigger many simple but effective innovations that need not be patented.