Distributional effects of energy- and environmental policies

Environmental taxes imposed on households have been introduced in many countries. However, few countries have reached the level of environmental taxation that is seen in Denmark today, although many are considering shifting the tax burden towards the consumption that is harming the environment. The total tax burden imposed on households in Denmark in the form of taxes on energy use of all kinds, water consumption and waste production, etc., is considerable. This project analyses the individual taxes as well as the combination of all these taxes and duties related to environmental concerns, including taxes on heating, transport fuels, electricity, water, waste, plastic bags, registration of cars, annual car use, pesticides, etc. The distributional effect of taxes is examined in relation to household income, socio-economic class, residential location and family status. The shifting of the tax structure from high marginal income tax to consumption-based taxes, especially environmental taxes, might have distributional impacts amongst income groups which have not been considered part of the tax policy. The taxes are compared with respect to distributional impact. Do the effects of the different taxes vary to such an extent that this should be considered when designing tax policies? The hypothesis is that some environmental taxes associated with luxury income are less regressive than the average environmental tax. The results suggest that in Denmark taxes on petrol and registration duties for cars are progressive, whereas most other environmental taxes are regressive, especially the green taxes on water, retail containers and CO_2. The distributional impacts are illustrated using household consumption survey data and data covering household expenditures on energy. The energy taxes and the more recently introduced green taxes are compared. The project is combining the direct and the indirect effect of taxes. The direct effect considers the taxes imposed directly on household consumption of energy and other polluting actitivities. Indirect effect is calculated to include the indirect tax effect from environmental taxes imposed on domestic production of goods are services that are finally consumed by domestic households. The input-output methodology is used by combing the household consumption patterns of different income and socioeconomic groups with the Danish input-output matrices. The finding that Danish environmental taxes are regressive is in line with international findings. The results further point to the large difference between transport related taxes and other environmental taxes. Transport related taxes in Denmark are progressive, whereas green taxes and energy taxes are regressive at a degree corresponding to that of VAT. Another result is that families living in rural areas use a higher fraction of their income for environmental taxes than do families in urban areas. On the other hand the findings show that families with children are not more severly hit by environmental taxes than other families. Finally the analysis point to the fact that environmental taxes on average are less regressive than VAT and are more directly addressing the consumption of goods that have negative environmental impacts