Reducing CO2 emissions by changing private consumption by differentiation of VAT and other taxes on consumption

Panel: Panel 2: Dynamics of Consumption

Authors:
Ole Thorbek, The Danish Council for Sustainable Energy
Thomas C. Jensen, The Danish Energy Agency
Poul Erik Morthorst, Risø National Laboratory
Thomas Thomsen, The Danish Energy Agency

Abstract

The Danish Kyoto target for 2008 - 12 is to reduce 21% of emissions of all greenhouse gases in relation to the emissions in 1990 (corrected for net of exports of electricity). The latest forecast shows there will be a deficit in 2008-12 on 3,4 mill. tons equivalent to 4,4% of the total emission of greenhouse gasses (lit.1).

In this connection it could be relevant to have a look at the structure of tax on commodities and services, and how changes in this structure could affect the emissions of CO_2.

The paper analyses how a value added tax (VAT) structure differentiated in relation to CO_2-emissions can change consumption, and how it would influence economy.

In principle the VAT should be differentiated in relation to the CO_2 - emission of all goods and services. This paper only examine one simple case, where the VAT is differentiated in such a way that the VAT rate on services is set to zero and the VAT rate on goods and investments is increased to an extent where the public debt is unchanged.

The results show that the VAT differentiation in relation to a reference scenario in the long term will cause a permanent saving of energy and in the short term the VAT differentiation will cause a small economic upturn. The long term economic effects are more complex. One of the conclusions made is that we need to develop methods to evaluate the socio-economic costs and benefits in relation to environmental measures.