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

1
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

2
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.

1
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.

3
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

5
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 ).

4
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, ex-
ante 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, cost-
minimising 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 market-
based 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

7
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.

5
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* A
1
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

9
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.

6
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 ex-
post 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.

12
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.

7
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

14
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

8
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.

9
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 non-
energy 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.

10
 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 (time-
series 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 energy-
intensive 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.

21
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.

11
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.

25
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.

12
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 CO2-
intensity, 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 low-
income 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.
∑ (Yi − Y ) 2
N
30 i =1
For univariate sample Y , Y , ..., Y , the skewness is
1 2 where is the mean, s
( N − 1) s 3
N

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.

13
- 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 ex-
ante 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
Carbon and CO2 taxes are easily comparable as a ton of carbon is approximately to 3.67 tons of CO2.
38
Not surprisingly, energy taxes are less cost-effective in reducing emissions as the relationship between
emission abatement and the tax base is less direct.

17
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 Refund available to the

added firm
Less than 1% 50%
More than 1% 75%
More than 2% 87.5%
More than 3% 95%
More than 3% 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.

39
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.

18
 Use category 1995 1999 2000

Households 13.47 13.47 13.47

Space heating
0 13.47 13.47
(industry)
Light process
With agreement 6.73 7.81 9.16
Without agreement 6.73 10.88 12.13
Heavy process
With agreement 0.40 0.40 0.40
Without agreement 0.67 2.69 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

43
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.

19
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, non-
feedstock 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.

20
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.

21
 Environmental Compulsory Regulatory Total
Excises
taxes in fuels stock levy Energy taxes taxes
Light fuel oil 1000L 46.58 13.29 4.99 126.5 191.23
Diesel (heating oil) 1000L 46.58 13.29 4.99 127.6 192.39
LPG 1000 Kg 0 15.86 0 150.1 166.75
Natural gas
0-5,000 m3 m3 0.0104 0.1203 0.1307
5,000-170,000 m3 m3 0.0104 0.0562 0.0665
170,000 - 1,000,000
m3 0.0104 0.0104 0.0208
m3
1 million – 10
m3 0.0104 0 0.0104
million m3
More than 10
m3 0.0068 0 0.0068
million m3
Electricity
0-10,000 kWh KWh 0.0583 0.0583
10,000 – 50, 000
KWh 0.0194 0.0194
kWh
50, 000 – 10 million
KWh 0.0059 0.0059
kWh
More than 10
KWh 0 0
million kWh

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 sector-
oriented 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 so-
called “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).

22
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.

49
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).

23
 Strategic Unit
Basic duty Additional duty stockpile
duty
Unleaded gasoline Litre
- normal grade 0.52
0.04 0.01
- reformulated 0.52
Leaded gasoline Litre
- normal grade 0.60
0.04 0.01
- reformulated 0.59
Leaded-unleaded blend Litre
- normal grade 0.56
0.04 0.01
- reformulated 0.55
Diesel oil Litre
- normal grade 0.28
0.04 0.01
- low sulphur content 0.26
Light fuel oil 0.02 0.05 0.01 Litre
Heavy fuel oil p/kg 0.05 0.01 Kilogram
Coal 41.37 0.01 Ton
Natural gas 0.023 0.01 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.

Tax level
Energy carrier Sectors exempted and sectors with reduced tax rates
$US/t CO
Petrol 56.7 Practically no use exempted.
Certain sectors exposed to international competition, such as air
transport and ships engaged in foreign trade, the supply fleet in
Light mineral oil 24.7 the North Sea, fishing, and coastal goods transport, are exempted.
Wood conversion and the herring meal industry pay 50% of the
tax rate.
Heavy mineral oil 21.2 Exemptions and tax reductions as for light mineral oil.
Natural gas 56.2 Onshore use of natural gas
Oil used on the
49.4
Continental Shelf
Coal used as a reducing agent or as raw material in industrial
Coal 27.1 processes and for energy purposes in the production of cement
and LECA (light-expanded clay aggregate).
Coke 20.6 Exemptions as for coal

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

24
 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.

Fuel Tax rate NOK

Petroleum sector, per litre 0.73
Gasoline, per litre 0.73
Mineral oil, coal and coke per litre (a) 0.49
Reduced rate mineral oil, per litre 0.28
Reduced rate gasoline, per litre 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 Unit 1995 1999 2000 2002

Fuel oils NOK/litre 0.415 0.46 0.47 0.49
Coal/Coke NOK/Kg 0.415 0.46 0.47 0.49
Emissions from the continental shelf NOK/litre Sm3 0.83 0.89 0.70 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.

25
 Total Tax Total Tax Energy tax Carbon Total Tax Tax 1990
Fuel Unit
2002 1993 1993 Tax 1993 1991 (1) (2)
Ind./other Ind./other Ind./other Ind./other Ind./other Ind./other
0/5-290-
Oil m3 539/2505 230/1460 230/920 1260 1078
540 (1)
Coal Tons 619/2015 200/1030 0/230 200/800 850 460
Natural 1000
404/1575 170/855 0/175 170/680 710 350
Gas m3
LPG Tons 567/2028 240/1065 0/105 240/960 855 210
Electricity MWh 0/198 0/35-85 0/35-63-85 0 50/72 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.

26
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 Rate
Electricity 0.43 p/kWh
Gas 0.15 p/kWh
0.96 p/kg (equivalent to 0.07
LPG
p/kWh)
1.17 p/kg (equivalent to 0.15
Solid fuels
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.

27
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.

28
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.

29
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,

56
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.

30
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.

61
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.

31
 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 price-
elasticity 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

68
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.

32
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

71
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.

33
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.

74
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.

34
 CCA vs. non CCA firms
Non-CCA firms CCA firms
CHP 12 27
ECA 21 59
Action Energy 24 64
Emissions trading 6 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 energy-
efficiency 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.

76
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.

35
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.

36
 Government Enevoldsen and
study Brendstrup (2000)

Public administrative costs 45 45

Private administration costs related to the CO2 tax 7-40 7-15

Private administration costs related to the agreements 7-15 12-25

Private administration costs related to the subsidies 5-15 5-15

Private and public sector enforcement costs 5 5-10

Total 69-120 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.

37
 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 250+employees
CHP 11 28
ECA 22 54
Action Energy 29 51
Emissions trading 13 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.

38
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

82
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.

39
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]
Price before
7.9 10.9 7.5 9.8
the tax
Energy tax 5.2
CO2 tax 8.8 2.2
Sulphur tax 1.0 1.0
Total 22.9 10.9 10.7 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
In relative terms, this means a change from 25% to 42% of the output (total district heating) supplied.
87
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.

40
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.

41
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.

Ratio 1 Ratio 2
Sweden 1:4 1:6
Denmark 1:9 1:14
Finland 1:2 1:3
Netherlands 1:1 1:2
Norway 1:2 1:3
Average ratio 1:4 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 energy-
intensive 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

90
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.

42
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 energy-
intensive 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

93
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.

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

95
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.

44
(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

99
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)

45
squeeze on margins caused by the strong pound and by the competition in this sector is further
exacerbated by the CCL.

Increase in energy National insurance

Net impact
costs rebate

Metals 30.1 5.9 24.2

Metal products 29.4 17.6 11.8
Machinery &
34.1 17.3 16.8
equipment
Electrical &
28.9 23.5 5.4
electronics
Motor vehicles 18.5 10.5 8.0
Other transport 32.6 9.6 22.9
Total engineering 173.6 84.4 89.2
Rubber & plastics 53.2 9.4 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 Net change in

NIC cut
levy costs
Mining 11.4 5.1 6.3
Manufacturing 328.2 185.6 142.6
Utilities 23.8 6.8 17.0
Services 356.1 417.7 - 61.6
Total 719.5 615.2 104.3

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;

46
- 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’

104
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.

47
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

112
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.

48
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.

49
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

120
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).

50
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.

121
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.

51
 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

124
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.

52
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.

126
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.

53
 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.

54
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Mix of CO2 Taxes and Agreements, pp. 148-171 in Andersen M. S., and Ulrich R. (eds.),
Market-based Instruments for Environmental Management: Politics and Institutions,
Edward Elgar, Cheltenham.
ENDS 2002 ‘Climate Change Levy making limited impact on business energy management’,
ENDS Report 330, July, p.9.
FSB (Federation of Small Businesses) 2002 The Climate Change Levy: Another Cost for Small
Businesses, FSB, London.
Green Alliance (2002). Next Steps for Energy Taxation – a Survey of Business Views, Green
Alliance, London.
Heckman J. J., and Robb, R. 1985. Alternative Methods for Evaluating the Impact of
Interventions: an Overview, Journal of Econometrics, 30, 239-67.
IEA (International Energy Agency), 1998. Denmark – 1998 Review. IEA, Paris
IIMD (International Institute for Management Development), 1996. The World Competitiveness
Yearbook, IIMD, Lausanne
Karas, J., 1995. Energiaverotuksen kansainvalinen vertailu. Energy Federation of Finnish
Industries.
Kasa S., 1999. Social and Political Barriers to Green tax Reform – The case of CO2-taxes in
Norway, Centre for Intarna6tional Climate and Environmental Research, Oslo.
Kasa S., 2000. Explaining Emission Tax Exemptions for Heavy Industries: a Comparison of
Norway, Denmark and the Netherlands, Centre for Intarna6tional Climate and
Environmental Research, Oslo.
Kolstad, C., 2000. Environmental Economics, New York: Oxford University PressKolstad, 2000.
Koomey, J. G., 2000. Avoiding "the big mistake" in forecasting technology adoption.
Downloadable from http://enduse.lbl.gov.
Jaffe, A., Peterson S., Portney P., and Stavins R., 1995. Environmental Regulation and the
Competitiveness of U.S. Manufacturing: What Does the Evidence Tell US?, Journal of
Economic Literature, 33 (March), pp.132-163
Johannsen K.S. and M. Togeby (1998): The Danish CO2 Tax on Trade and Industry in InterSEE:
Interdisciplinary Analysis of Successful Implementation of Energy Efficiency in the
Industrial, Commercial and Service Sector, VOL. II. Contract JOS3-CT95-0009. JOULE
III).
Larsen B. M., and Nesbakken R., 1997. Norwegian Emissions of CO2 1997 - 1994.
Environmental and Resource Economics, 9, pp. 275-290.
Malaska P., Luukkanen J., Vehmas J., Kaivo-oja J., 1997. Environment-based Energy Taxation in
the Nordic Countries, Ministry of the Environment, Helsinki.
Ministry of Housing, Spatial Planning and Environment (VROM), 2000. The Netherlands’
Regulatory Tax on Energy. Questions and Answers.
Ministry of Taxation (Skatteministeriet), 1999. Erhversvlivets Skattemaessige Rammevilkar,
Skatteministeriet, Copenhangen.
NUTEK, 1994. Utvardering av Styrmedel och Stod for Begransning av Koldioxidutslapp i
Sverige. NUTEK, Stockholm.
OECD (Organisation for Economic Cooperation and Development), 1995. Climate Change,
Economic Instruments and Income Distribution. OECD, Paris.
OECD (Organisation for Economic Cooperation and Development), 1996. Implementation
Strategies for Environmental Taxes. OECD, Paris.
OECD (Organisation for Economic Cooperation and Development), 1997. Evaluating Economic
Instruments for Environmental Policy, OECD, Paris

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OECD (Organisation for Economic Cooperation and Development), 2001. Environmentally
Related Taxes in OECD Countries - Issues and Strategies, OECD, Paris
RCEP (Royal Commission on Environmental Pollution), 2002. Energy – the Changing Climate.
Downloadable from www.rcep.org.uk.
SEI (Stockholm Environment Institute), 1999. Costs and Strategies Presented by Industry during
the Negotiation of Environmental Regulations, Prepared by the Stockholm Environment
Institute for the Swedish Ministry of the Environment, Stockholm.
SEPA (Swedish Environmental protection Agency), 1995. Environmental Taxes in Sweden -
Economic Instruments of Environmental Policy." Report 4745. Stockholm.
Shopley J., and Brasser D., 1996. Conference on Environmental Economic Policies:
Competitiveness and Employment: Summary Report on Two Microeconomic Case
Studies in the Field of Business and the Environment (conference Paper). Arthur D.
Little, Brussels.
Smith, S., 1992. The Distributional Consequences of Taxes on Energy and the Carbon Content of
Fuels. European Economy, pp. 241-68. Special Edition Of The Economics Of Limiting
CO2 Emissions, Commission Of The European Community
Smith, S., 1998. Distributional Incidence Of Environmental Taxes on Energy and Carbon: a
Review of Policy Issues, presented at the colloquy of the Ministry of the Environment and
Regional Planning, “Green Tax Reform and Economic Instruments for International
Cooperation: The Post-Kyoto Context”, Toulouse, 13 May 1998
Svendsen G. T., Daugbjerg C., Hjollund L., Pedersen A. B., 2001. Consumers, Industrialists and
the Political Economy of Green Taxation – CO2 Taxation in OECD, Energy policy, 29,
pp.489-97.
Tegeby M., Kraemer T. P., Gjesse L., Klok J. and Clases C., 1997. Why Do Some Comapnoies
Have success with Emnergy Efficiency?, pp. 3111-22 in Proceedings of the 1997 ACEEE
Summer Study on Energy Efficiency in Industry, July 8-11 1997, Saratoga Springs, New
York.
Trade and Industry Committee, 1999. Impact on Industry of the Climate Change Levy, Ninth
Report, Hose of Commons, London.

57
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-by- Shackley, S. and Gough, C., (2002). The Use of
Country Analysis of Past and Future Warming Integrated Assessment: An Institutional
Rates, Tyndall Centre Working Paper 1. Analysis Perspective, Tyndall Centre Working
Paper 14.
Hulme, M. (2001). Integrated Assessment
Models, Tyndall Centre Working Paper 2. Köhler, J.H., (2002). Long run technical change
in an energy-environment-economy (E3)
Berkhout, F, Hertin, J. and Jordan, A. J. (2001).
model for an IA system: A model of
Socio-economic futures in climate change
Kondratiev waves, Tyndall Centre Working Paper
impact assessment: using scenarios as
15.
'learning machines', Tyndall Centre Working
Paper 3. Adger, W.N., Huq, S., Brown, K., Conway, D. and
Hulme, M. (2002). Adaptation to climate
Barker, T. and Ekins, P. (2001). How High are
change: Setting the Agenda for Development
the Costs of Kyoto for the US Economy?,
Policy and Research, Tyndall Centre Working
Tyndall Centre Working Paper 4.
Paper 16.
Barnett, J. (2001). The issue of 'Adverse Effects
Dutton, G., (2002). Hydrogen Energy
and the Impacts of Response Measures' in the
Technology, Tyndall Centre Working Paper 17.
UNFCCC, Tyndall Centre Working Paper 5.
Watson, J. (2002). The development of large
Goodess, C.M., Hulme, M. and Osborn, T. (2001).
technical systems: implications for hydrogen,
The identification and evaluation of suitable
Tyndall Centre Working Paper 18.
scenario development methods for the
estimation of future probabilities of extreme Pridmore, A. and Bristow, A., (2002). The role of
weather events, Tyndall Centre Working Paper 6. hydrogen in powering road transport, Tyndall
Centre Working Paper 19.
Barnett, J. (2001). Security and Climate
Change, Tyndall Centre Working Paper 7. Turnpenny, J. (2002). Reviewing organisational
use of scenarios: Case study - evaluating UK
Adger, W. N. (2001). Social Capital and Climate
energy policy options, Tyndall Centre Working
Change, Tyndall Centre Working Paper 8.
Paper 20.
Barnett, J. and Adger, W. N. (2001). Climate
Watson, W. J. (2002). Renewables and CHP
Dangers and Atoll Countries, Tyndall Centre
Deployment in the UK to 2020, Tyndall Centre
Working Paper 9.
Working Paper 21.
Gough, C., Taylor, I. and Shackley, S. (2001).
Watson, W.J., Hertin, J., Randall, T., Gough, C.
Burying Carbon under the Sea: An Initial
(2002). Renewable Energy and Combined Heat
Exploration of Public Opinions, Tyndall Centre
and Power Resources in the UK, Tyndall Centre
Working Paper 10.
Working Paper 22.
Barker, T. (2001). Representing the Integrated
Paavola, J. and Adger, W.N. (2002). Justice and
Assessment of Climate Change, Adaptation
adaptation to climate change, Tyndall Centre
and Mitigation, Tyndall Centre Working Paper 11.
Working Paper 23.
Dessai, S., (2001). The climate regime from
Xueguang Wu, Jenkins, N. and Strbac, G. (2002).
The Hague to Marrakech: Saving or sinking
Impact of Integrating Renewables and CHP
the Kyoto Protocol?, Tyndall Centre Working
into the UK Transmission Network, Tyndall
Paper 12.
Centre Working Paper 24
Dewick, P., Green K., Miozzo, M., (2002).
Xueguang Wu, Mutale, J., Jenkins, N. and Strbac,
Technological Change, Industry Structure and
G. (2003). An investigation of Network
the Environment, Tyndall Centre Working Paper
Splitting for Fault Level Reduction, Tyndall
13.
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 Multi-
Criteria Assessment Framework for Carbon-
Mitigation 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 pilot-
phase 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-by- Shackley, S. and Gough, C., (2002). The Use of
Country Analysis of Past and Future Warming Integrated Assessment: An Institutional
Rates, Tyndall Centre Working Paper 1. Analysis Perspective, Tyndall Centre Working
Paper 14.
Hulme, M. (2001). Integrated Assessment
Models, Tyndall Centre Working Paper 2. Köhler, J.H., (2002). Long run technical change
in an energy-environment-economy (E3)
Berkhout, F, Hertin, J. and Jordan, A. J. (2001).
model for an IA system: A model of
Socio-economic futures in climate change
Kondratiev waves, Tyndall Centre Working Paper
impact assessment: using scenarios as
15.
'learning machines', Tyndall Centre Working
Paper 3. Adger, W.N., Huq, S., Brown, K., Conway, D. and
Hulme, M. (2002). Adaptation to climate
Barker, T. and Ekins, P. (2001). How High are
change: Setting the Agenda for Development
the Costs of Kyoto for the US Economy?,
Policy and Research, Tyndall Centre Working
Tyndall Centre Working Paper 4.
Paper 16.
Barnett, J. (2001). The issue of 'Adverse Effects
Dutton, G., (2002). Hydrogen Energy
and the Impacts of Response Measures' in the
Technology, Tyndall Centre Working Paper 17.
UNFCCC, Tyndall Centre Working Paper 5.
Watson, J. (2002). The development of large
Goodess, C.M., Hulme, M. and Osborn, T. (2001).
technical systems: implications for hydrogen,
The identification and evaluation of suitable
Tyndall Centre Working Paper 18.
scenario development methods for the
estimation of future probabilities of extreme Pridmore, A. and Bristow, A., (2002). The role of
weather events, Tyndall Centre Working Paper 6. hydrogen in powering road transport, Tyndall
Centre Working Paper 19.
Barnett, J. (2001). Security and Climate
Change, Tyndall Centre Working Paper 7. Turnpenny, J. (2002). Reviewing organisational
use of scenarios: Case study - evaluating UK
Adger, W. N. (2001). Social Capital and Climate
energy policy options, Tyndall Centre Working
Change, Tyndall Centre Working Paper 8.
Paper 20.
Barnett, J. and Adger, W. N. (2001). Climate
Watson, W. J. (2002). Renewables and CHP
Dangers and Atoll Countries, Tyndall Centre
Deployment in the UK to 2020, Tyndall Centre
Working Paper 9.
Working Paper 21.
Gough, C., Taylor, I. and Shackley, S. (2001).
Watson, W.J., Hertin, J., Randall, T., Gough, C.
Burying Carbon under the Sea: An Initial
(2002). Renewable Energy and Combined Heat
Exploration of Public Opinions, Tyndall Centre
and Power Resources in the UK, Tyndall Centre
Working Paper 10.
Working Paper 22.
Barker, T. (2001). Representing the Integrated
Paavola, J. and Adger, W.N. (2002). Justice and
Assessment of Climate Change, Adaptation
adaptation to climate change, Tyndall Centre
and Mitigation, Tyndall Centre Working Paper 11.
Working Paper 23.
Dessai, S., (2001). The climate regime from
Xueguang Wu, Jenkins, N. and Strbac, G. (2002).
The Hague to Marrakech: Saving or sinking
Impact of Integrating Renewables and CHP
the Kyoto Protocol?, Tyndall Centre Working
into the UK Transmission Network, Tyndall
Paper 12.
Centre Working Paper 24
Dewick, P., Green K., Miozzo, M., (2002).
Xueguang Wu, Mutale, J., Jenkins, N. and Strbac,
Technological Change, Industry Structure and
G. (2003). An investigation of Network
the Environment, Tyndall Centre Working Paper
Splitting for Fault Level Reduction, Tyndall
13.
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 Multi-
Criteria Assessment Framework for Carbon-
Mitigation 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 pilot-
phase 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