Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

NAITO and MOTOKI

Green Growth Knowledge Platform (GGKP) Fourth Annual Conference on Transforming Development Through Inclusive Green Growth 6-7 September 2016 Jeju International Convention Center, Republic of Korea

LATEST TRENDS IN THE GREENING OF TAX SYSTEMS IN JAPAN, EUROPE, NORTH AMERICA AND AUSTRALIA, AND THEIR IMPLICATIONS FOR JAPAN NAITO Aya1, and MOTOKI Yuko1 1

Environment and Energy Division 1, Mizuho Information & Research Institute, Inc. 2-3 Kanda Nishikicho, Chiyodaku, Tokyo, Japan.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

NAITO and MOTOKI

ABSTRACT Japan as a world’s 8th largest CO2 emitter is required to advance low-carbon actions and needs to mobilise every available measure to tackle climate change issues. Environmental taxation is one of the most important tools to achieve this objective, thus authors conducted interviews to experts in Japan and 15 countries (9 European countries, US, Canada and Australia) to investigate the latest trends of greening taxation in those countries. This paper is based on the result of our interviews and compares all countries to extract policy recommendation to the environmental taxation in Japan. As for the energy taxes in Japan, our analysis indicate that Japan’s fuel tax rates are low compared to European countries on both transport and industry fuels thus there is a potential for tax increase. Especially for the Tax for Climate Change Mitigation (so-called carbon tax), the tax rate is quite low compared to other countries which have carbon taxes and the future prospect of tax increase (price signal) is not indicated in Japan. In addition, carbon tax revenue is recycled into the special account then used for CO2 emissions reduction projects in Japan, whereas multiple other countries successfully use tax revenue to stimulate economic growth. As for vehicle taxes, changes in tax burden based on environmental performance are significantly small in Japan compared to Europe. Moreover, fuel efficiency standards which would be criteria of vehicle tax rates are well below the levels in Europe and providing little incentive to further technological development. To achieve low-carbon and sustainable future, now is the time for Japan to seek for emissions reduction through greener taxation policy based on the policy recommendation gained from other countries’ experiences. Keyword: environmental tax, carbon tax, energy tax, vehicle tax

1. INTRODUCTION In December, 2015, COP21 (the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change) adopted the Paris Agreement as the new framework for international cooperation against global warming, which stipulated that all countries, including the United States and China, must submit their voluntary greenhouse gas reduction targets and steadily take actions to meet them. The Agreement further spells out the goal of limiting the temperature rise to less than two degrees above pre-Industrial Revolution levels and requires further efforts to limit the rise to less than 1.5 degrees (Ministry of Foreign Affairs in Japan, 2015 ). In addition, the United Nations adopted the Sustainable Development Goals in September, 2015 under which all countries agreed to emphasise environmental programs in their development goals in a shift from the previous goal, which focused on poverty eradication, to sustainable development (United Nations, 2015). While Japan is a world economic power that would be expected to lead the effort to build a low-carbon society, its greenhouse gas reduction goals for 2030 (26 percent reduction below 2013 and 18 percent reduction below 1990) do not compare with the goal set by the EU (40 percent reduction below 1990). It has been also pointed out that Japan’s recent move to promote thermal power generation in the country runs counter to a growing global trend, such as the tightening of power plant regulations in the UK and the US as well as the withdrawal of investment from businesses engaging in fossil fuels in a movement called “divestment” (E3G, 2015). The world is looking at Japan’s approach with an increasingly critical view. In order to keep abreast of the world, Japan should mobilise every possible tool, including regulatory and economic ones, to concentrate its effort on increasing the use of renewable energy and energy efficiency. Environmental taxation is an important tool for this purpose. According to the Organisation of Economic Cooperation and Development (OECD), environmental taxes (or environment-related taxes) consist of “energy taxes” levied on energy goods, “vehicle taxes” levied on automobiles and other transportation equipment, and “other environmental taxes” levied on waste and natural resources, all of which are characterised by their potential for reducing emissions at the consumption stage or improving production technology by having polluters, such as businesses and consumers, take into account the cost of environmental pollution through price Page 2

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

NAITO and MOTOKI

signals (OECD, 2010). The environmental taxes also benefit the government by providing revenues. The movement toward the greening of tax systems that impose taxes based on environmental loads (Committee for the Promotion of Greening the Whole Tax System , 2012), which has spread over time, has been in practice in Europe for 20 years as environmental tax reforms (ETR) and environmental fiscal reforms (EFR). We surveyed the approaches taken by Japan and other countries toward the greening of tax systems for the past two years, and reported on the latest trends in major European countries last year (Motoki and Naito, 2015). This year, we expanded the scope to cover 16 countries (Japan, Germany, UK, France, Italy, Sweden, Denmark, Finland, Switzerland, Ireland, Portugal, Netherlands, Belgium, USA, Canada and Australia) and carried out interview surveys of the tax experts, including administrators, in these countries. This paper summarises the latest trends in the greening of tax systems in these countries. We also present our views on future issues and the course of action for Japan based on our findings from comparisons of the surveyed countries. 2. APPROACHES TO THE GREENING OF TAX SYSTEMS IN JAPAN AND THE WORLD Figure 1 shows a comparison of the amount of revenues from environmental taxes and their composition as well as revenues from environmental taxes as a percentage of GDP in Japan and the world. Japan’s ratio is about 1.5% (7 trillion JPY), which is higher than the US (0.7%) and Canada (1.1%), but lower than Australia (2%) and Europe (1.8 – 3.9%). Denmark has the highest ratio, which is 2.5 times that of Japan. The composition of tax revenues varies by country. Energy and vehicle taxes account for more than 90% of all environment-related tax revenues in all countries, except the Netherlands. The category of “other environmental taxes” includes a variety of levies intended for dealing with waste and recycling, pollution-related problems and the conservation of natural resources and ecosystems. This category accounts for as much as 10% of all environment-related taxes in some countries, such as the Netherlands, Denmark and France. We shall examine the specific approaches taken by Japan, Europe, North America and Australia for the greening of their tax systems. Table 1 lists major environmental taxes that each of the survey countries has introduced to date.

Figure 1. Revenue from environment-related taxes as percentage of GDP (2013) Source: Compiled by Mizuho Research Institute from the OECD database on instruments used for environmental policy

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

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Table 1. Environment-related taxes currently in effect Country

Japan1

Belgium2

Denmark

Energy taxes Energy tax Carbon Tax (w/o Carbon Tax)

Vehicle taxes Acquisition tax

Gasoline Tax, Local Gasoline Excise, Diesel Oil Delivery Tax, Oil and Gas Carbon Tax (Tax Tax, Aviation Fuel Tax, for Climate Automobile Petroleum and Coal Tax, Change Acquisition Tax Electric Power Mitigation) Development Promotion Tax Fuel Tax, Federal Vehicle registration contributions for electricity ― tax (BIV) and natural gas Gasoline Tax, Tax on petroleum products, Gas CO2 tax Registration tax tax, Tax on coal, Duty on electricity

Other transport taxes

Freon tax

Waste tax

Motor Vehicle Weight Tax, Automobile Tax, Light Vehicle Tax

Norikura Environmental Conservation Tax (Gifu Pref.)

―

Industrial waste tax (ex. Mie Pref.)

Annual road tax

―

―

Landfill tax, Industrial Waste Tax

Motor Vehicle Tax

―

Tax on CFC

Excise duty on motor cars

Rail Tax

―

Finland

Energy Tax, Stockpile duties

CO2 tax

Registration fee of vehicles

France1

TICPE, TICGN, TICC, TICPE, Local tax on electricity (TICFE+TCFE)

Carbon Tax

Cartes grises, Bonus-Malus

Germany

Energy Duty, Electricity Duty

―

―

Motor Vehicle Tax

Ireland

Fuel Tax, Electricity Tax

Carbon Tax

Vehicle Registration tax (VRT)

―

―

Mineral oil and derivate excise tax, Tax on natural gas, Coal tax, Tax on electricity Excise tax on gasoline and other mineral oils, Taxes on Netherlands an environmental basis (Energy Tax) Italy

Portugal

Tax on oil products, Energy Service Tax

Carbon Tax

Sweden

Energy Tax

CO2 tax

Others (pollution)

Ownership tax

Tax for Civil Tax on company Aviation, Solidarity cars, Axle tax, contribution on Annual Malus airline tickets

Waste tax, Tax on Ni/Cd batteries, Tax on PVC and phthalates Tax on Waste, Oil Waste Levy, Oil Damage Levy

―

TGAP

Aviation Tax

―

―

Motor tax

Air Travel Tax

―

Landfill Levy

Vehicle registration tax (IPT)

Vehicle tax

Tax on boats and aircrafts, Tax on air taxi

―

Special tax on landfill

Registration tax on motor cars (BPM)

Annual road tax (MRB)

―

―

Taxes on an environmental basis (Waste Tax)

Tax on motor Traffic tax (IUC) vehicle sales (ISV)

―

―

Regulatory fee on water and waste services

―

―

Waste Tax

Super green car premium

Annual road tax

Cantonal tax on Tax incentive Car tax, CO2 motor vehicles, Fee Cantonal taxes on Switzerland Tax on mineral oils CO2 on fossil ― ― reduction penalty on heavy goods waste fuels traffic Fuel Duties, Climate Vehicle Excise UK ― ― Air passenger duty ― Landfill tax Change Levy Duty Harbor Tax on Gas Guzzler Tax, Registration fee, USA2 Fuel excise tax ― Maintenance Trust ozone-depleting ― Tax on Track County use taxes Fund Excise Tax chemicals Federal excise taxes on Green Levy, BC Eco fee (Tire tax, Canada2 motive fuels, BC motor fuel BC Carbon Tax Automobile air ― ― ― Battery tax) tax, BC LNG tax conditioners Stamp duty, Australia Fuel excise tariff ― Motor vehicle tax ― ODC excise tax Waste levy Luxury Car Tax

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

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Table 1. Environment-related taxes currently in effect (cont.) Others (pollution)

Country

Japan

Others (resources) Tax on Pollution prevention Nuclear energy Water Tax on harvesting of Packaging tax extraction of raw tax tax abstraction tax biological resources materials

―

―

Nuclear Fuel Tax (Fukui Pref.) etc.

―

Hunting tax、Fishing License Tax (Fujikawaguchiko Town)

(Joyo City) etc.

Aggregate Tax

Tax on landscape change and cutting trees Forest conservation tax (ex. Kochi Pref.), Tax for history and culture (Dazaifu City), Environmental cooperation tax (ex. Izena Village), etc.

Belgium2

Packaging charge

Water pollution tax

―

Tax on water withdrawal, Groundwater tax

―

―

―

Denmark

Packaging tax

Sulfur tax, NOx tax, Pesticide tax, Tax on wastewater

―

Tax on piped water

―

Duty on raw materials

―

Finland

Excise on certain beverage packages

―

―

―

Hunting and fishing licenses, Tax on dogs

―

―

France

TGAP

TGAP, Tax on airport noise

Tax on nuclear facilities

Royalties water withdrawal

―

TGAP, Royalties mine

―

―

―

Nuclear fuel tax

―

Fishing/Hunting tax

―

―

Environmental Levy On Plastic Bags

―

―

―

―

―

―

Italy

―

Provincial tax for environmental protection, Tax on emissions of sulfur dioxide and nitrogen oxides, Regional tax on aircraft noise

―

―

―

―

―

Netherlands

―

―

―

Minerals charge

―

Portugal

Tax on lightweight plastic bags

Tax on noise

―

―

―

Sweden

―

Sulphur tax, Pesticide tax

Nuclear fuel tax

―

―

Natural gravel tax

―

Switzerland

―

Cantonal taxes on wastewater, Incentive tax on VOCs

―

―

―

―

―

UK

―

―

―

―

Aggregates Levy

―

USA

―

―

―

―

Betting and gaming taxes ―

―

―

Germany Ireland

Taxes on an environmental ― basis (Tap water tax) Fee for the use of public water domain, Fishery license tax, Regulatory fee Tax on hunting on quality of licenses water for human consumption

Canada2

―

―

―

―

―

Australia

―

Aircraft noise levy

―

―

―

BC Mineral exploration tax credit ―

Note 1: As of January, 2016 in each country. Note 2: Japan levies the Tax for Climate Change Mitigation (Carbon Tax) as part of the Petroleum and Coal Tax; France levies its carbon tax as part of the Domestic Duty on Consumption of Energy Products (TICPE) and other taxes. Note 3: Belgium’s Landfill Tax, Water Pollution Tax and Groundwater Tax are regional taxes levied in Flanders and Waste Tax and Tax on Water Withdrawal are levied in Wallonia; the Automobile registration fee and County use tax (USA) are state taxes in New York State; and the Motor Fuel Tax, LNG Tax, Carbon Tax, and Eco fee and Mineral Exploration Tax Credit (Canada) are provincial taxes in the Province of British Columbia. Source: Compiled by Mizuho Research Institute from the interview survey results and the information obtained from each country.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

NAITO and MOTOKI

3. CURRENT SITUATION OF GREENING TAX SYSTEM IN JAPAN There are a total of seven energy taxes: the Petroleum and Coal Tax levied on the importation and extraction of fossil fuels; the Gasoline Tax, Local Gasoline Excise Tax, Oil and Gas Tax, Diesel Oil Delivery Tax and Aviation Fuel Tax, which are levied on different fuels throughout the distribution of petroleum products; and the Electric Power Development Promotion Tax which is levied on the sale of electricity. Japan introduced the Tax for Climate Change Mitigation (Carbon Tax) in October, 2012 as an add-on to the Petroleum and Coal Tax. It is levied equally on all fossil fuels at a rate corresponding to their CO2 emissions. The final rate will reach 289 JPY/tCO2 in April, 2016 after incremental increases by 1/3 over 3-1/2 years. The revenue is placed in the Special Account for Energy Policy to be used to fund projects designed to reduce energy-related CO2 emissions. All other energy tax revenues are placed in the general budgets of the national and regional governments. Vehicle taxes include the Automobile Acquisition Tax levied on the acquisition of automobiles and the Motor Vehicle Weight Tax, Automobile Tax and Light Vehicle Tax levied on their ownership. There are fuel efficiency-based tax reductions, such as the Eco-car Tax Incentives and the special exemption of the automobile tax and light vehicle tax. The vehicle tax revenues are generally incorporated into the general budget except that a portion of the Motor Vehicle Weight Tax revenue is earmarked for compensation payments related to pollution-related health damage. In conjunction with the increase of the Consumption Tax rate to 10% in April, 2017, the Automobile Acquisition Tax will be replaced by a tax entitled “Taxation Based on Environmental Performance” (tentative title) which is a new levy on automobiles and light vehicles at the time of acquisition (Government of Japan, 2015). All other environment-related taxes are levied at the local level, and their total revenue accounts for less than 1% of all environment-related tax revenues. As of January, 2016, pollution-related taxes include an industrial waste tax levied by 28 governments, including Mie Prefecture, and nuclear power-related taxes levied by 14 governments, including Fukui Prefecture. In the resource sector, 36 governments, including Kochi Prefecture, levy a forest conservation tax as an add-on to their respective resident tax as well as the Hunting Tax which is a statutory tax. Certain local governments have introduced additional environmental levies to fund the nature conservation programs in their respective regions, such as the Fishing License Tax (Township of Fujikawaguchiko in Yamanashi Prefecture), the Aggregate Tax (Joyo in Kyoto Prefecture and one other municipality), the Environmental Cooperation Tax (Village of Izena in Okinawa Prefecture and two other municipalities) and the Environmental Tax for History and Culture (Township of

Dazaifu in Fukuoka Prefecture). 4. COMPARISON OF ENERGY TAXES AND IMPLICATIONS FOR JAPAN In this chapter, we will focus on energy taxes, and compare and examine them from the two viewpoints of “taxation based on fuel types” and the “design of the carbon tax” with reference to the latest trends in taxation in the countries we surveyed in order to present our views on the course of action from which Japan could learn with respect to the greening of Japan’s tax system. 4.1. Comparison of Tax Bases by Fuel Types First, we divided fuel types into transportation and industrial use and compared the rates of the energy taxes levied on them in each country. Two types of taxes are levied on energy consumption: the existing energy taxes levied as excise taxes and the carbon tax levied equally according to the carbon content of fossil fuels. In this paper, we calculate the sum of these taxes by converting their rates to a rate per ton of CO2 emissions in order to make comparisons. 4.1.1. Transportation fuels A look at the transportation fuels (gasoline and diesel) in Figure 2 indicates that Japan’s tax rates are the lowest next to those in North America and Australia for gasoline, and the lowest next to the Page 6

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

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US for diesel. The Tax for Climate Change Mitigation (Carbon Tax) accounts for only 1% and 2% of the gasoline tax and diesel tax rates, respectively. The UK imposes the highest tax rate, 3 times that of Japan, for both gasoline and diesel. Gasoline is taxed at a significantly higher rate than diesel in many countries, except the US, the UK, Australia, and Switzerland. There is as much as a 50% difference in the rates for the two fuel types. The differences widen when the rates are converted to per-liter rates, with diesel fuel enjoying tax preference. In view of the health hazards and air pollution risks of exhaust gas from diesel cars (OECD, 2014), however, France imposed an additional levy on diesel fuel in conjunction with the increase in its Carbon Tax in 2016. As Belgium and Switzerland are expected to follow France with similar measures, the move to remedy the gap between gasoline and diesel taxes appears to be accelerating in Europe. 4.1.2. Industrial fuels A comparison of the industrial fuels (coal, natural gas and heavy fuel oil) in Figure 3 indicates that Japan’s tax rates are at a low level for all categories. The Tax for Climate Change (Carbon Tax) accounts for 49% of the rate of coal tax, 42% of natural gas tax, and 27% of heavy fuel oil tax. The highest rates are levied by Denmark at 24 times Japan on coal, 41 times Japan on natural gas, and 4 times Japan on heavy fuel oil. Many other countries that have adopted a carbon tax levy it on industrial fuels at the same rates as the existing energy tax or even higher. While the energy taxes in the past afforded significantly lower rates for industrial fuels compared to transportation fuels, the carbon tax, which is intended to suppress greenhouse gas emissions, is imposed equally on a wide range of energy consumption, including industrial energy. Carbon tax countries, such as France and Switzerland, are planning to raise the rates on industrial fuels through increases in their carbon tax. These countries seek to reconcile the environment with the economy by taxing the industrial sector at a non-preferential rate while mitigating the impact on their economy with finely-tuned tax reductions and exemptions.

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Figure 2. Comparison of tax rates for transportation fuels (gasoline and diesel) Note: Effective rates in 2015 in each country, except Japan’s Tax for Climate Change Mitigation (Carbon Tax), which will come into effect in April, 2016. US data includes New York state taxes, and Canada BC provincial taxes. The emission factors and energy content used in this report are taken from the “Ministerial Ordinance on Calculation of Greenhouse Gas Emissions Emitted by Specified Emitters” (METI and MOE Ordinance No. 3 of 2006). Foreign exchange rates are based on Mizuho Bank’s monthly average exchange rates from April to October, 2015. Source: Compiled by Mizuho Research Institute based on the EU, 2015, Excise Duty Tables and the respective country data.

Figure 3. Comparison of tax rates for industrial fuels (coal, natural gas, and heavy fuel oil) Note: Taxation on natural gas (for industrial use) is divided into 4 tiers, the lowest rate (over 1.000m3) of which is identified in this graph as “Natural gas (large)” and the highest (less than 170m3) as “Natural gas (small)”. Both were estimated under the same conditions used for Figure 2. Source: Compiled by Mizuho Research Institute based on the EU, 2015, Excise Duty Tables and the respective country data.

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4.2. Comparison of System Designs of Carbon Tax With respect to taxation on fuels, we compared the features of the carbon tax systems in Japan and eight countries where the carbon tax is in effect (Finland, Sweden, Denmark, Switzerland, Ireland, France, Portugal, and the Canadian province of British Columbia) in terms of tax rates, tax revenue recycling, and tax reductions in order to compare Japan’s Tax for Climate Change Mitigation (Carbon Tax) and the carbon taxes adopted by the other countries. 4.2.1. Carbon tax rates Changes in the carbon tax rates shown in Figure 4 indicate that the rate of Japan’s Tax for Climate Change Mitigation (Carbon tax) is relatively low, with no plan for further increases at this point after it rises to 289 JPY/tCO2 in April, 2016. The tax rates have risen significantly in other countries. For example, France is planning an eightfold increase from the original rate of 7 EUR/tCO2 (950 JPY) set in 2014 to 56 EUR/tCO2 (7,600 JPY) in 2020 and 15-fold to 100 EUR/tCO2 in 2030 (13,500 JPY). Switzerland, which introduced its carbon tax in 2008 at the rate of 12 CHF/tCO2, determines the rate based on the most recent CO2 emission reduction results. Accordingly, the rate will increase to as much as 120 CHF/tCO2 (15,300 JPY) in 2018. In Portugal, where the tax rate is determined based on the previous-year average of the price of EU Emission Allowances (EUA), there may be a sharp increase in the rate depending on international trends in carbon prices. As a number of international organisations have estimated the carbon prices in 2030 to be, on average, 10,000 JPY per ton of CO2 emissions1, the goals set in Europe are ambitious on a par with the daunting predictions. Furthermore, the clear signal for future carbon prices has led to the removal of uncertainties for businesses in making their investment decisions (New Climate Economy, 2014). In fact, British Columbia (Canada) anticipated such a benefit, and gave advance notice of carbon tax rates for the 5-year period at the time of their introduction and widely publicised them (Pedersen and Elgie, 2015).

Figure 4. Changes in carbon tax rates and country outlook Note 1: For Switzerland, the highest rate is used because its 2018 carbon tax rate varies from 96 – 120 CHF/tCO2. Note 2: Foreign exchange rates are based on Mizuho Bank’s monthly average exchange rates from April to October, 2015. Source: Compiled by Mizuho Research Institute from the interview survey results and information obtained from each country. 1

The averages were calculated based on estimates by the International Energy Agency (using the values for EU), US Environmental Protection Agency and the Department of Energy and Climate Change. Source: IEA, 2015, World Energy Outlook 2015; EPA, 2015, The Social Cost of Carbon; DECC, 2015, Updated short-term traded carbon values used for UK public policy appraisal.

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4.2.2. Use of carbon tax revenues/tax reduction As Table 2 indicates, the revenue from Japan’s Tax for Climate Change Mitigation (Carbon Tax) is placed entirely in the Special Account for Energy Policy and used to fund projects aimed at reducing energy-related CO2 emissions so as to increase the environmental effect (“budget effect”). In contrast, the countries we surveyed place their tax revenues in their general budget and leave the environmental effect entirely to incentives, such as energy-saving activities in response to rate increases (“price effect”). Sweden, which is known for the highest carbon tax rate (1,120 SEK/tCO2; 160,000JPY), carried out an environmental tax reform in 1991 and appropriated the increased tax revenue to significantly reduce corporate taxes (to 53% in 1990, 30% in 1991, and 22% in 2015) to ease the tax burden on businesses from the point of view of revenue neutrality in conjunction with the introduction of the carbon tax, SO2 tax, and value-added tax on energy consumption. Such an approach has also been adopted in Finland and Canada (Province of British Columbia). Furthermore, Europe exempts corporations participating in the EU-ETS from taxation in order to protect them in the face of international competition, to prevent carbon leakage, and to avoid double taxation through the carbon tax and emission credits2. In some cases, taxation on the agriculture sector is reduced, even if it is not covered by the EU-ETS, due to the limited scope of measures available to it and for the purpose of mitigating effects on small-scale farmers. Japan has also adopted this measure. In the case of France, the initial carbon tax rates on gasoline and diesel were left unchanged in order to avoid sharp increases in prices as a result of the introduction of the carbon tax. Energy taxes were divided into the carbon tax and others in order to gradually increase the proportion of carbon tax in the second and subsequent years. In order to avoid impacting industry and to maximise the positive effects on both the economy and the environment, many countries we surveyed are implementing a variety of measures by utilising tax revenues and fine-tuning tax reductions and exemptions.

2

On the other hand, in response to indications that excessive preferential treatment of the industry could spoil the effectiveness of the carbon tax, Sweden will phase out the tax reduction for the industry (to 60% of the standard rates) by 2018. Source: Andersen, M., S., 2015, Reflections on the Scandinavian Model: Some Insights into Energy-Related Taxes in Denmark and Sweden、Ministry of Finance Sweden, 2015, Environmental taxes in Sweden.

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Table 2. Overview of carbon taxes by country Country

Year introduced

Rate (JPY/tCO2)

Revenue (100 mil JPY)[year]

Fund

Use of Revenue

Major tax reduction and exemption

 Control energy-related CO2 emissions through  Naphtha for producing energy conservation imported/domestic petrochemical measures, promote products; diesel used in renewable energy, clean agriculture, forestry and fishing. fossil fuels  Exemption for EU-ETS companies  Reduce income taxes  Reduce for industrial and reduce employment power/CHP; refund for costs to businesses energy-intensive industry and agriculture

Japan

2012

289

2,623 [2016]

Special account

Finland

1990

7,834 (For transport)

737 [2008]

General account

Sweden

1991

16,074

336 [2014]

General account

 Reduce corporate taxes (revenue neutral）

 Exemption for EU-ETS companies/CHP  Reduce to 60% of standard rate for industry and agriculture

Denmark

1992

3,103

670 [2014]

General account

 Expend according to government fiscal demand

 Exemption for EU-ETS companies

Switzerland

2008

10,739

969 [2014]

Ireland

2010

2,702

465 [2012]

France

2014

2,972

3,377 [2015年]

Portugal

2015

901

128 [2015]

British Columbia (Canada)

2008

2,883

1,191 [2015]

 Exemption for domestic ETS General  Return 1/3 to the companies account Buildings programme  Reduce for companies achieving (Partially placed and the remaining 2/3 to legally binding commitment in a fund) citizens and businesses  Exemption for gasoline/diesel for transportation  Exemption for EU-ETS General  Reduce deficit (fiscal companies account consolidation)  Reduce for diesel used in agriculture  Carbon tax revenue is partially earmarked for the General  Exemption for EU-ETS Competitiveness and account companies Employment Tax Credit (CICE) in general budget.  Use for corporate tax general  Exemption for EU-ETS reduction by 2020 account companies (planned)  Return to taxpayers General through reduction of  Exemption for fuels for account other taxes (corporate, cross-border transportation etc.)

Note 1: Effective rates in 2015 in each country, except Japan’s Tax for Climate Change Mitigation (Carbon Tax), which will come into effect in April, 2016. Note 2: The revenues are shown in the most recently available values, except for Japan’s Tax for Climate Change Mitigation (Carbon Tax), which is an estimate for FY2016 (full year). Note 3: Foreign exchange rates are based on Mizuho Bank’s monthly average exchange rates from April to October, 2015. Source: Compiled by Mizuho Research Institute from the interview survey results and information obtained from each country.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

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4.3. Course of Action for the Greening of Japan’s Energy Taxes Based on the comparisons between Japan and other countries surveyed, we summarised the implications for Japan with respect to the course of action it might take to further the greening of its energy taxes as follows:  Maximise the “price effect” by increasing energy tax rates (carbon tax in particular), and provide a clear indication of the long-term prospects for future carbon prices in order to remove business uncertainties; and  Use tax revenues to revitalise the economy. 4.3.1. Increasing the rates of energy taxes As discussed in 4.1., we believe Japan needs to examine the potential for turning existing energy taxes, such as the Gasoline Tax and Diesel Oil Delivery Tax, into a carbon tax in addition to significantly increasing the Tax for Climate Change Mitigation (Carbon Tax) in keeping with Europe, where many countries are introducing energy taxes at higher rates than Japan, and the emerging global trend to “shift tax burden from labor and income to consumption and environment”. The effect of Japan’s Climate Change Mitigation (Carbon Tax) on CO2 reductions is estimated to be 2% (Ministry of the Environment Japan, 2012), most of which is produced by the budget effect. It is essential that Japan maximise the price effect in the future by increasing the tax rates. Industry in Japan is highly critical of the Tax for Climate Change Mitigation (Carbon tax) and states that drastic reconsideration, including its elimination, is an urgent issue (Keidanren, 2015). Yet the global situation is on the opposite way and more private sectors around the world are embracing the carbon tax. For example, major oil companies, such as Shell and Total, issued statements in 2015 saying that carbon pricing would make the road map for future investment clear even though the system would be a burden on them (BG, BP, Eni, Royal Dutch Shell, Total, 2015 ). More than 1,000 companies from 74 countries expressed support for carbon pricing at the UN Climate Summit in 2014 (United Nations, 2015). In such an environment, it is advisable that Japan raise tax rates in order to maximise the price effect. At that time, it will be more important that Japan present the long-term outlook on “future carbon prices”, in order to remove uncertainties cast on businesses by following the examples of British Columbia (Canada) and Switzerland. 4.3.2 Using tax revenues to revitalise the economy Unlike other countries in our survey, Japan’s current Tax for Climate Change Mitigation (Carbon Tax) limits the use of revenue to measures that reduce energy-related CO2 emissions. These measures help to maximise the effect on the environment by creating a budget effect. With respect to the increased tax revenue resulting from future rate increases, some are of the opinion that it is important for Japan to select the measures from among the diverse choices that will bring positive effects to the economy with a view to overall tax revenues. If this is to be the case, Japan should look at the examples of other countries. For a country like Japan, which has a large fiscal deficit, we also believe that using tax revenues to fund deficit reduction, as Ireland has done, or using tax revenues equivalent to reducing corporate taxes and social security contributions, as Germany and Sweden have done, will be the subject of analysis that is of considerable political importance.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

NAITO and MOTOKI

5. COMPARISON OF VEHICLE TAXES AND THE IMPLICATIONS FOR JAPAN In this chapter, we focus on vehicle taxes, and, based on the latest trends in taxation in the countries in our survey, discuss and compare them from the two points of view of “levels of taxation on standard automobiles” and the “status of the introduction of taxation based on fuel efficiency”. We then present our view on courses of action for Japan suggested by the results with respect to the greening of vehicle taxation. 5.1. Comparison of Tax Burden Relating to the Acquisition, Ownership, and Motoring of Standard Automobiles We compared the amount of tax burden relating to the acquisition, ownership, and motoring of passenger vehicles in the countries we surveyed. The tax items included consumption taxes and energy taxes linked to the acquisition of vehicles and the fuel efficiency while operating vehicles as well as vehicle taxes (acquisition and ownership). The respective tax burdens are compared by aggregates of the amounts of these taxes. Table 3 indicates that all countries, except Germany and the UK, impose a tax on the acquisition of automobiles. Many countries have adopted CO2 emissions or fuel efficiency as a tax base. Japan is a minority, which bases the tax solely on the prices of vehicles. Ownership is taxed in all countries except Canada. Similar to the acquisition tax, taxation is based on either CO2 or fuel efficiency alone or in combination with other elements, such as weight or cylinder capacity. We calculated the tax burdens based on the tax systems of the various countries and the 12-year ownership of a standard gasoline car with fuel efficiency meeting Japan’s 2015 emission standards, and a diesel car of the same class. In Japan, vehicle taxes impose 50% of the tax burden (1.27 million JPY on a gasoline car and 1 million JPY on a diesel car), most of which relates to ownership, as indicated in Figure 5. A comparison of gasoline cars and diesel cars indicates that they are categorised by the same weight, cylinder capacity classes, resulting in the same tax burden. At the same time, however, diesel cars enjoy larger tax reductions on fuel efficiency than the cost increase from vehicle price. In addition, a low rate of energy tax on diesel fuel further reduces the tax burden on diesel cars in all of the acquisition, ownership, and motoring categories. In Europe, there is a more than ten-fold difference in tax burden between the countries that impose lower tax rates, such as Sweden, Germany, France, the UK and Italy, which have domestic automobile manufacturers, and Denmark and the Netherlands, which impose higher tax rates. Some countries, such as Denmark, the Netherlands, and Belgium, impose additional taxes on diesel cars based on the air pollution and health risks posed by diesel. This trend has been spreading to other countries gradually. Furthermore, Europe imposes a high value-added tax in the range of 19% to 25% on acquisition and motoring, resulting in a generally higher tax burden in the EU than in Japan. The burden of vehicles taxes is small in North America and Australia. In the US, in particular, the tax burden relating to motoring is considerably small due in part to having the lowest gasoline tax and diesel tax compared to other regions.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

NAITO and MOTOKI

Table 3. Taxes relating to acquisition, ownership, and motoring of passenger vehicles Country

Acquisition tax

Ownership tax

Consumption tax / VAT rate

Japan1

 Automobile Acquisition Tax (price)

 Motor vehicle weight tax (weight)  Automobile tax (cylinder capacity)  Light vehicle tax (fixed amount)

8％

Belgium2

 Vehicle registration tax (CO2, Euro standards, fuel type)

 Annual road tax (cylinder capacity, CO2, Euro standards, fuel type)

21％

Denmark

 Registration tax (price, fuel efficiency, fuel type)

 Motor vehicle tax (fuel efficiency)

25％

Finland

 Registration fee of vehicles (price, CO2)

 Excise duty on motor cars (CO2, fuel type, weight)

24％

France

 Cartes grises (puissance fiscal, CO2)  Bonus-Malus (CO2)

 Annual Malus (CO2)

20％

Germany

―

 Motor Vehicle Tax (CO2, cylinder capacity)

19％

Ireland

 Vehicle registration tax (price, CO2)

 Motor tax (CO2)

23％

Italy

 Vehicle registration tax (horse power)

 Vehicle tax (horse power, Euro standards)

22％

Netherlands

 Registration tax on motor cars (CO2, fuel type)

 Annual road tax (CO2, weight, fuel type)

21％

Portugal

 Tax on motor vehicle sales (cylinder capacity, CO2, fuel type)

 Traffic tax (cylinder capacity, CO2)

23％

Sweden

 Super green car premium (CO2)

 Annual road tax (CO2, fuel type, weight)

25％

UK

―

 Vehicle excise duty (CO2)

20％

 Cantonal tax on motor vehicles (horse power, CO2)

8％

Switzerland  Car tax (price) 2  CO2 reduction penalty (CO2, weight) USA2,3

 Gas Guzzler Tax (fuel efficiency)

 Registration fee (weight)  County use taxes (fixed amount)

Canada3

 Green Levy (fuel efficiency)  Automobile air conditioners (fixed amount)

―

12％

Australia

 Stamp duty (price)  Luxury Car Tax (price)

 Motor vehicle tax (weight)

10％

8.88％ 34.8％

Note 1: Japan’s vehicle taxes provide rate reductions based on fuel efficiency. Note 2: Vehicle taxes are imposed regionally in Flanders, Belgium; an ownership tax is imposed in Canton of Geneva, Switzerland, and in New York State, USA. Note 3: The US sales tax figure is an aggregate of New York State and New York City taxes (top: rate on acquisition; bottom: rate on mileage); sales tax in Canada is an aggregate of the federal value-added tax and the provincial sales tax in BC. Note 4: Rates for vehicle taxes, consumption tax, and energy tax are effective as of January, 2016, calculated based on Mizuho Bank’s monthly average foreign exchange rates from April to October, 2015. Source: Compiled by Mizuho Research Institute from the interview survey results and information obtained from each country.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

NAITO and MOTOKI

Figure 5. Tax burden relating to acquisition, ownership, and motoring of standard automobile Note 1 Parameters for passenger cars (gasoline/diesel cars): Vehicle price - 1.8 million JPY/2.1 million JPY; cylinder capacity – 1,800 cc/2,000 cc; vehicle weight – 1.5 t / 1.6 t; fuel efficiency - 15.3 km/L / 18.4 km/L (in JC08 mode); horsepower – 142 PS (common). Calculations are based on the assumptions of an emission factor of 2.32 kgCO2/L, a travelled distance of 10,000 km per year, and redemption of 12 years. Fuel efficiency is the value as stated in vehicle catalogues. Note 2: Gasoline price (excluding tax) is calculated for each country based on that country’s average for the 2nd and 3rd quarters of 2015 published in the IEA Energy Prices and Taxes (Vol. 2015, Issue 4); foreign exchange rates are based on Mizuho Bank’s monthly average exchange rates from April to October, 2015. Note 3: Calculated by applying the tax systems listed in Table 3. at the tax rates in effect as of January, 2016 in each country, except, in addition to Flanders (Belgium), the Canton of Geneva (Switzerland), and New York State (US), local tax rates are used for the acquisition tax in France (City of Paris), vehicle taxes in Italy (City of Rome), ownership tax in Netherlands (Province of Noord-Holland), and ownership tax in Australia (State of New South Wales). Source: Compiled by Mizuho Research Institute from the interview survey results and information obtained from each country.

5.2. Current Status of Fuel Efficiency-Based Taxation – Comparison of Tax Burdens According to Fuel Efficiency We investigated how taxation on gasoline cars and diesel cars based on differences in fuel efficiency would change the weight of the tax burden. Figure 6 presents the results of our calculations of the changes from the baseline in tax burden for both gasoline and diesel cars when two types of alternative cars (with a certain level of fuel efficiency and poor efficiency) are added to the standard cars used in 5.1. With respect to the fuel efficiency of the alternative cars, the rate of change was set to 30% from the standard level based on the fact that the CO2 emission target for 2021 (95 gCO2/km) required about 30% improvement from the current level (130 gCO2/km in 2015). The graph below indicates that the scope of change in Japan (460,000 JPY for gasoline cars and 360,000 JPY for diesel cars) is wider than in North America and Australia, but narrower than all European countries in this survey. A comparison of Japan and Europe suggests that the scope of change in Europe is 1.5 to 10 times wider in Japan. The fact that the countries for which larger changes are seen mostly in vehicle taxes, such as the Netherlands, Denmark and Ireland implies that their inclination toward tax increases is linked to fuel efficiency.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

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With contributions from these tax systems, the EU as a whole has already met its 2015 goal early, with the average emissions from passenger cars in 2014 at 123.4 gCO2/km (EEA, 2015). In order to meet the increasingly demanding CO2 emission goals and the control of exhaust gas, European countries are likely to continue to increase their level of taxation based on CO2 emissions, fuel efficiency, and exhaust emissions in order to accelerate the popularisation of automobiles with high environmental performance.

Figure 6. Changes in tax burden per car at different fuel efficiencies Note: Calculated based on the same parameters used for Fig. 5. Source: Compiled by Mizuho Research Institute from the interview survey results and information obtained from each country.

5.3. Direction of the Future Greening of Vehicle Taxes in Japan Based on the comparisons made between Japan and the world, we summarised the measures that Japan should implement in order to continue with the further greening of its vehicle taxes as follows:  Introduce a flexible tax system linked to fuel efficiency (i.e. tax based on fuel efficiency); and  Tighten the fuel efficiency standards, closely linking them to taxes based on fuel efficiency 5.3.1. Introducing a flexible tax system linked to fuel efficiency As discussed in Sections 5.1. and 5.2., our current survey clearly reiterated the fact that Japan’s changes in tax burden based on environmental performance, such as fuel efficiency and CO2 emissions, are significantly small compared to Europe. Japan must direct its future efforts toward introducing a more flexible tax system that is linked to the environmental performance of vehicles , as is the case in Europe.

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

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Japan will replace its Automobile Acquisition Tax with a new tax based on the environmental performance linked to fuel efficiency in April, 2017. Given the continuing effort to tighten the standards through the Eco-car Tax Incentives and other measures, the design of a new taxation regime based on environmental performance is a dramatic departure from the past that can lead to disincentives for purchasing or developing eco-cars. As the new tax will actually decrease tax revenues, the financial basis of local governments may be affected as well. According to the tax reform proposals for 2016, the tax brackets in taxation based on environmental performance are to be reviewed every two years. Immediately after introducing the new system, it is essential for the government to investigate the trends in improvements of fuel efficiency and development of eco-car technologies as well as the effects on local government finances. The government should then put forward an appropriate proposal from the viewpoint of the environment for a revision of the system. From the viewpoint of the weight of tax burden on users and tax revenues, ownership taxes (Motor Vehicle Weight Tax, Automobile Tax, and Light Vehicle Tax) are more important in Japan than the acquisition tax. Japan should set out in the future to consider a structure for the permanent greening of its ownership tax system that includes a tax based on fuel efficiency. 5.3.2 Tightening the fuel efficiency standards Behind the tightening of taxation in Europe (for example, shifting of the tax base to CO2 and more stringent conditions of tax reduction) lie strict CO2 emission goals that demand unremitting efforts. Although Japan has similar fuel standards, its goals are 16.8 km/L in 2015 and 20.3 km/L in 2020 (equivalent to 138 gCO2/km and 114 gCO2/km, respectively3, which are well below the levels in Europe (95 gCO2/km in 2021) and the US (143 gCO2/mile, or 89 gCO2/km, in 20254. As far as past trends in fuel efficiency in Japan indicate, these goals are expected to be easily achievable (Ministry of Land, Infrastructure, Transport and Tourism, 2015), thus providing little incentive to further technological development. Countries other than those we surveyed in this paper (for example, China) are considering introducing fuel standards that are stricter than Japan (ICCT, 2014). As one of the world’s leading automobile powers, Japan must continue with the greening of its automobiles through stricter fuel standards that are linked closely to taxes based on fuel efficiency. 6. CONCLUSION Based on the results of our two-year study, we summarised the latest trends in the greening of tax systems in 16 countries including Japan. In Europe, the move to shift the tax burden toward environmental taxes is shared by the EU and its member countries, with many increasing their environmental taxes almost annually. With respect to the carbon tax, Sweden, Switzerland, and France have introduced, or are going to introduce, a carbon tax at a rate that is 10 times higher than the one set at the time of its initial introduction. The “visualisation” of these prices is understood to be a policy that is likely to be welcome by businesses because it eliminates long-term uncertainties. Environmental taxes have been designed to maximise the positive effect on both the environment and the economy in Europe, with Denmark and Sweden reporting remarkable success in decoupling that reduces CO2 emissions while expanding the economy. Japan should also strive to realise sustainable growth through the greening of its tax system. Policy recommendation which is based on the other countries’ experiences is summarised in section 4.3 (energy taxes including carbon tax) and 5.3 (vehicle taxes) in this paper. In addition to energy and vehicle taxes, other countries have introduced a wide variety of taxes in order to combat pollution and protect resources. All of these taxes are intended to contribute to the building of a “low-carbon society”, a “sound material-cycle society”, a “society in harmony with nature”, and a “safe and secure society”, which were held up in the Fourth Basic Environment Plan 3 4

Converted at 1L=2.32kgCO2 Converted at 1 mile=1.60934km

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Latest Trends in the Greening of Tax Systems in Japan, Europe, North America and Australia, and Their Implications for Japan

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in Japan. While regional governments in Japan have actively introduced forest conservation taxes, industrial waste taxes and so on, there are many more environmental taxes that are yet to be introduced in Japan. They include a Freon tax, a water abstraction tax, a groundwater tax, a packaging tax, a waste water tax, a tax on noise, and a fishing license tax, to name a few. With the adoption of the Paris Agreement and the Sustainable Development Goals, now is the time for Japan to mobilise every available measure to tackle the significant reduction of CO2 emissions and to achieve sustainable growth towards 2030, 2050, and beyond. We will continue to investigate the various means available to promote the greening of tax systems in Japan while keeping one eye on the approaches taken by other countries around the world.

REFERENCES BG, BP, Eni, Royal Dutch Shell, Total (2015) Letter to UNFCCC. Committee for the Promotion of Greening the Whole Tax System (2012) Interim Compilation of Preceding Discussions on the Promotion of Greening the Whole Tax System. http://www.env.go.jp/en/policy/tax/env-tax/20120904a_ic.pdf EEA (2015) Monitoring CO2 emissions from passenger cars and vans in 2014. EU (2015) Excise Duty Tables and the respective country data. Government of Japan (2015) Outline of Tax Reform in 2016. (in Japanese) http://www.mof.go.jp/tax_policy/tax_reform/outline/fy2016/20151224taikou.pdf ICCT (2014) Development of test cycle conversion factors among worldwide light-duty vehicle CO2 emission Standards. Keidanren (2015) Opinions to the Outline of Tax Reform in 2016 (in Japanese). https://www.keidanren.or.jp/policy/2015/075_honbun.html#s3-4 Littlecott, C. (2015) G7 Coal Scorecard Benchmarking Coal Phase Out Actions, E3G publications. Ministry of the Environment (2012) Details on the Carbon Tax (Tax for Climate Change Mitigation). http://www.env.go.jp/en/policy/tax/env-tax/20121001a_dct.pdf Ministry of Foreign Affairs in Japan (2015) The 21st Session of the Conference of the Parties to the United Nations (UN) Framework Convention on Climate Change (COP21), The 11th Session of the Conference of the Parties Serving as the Meeting of the Parties to the Kyoto Protocol (CMP11). http://www.mofa.go.jp/ic/ch/page24e_000125.html Ministry of Land, Infrastructure, Transport and Tourism (2015) Vehicles (in Japanese). http://www.mlit.go.jp/jidosha/jidosha_fr10_000024.html Motoki, Y. and Naito, A. (2015) The Latest Trends in the Greening of Tax Systems in Japan and EU Countries, Mizuho Information & Research Institute, Inc. (in Japanese). http://www.mizuho-ir.co.jp/publication/report/2015/mhir09_greentax_01.html New Climate Economy (2014) Better Growth, Better Climate, The New Climate Economy Report. OECD (2010) Taxation, Innovation and the Environment, OECD Publishing, Paris. OECD (2014) The Cost of Air Pollution: Health Impacts of Road Transport, OECD Publishing, Paris.. Pedersen, T., F. and Elgie, S. (2015) A template for the world: British Columbia’s carbon tax shift. United Nations (2015) Transforming Our World: The 2030 Agenda for Sustainable Development, A/RES/70/1. United Nations (2015) Secretary-General welcomes new carbon pricing panel. http://www.un.org/climatechange/blog/2015/10/secretary-general-welcomes-new-carbon-pricing-panel/

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