7.9.3 Financial instruments: taxes, subsidies and access to capital
To date there is limited experience with taxing industrial GHG emissions. France instituted an eco-tax on a range of activities, including N2O emission from the production of nitric, adipic and glyoxalic acids. The tax rate is modest (37 US$ (2000) per tonne N2O, or 1.5 US$/tCO2-eq (5.5 US$/tC-eq), but it provides a supplementary incentive for emissions reductions. The UK Climate Change Levy applies to industry only and is levied on all non-household use of coal (0.15 UK pence/kWh or 0.003 US$/kWh), gas (0.15 UK pence/kWh), electricity (0.43 UK pence/kWh or 0.0085 US$/kWh) and non-transport LPG (0.07 UK pence/kWh or 0.0014 US$/kWh). Industry includes agriculture and the public sector. Fuels used for electricity generation or non-energy uses, waste-derived fuels, renewable energy, including quality CHP, which uses specified fuels and meets minimum efficiency standards, are exempt from the tax. The UK Government also provided an 80% discount from the levy for those energy-intensive sectors that agreed to challenging targets for improving their energy efficiency. Climate change agreements have now been concluded with almost all eligible sectors (UK DEFRA, 2006).
In 1999, Germany introduced an eco-tax on the consumption of electricity, gasoline, fuel oil and natural gas. Revenues are recycled to subsidize the public pension system. The tax rate for electricity consumed by industrial consumers is € 0.012/kWh. Very large consumers are exempt to maintain their competitiveness. The impact of this eco-tax on CO2 emissions is still under discussion (Green Budget Germany, 2004).
Tax reductions are frequently used to stimulate energy savings in industry. Some examples include:
- In the Netherlands, the Energy Investment Deduction (Energie Investeringsaftrek, EIA) stimulates investments in low-energy capital equipment and renewable energy by means of tax deductions (deduction of the fiscal profit of 55% of the investment) (IEA, 2005).
- In France, investments in energy efficiency are stimulated through lease credits. In addition to financing equipment, these credits can also finance associated costs such as construction, land and transport (IEA, 2005).
- The UK’s Enhanced Capital Allowance Scheme allows businesses to write off the entire cost of energy-savings technologies specified in the ‘Energy Technology List’ during the year they make the investment (HM Revenue & Customs, n.d.).
- Australia requires companies receiving more than AU$ 3 million (US$ 2.5 million) of fuel credits to be members of its Greenhouse Challenge Plus programme (Australian Greenhouse Office, n.d.).
- Under Singapore’s Income Tax Act, companies that invest in qualifying energy-efficient equipment can write-off the capital expenditure in one year instead of three. (NEEC, 2005).
- In the Republic of Korea, a 5% income tax credit is available for energy-efficiency investments (UNESCAP, 2000).
- Romania has a programme where imported energy-efficient technologies are exempt from customs taxes and the share of company income directed for energy efficiency investments is exempt from income tax (CEEBICNet Market Research, 2004).
- In Mexico, the Ministry of Energy has linked its energy efficiency programmes with Energy Service Companies (ESCOs). These are engineering and financing specialised enterprises that provide integrated energy services with a wide range and flexibility of technologies to the industrial and service sectors (NREL, 2006).
Subsidies are used to stimulate investment in energy-saving measures by reducing investment cost. Subsidies to the industrial sector include: grants, favourable loans and fiscal incentives, such as reduced taxes on energy-efficient equipments, accelerated depreciation, tax credits and tax deductions. Many developed and developing countries have financial schemes to promote industrial energy savings. A WEC survey (WEC, 2004) showed that 28 countries, most in Europe, provide grants or subsidies for industrial energy efficiency projects. Subsides can be fixed amounts, a percentage of the investment (with a ceiling), or be proportional to the amount of energy saved. In Japan, the New Energy and Technology Development Organization (NEDO) pays up to one-third of the cost of each new high performance furnace. NEDO estimates that the project will save 5% of Japan’s final energy consumption by 2010 (WEC, 2001). The Korean Energy Management Corporation (KEMCO) provides, long-term, low interest loans to certified companies (IEA, 2005).
Evaluations show that subsidies for industry may lead to energy savings and corresponding GHG emission reductions and can create a larger market for energy efficient technologies (De Beer et al., 2000b; WEC, 2001). Whether the benefits to society outweigh the cost of these programmes, or whether other instruments would have been more cost-effective, has to be evaluated on a case-by-case basis. A drawback to subsidies is that they are often used by investors who would have made the investment without the incentive. Possible approaches for improving their cost-effectiveness include restricting schemes to specific target groups and/or techniques (selected list of equipment, only innovative technologies, etc.), or using a direct criterion of cost-effectiveness.
Investors in developing countries tend to have a weak capital basis. Development and finance institutions therefore often play a critical role in implementing energy efficiency and emission mitigation policies. Their role often goes beyond the provision of project finance and may directly influence technology choice and the direction of innovation (George and Prabhu, 2003). The retreat of national development banks in some developing countries (as a result of both financial liberalisation and financial crises in national governments) may hinder the widespread adoption of mitigation technologies because of lack of financial mechanisms to handle the associated risk.