EFR and Canada’s Environment

1. Why EFR is important for Canada
2. Why EFR is an important Policy Tool
3. EFR Successes in Canada
4. EFR Successes Elsewhere

1. Why EFR is important for Canada?
Despite government and industry efforts to stem the tide, polluting of Canada’s air, water and land continues unabated; increasing by more than 20 % since 1995. A 2001 publication, “Canada vs. the OECD: An Environmental Comparison,” compared Canada’s environmental record to the 28 other nations in the Organization for Economic Cooperation and Development (OECD). Canada’s overall ranking was 28th out of 29 based on the 25 environmental indicators that were examined. Issues on which Canada ranked among the bottom three worst countries included greenhouse gas emissions, water consumption, energy consumption, deforestation, and generation of nuclear waste.

Governments have several policy instruments available to address environmental issues such as those described above, including regulations, education/information programs, voluntary programs and planning instruments. These policy options have been used to varying degrees by governments in Canada for decades.

A very powerful way to influence behaviour that is sometimes overlooked as a means to address environmental issues is the use of fiscal policy. Indeed, the federal and provincial budgets are the single most important policy statements made by government on an annual basis. Through the budget process, governments can adjust market forces to bring them into line with environmental reality; a procedure referred to as ecological fiscal reform (EFR).
Ecological Fiscal Reform is a strategy that redirects a government's taxation and expenditure programs, i.e. it's fiscal policies, to create an integrated set of incentives to support the shift to sustainable development. EFR makes it non-cost effective to operate in an environmentally unsustainable manner, it creates conditions making it more financially attractive to implement pro-environment measures.

Fiscal reform is increasingly being recognized as an important policy tool for addressing environmental issues. Several European governments have applied broad based ecological fiscal reform policies in which taxes are placed on substances and activities that cause environmental harm, such as carbon dioxide emissions, while other existing taxes, often payroll taxes, are reduced. On a smaller scale, ecological fiscal reform policies provide incentives, such as tax breaks, to invest in energy efficiency improvements, renewable energy and new and innovative environmental technologies. Similarly disincentives, typically in the form of environmental taxes, are put in place to discourage things such as nitrogen oxide emissions, leaded fuel, waste generation and water pollution.

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2. Why is EFR an Important Policy Tool?
Ecological fiscal reform is regarded as an important policy tool both on its own and as a compliment to existing environmental policies. For example, where regulations ensure a minimum amount of environmental protection, ecological fiscal reform can be used to provide incentives to exceed the regulated minimum.

Similarly, EFR can be used to provide an incentive to participate in voluntary programs or to provide a disincentive (in the form of financial penalties) for not achieving environmental targets established through voluntary or planning programs.

Much of the interest in EFR is based on the notion that it is capable of achieving not only environmental improvements and protection, but also better economic performance, technological innovation and job creation. When environmental considerations are not taken into account in market prices, individuals and businesses make decisions about goods to purchase and technologies to invest in without considering all of the associated costs. In such situations, goods and technologies which have a high environmental impact are typically over-consumed relative to the level of consumption that would take place if market prices reflected environmental considerations.

EFR incorporates environmental considerations into market prices and provides individuals and businesses with a full set of costs on which to base investment decisions. In doing so, ecological fiscal reform provides incentives to move away from goods and services associated with environmental impacts and towards environmentally sensitive goods and services. The result will be more informed decision making and new and expanded markets for budding, innovative and increasingly “green” technologies and consumer products.
Ecological fiscal reform may also result in increased employment. Numerous

European countries have implemented broad-based EFR policies that involve increased use of environmental taxes and accompanying reductions in payroll taxes. Employers remit payroll taxes according to the number of employees they have. Thus, such taxes provide a disincentive to employers to create additional jobs.

The rationale behind using revenue from environmental taxes to reduce these taxes is to remove a portion of the disincentive and, in doing so, increase employment. Similar rationales are presented for financing reductions in capital taxes on green technology investments. Here the argument is that such tax reductions remove a disincentive to increasing capital investment by eco-industries, which spurs sustainable growth and subsequently increases GDP.

The combined effect of environmental improvements and employment creation or increased GDP is referred to as a double dividend. Substantial research has been conducted to test the double dividend hypothesis. Recent work by the Organization for Economic Development and Cooperation to evaluate and summarize double dividend research thus far, concludes that positive employment effects can be expected if the revenues from environmental taxes are used to finance reductions in labour taxation, such as payroll or social security contributions. Likewise, the OECD concluded that positive effects on GDP could be expected if the revenues are used to finance reductions in capital taxes (thus favouring investment).

In addition to the potential for increased employment opportunities, by driving innovation and market development, EFR can also lead to additional employment opportunities in new and developing environmental sectors.
For more information on Ecological Fiscal Reform, visit www.fiscallygreen.ca.

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3. EFR Successes in Canada
Pilot Emission Removals, Reductions and Learnings (PERRL) - Through PERRL, the federal government buys the rights to verified greenhouse gas emission reductions from eligible projects for a fixed price per tonne. PERRL's successful first auction round resulted in signed purchase contracts for 899,606 tonnes of greenhouse gas emission reductions at an average price of $3.33 per tonne from four landfill gas projects. The next auction round will cover renewable energy.

Allowance Trading Scheme for Methyl Bromide (MBr) - The use of MBr is gradually being phased out in Canada. Each year, allowances for the use of MBr are distributed to direct users in accordance with the phase out schedule. Direct users can transfer allowances to other users over the course of the year. This scheme has already facilitated a 70% reduction in annual Methyl Bromide importation from 1991 levels . The importation of MBr will be eliminated by 2005.

Deposit Refund Systems for Beverage Containers - Numerous provinces in Canada have deposit refund systems in place for both alcoholic and non-alcoholic beverage containers. Deposits range from 5¢ to 40¢ per bottle, depending on the size of the container and the region. One of the most successful deposit refund policies is Ontario’s system of deposit refunds for beer bottles. This policy has close to a 99% return rate for its bottles, which are reused 15 to 20 times.

For more information on these and other EFR policies in Canada, visit www.fiscallygreen.ca.

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4. EFR Successes Elsewhere

There are numerous EFR success stories from around the world, a few of which are highlighted below.

Denmark's Mineral Aggregates Tax- The Danish tax on raw materials is levied on a number of raw materials - for example, gravel and limestone, either extracted in Denmark or imported. The tax is levied at a rate of $1.047 per m3 of raw material extracted. This tax, in conjunction with the tax imposed on Danish waste going to landfill, has resulted in a 90% rate of recycling for all demolition waste.

Sweden's Charge on Nitrogen Oxide (NOx) Emissions- The Swedish NOx charge applies to NOx emissions from energy production plants. The charge corresponds to $6.15 per kilogram of NOx emitted. Initially, the tax was levied on energy production plants with yearly energy production of more than 50 GWh. In 1997, it was extended to include plants that produce more than 25 GWh per year. Revenue from the charge is refunded to plants in accordance with their energy production. For plants that entered the system in 1992 and that have remained within the system since that time, specific emissions have fallen by approximately 37%. The smaller plants, which entered the system later, have reduced their emissions by about 20%.

United State's Sulphur Dioxide (SO2) Allowance Trading Scheme- This initiative began in 1995 when a total annual emissions budget (measured in tons of SO2) was established. The allowable emissions level has declined in steps since 1995, and will continue to do so through to 2020. Emissions allowances are issued to electrical utilities in the United States according to their 1985 emissions. Allowances can be traded between electrical utilities. In this way, utilities that have emission control options that are cheaper than the cost of buying permits can reduce their emissions below the allowance level and sell their excess allowances to electrical utilities that cannot find economical ways to meet their allowance requirements. In 2010, SO2 emissions from major utilities will be capped at 8.95 million tons, down from 17.0 million tons in 1980 and 15.6 million tons in 1990.

For more information on these and other EFR policies around the world, visit www.fiscallygreen.ca.

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