Assessment of Environmental Tax System in Latvia

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Assessment of Environmental Tax System in Latvia Jurušs Mārisac, Brizga Jānisbc*a Riga Technical University, Latvia, [email protected] b University of Latvia, Latvia, [email protected] c Green Liberty, Latvia, [email protected] AbstractEnvironmental taxes have always played an important part in Latvia’s environmental policy as they help to internalize externalities, reduce damage, and increase quality of life, besides they allow to raise revenue for national and local governments. In this paper we looked at environmental (energy, transport and natural resource) taxes in Latvia to evaluate their environmental effectiveness, economic efficiency, equity impact, administrative feasibility and cost, and political acceptability. The research is based on the expert survey and desk. Results demonstrate little evidence that existing environmental taxes lead to the significant reduction in environmental pollution and waste flows, but they have significant fiscal effect. Most of the environmental taxes in Latvia applies direct and indirect subsidies but most of the revenue come from taxes on energy and transport. Environmental tax rates in Latvia are the result of political compromise and are not backed by the research on environmental costs of particular activity.Keywords: Environmental policy, economic instruments, environmental taxes, OECD.1. IntroductionEconomic instruments have always played an important part of the policy as they help to internalize externalities, reduce damage, and increase quality of life, besides they allow to raise revenue for national and local governments (Andersen et al., 2011). However, these desirable effects are not straightforward to achieve - whether policy would yield the effects or not would depend on many factors, including household behavior, technology development and the strictness of the instrument with respect to involved abatement costs.At the same time environmental regulation is also not free of social-economic impact. Use of economic instruments in environmental policy might harm the economy and can be more costly for some of the social groups, but there are is also evidence of a double dividend from use of economic instruments in environmental policy, e.g. it could trigger technological progress or boost employment.Latvia has more than 20 years’ experience in designing its environmental policy and respective regulation where economic instruments have always played an important role. However, there has not been a proper evaluation of the effectiveness of these economic instruments.In this paper we have focused on the assessment of environmental taxes as the most important economic instrument used in Latvia’s environmental policy. The aim of the research is to evaluate the effectiveness of environmental taxes by assessing environmental and economic effectiveness, equity impact, administrative feasibility and efficiency, and acceptability and to come up with the recommendations for improvement.2. Economic instruments in environmental policy in LatviaLatvia has a wide suite of environmental taxes in place, including Energy taxes, Transport taxes and Natural resources tax (NRT). 2.1Energy taxesExcise duty on energy resources in Latvia apply to mineral oils and natural gas used for both transport and heat and power. All excise duty rates in Latvia are above the minimum set out in the EU Energy Taxation Directive (EU ETD); however, almost all of excise duty tax rates are also below the EU-28 average, putting Latvia towards the lower end of OECD Member States in terms of energy taxation. However, if we compare the tax burden by purchasing power, the situation is vice versa – Latvia has the higher excise tax burden than the OECD average by purchasing power. Furthermore, the government at the end of 2015 increased the excise duty rates for fossil fuels using the current market situation with low energy prices. Therefore, it will be additional pressure to the cost of consumers and will make even higher energy taxation burden in Latvia than in most of the OECD comparing by purchasing burden. LPG used for industrial and commercial purposes is taxed at a higher rate in Latvia than the European Union average already.Several tax exemptions also apply, e.g. biofuels and gas oil used for certain agricultural purposes are exempt from excise duties. Additionally, any fuel used for the following purposes is exempt from excise duties: aircraft, except those used for private recreation and entertainment; ships, except those used for private recreation and entertainment; generation of energy or in CHP plants; and chemical treatment processes.There are also several taxes on electricity. Electricity tax was introduced in 2003 in order to promote electricity production from renewable resources. It is levied on electricity supplied to final consumers or consumed by suppliers. Tax exemption have has both social and environmental aims. Furthermore, the Tax for subsidized electricity producers was introduced in January 2014. The tax should be paid by companies receiving financial support for power generation from renewable energy sources or from combined heat and power plants. Income from this tax is due to be used for a new Electricity Customer Support Fund. This tax is aimed at compensating the growth of the mandatory procurement component for households and Latvian companies.2.2Transport taxesIn Latvia several taxies apply to different modes of transportation. In addition to The Vehicle registration tax, there is Annual car tax, as well as special Company Car Tax introduced in 2011. Additionally, as part of the Natural Resources Tax, there is also a flat-rate charge of €40 per vehicle at the time of registration in Latvia.There is currently no air passenger or freight tax, but a ‘passenger departure duty’ was in place until the end of the 2004. The revenue in 2004 (the latest year the tax was appliesapplied) was €5.40 million (equivalent to 0.024% of GDP) which was reinvested in airport infrastructure. But in 2012 Riga airport introduced a fee (7 EUR per passenger) for the security services.The road user charge (Euro Vignette) is the payment for the use of the main roads of Latvia and is in place since 1st July 2014. The charge is paid by commercial vehicles having the gross vehicle weight exceeding 3.5 tons, and which are intended or are used for the carriage of goods by road. There are also support mechanisms to promote environmentally friendly transportation in Latvia. New draft Sustainable alternative fuels strategy and Electro-mobility development plan 2014 – 2016 foresees several support mechanisms, e.g. for electric cars – free parking, use of public transport lanes. However, fuel taxes should remain the core instrument for car pollution control (Montag, 2015).2.3Natural resources taxIn Latvia, one all-encompassing NRT has been imposed since 1991. The purpose of this tax is to facilitate effective use of natural resources, restrict the environment pollution, reduce the use of environmentally damaging products, promote implementation of new and improved environment-friendly technologies, as well as to support sustainable economic development and ensure a revenue for environmental protection measures and projects. Both basic rates and additional rates are used simultaneously for calculation of tax to be imposed on the use of natural resources over the limits.The activities upon which the natural resources tax is imposed can be divided into the following groups: waste disposal, water abstraction, aggregates, air and water pollution, packaging, harmful goods and coal, coke and lignite.There has been a progressive increase in the several NRT rate, e.g. on PM10 released into the air and waste landfilled. However, taxation on other air pollutants, such as NO2 have not increased in recent years. 3. MethodThe research is based on the expert survey and desk research to

 

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