Proposals to increase environmentally related taxes are often challenged on competitiveness grounds given concerns that certain sectors might decline domestically if a country introduces environmentally related taxes unilaterally. Furthermore, environmental goals might not be reached if pollution shifts abroad. A competing view argues that properly implemented environmentally related taxes foster innovation, thereby boosting productivity and competitiveness. Empirical research is needed to gain insight into the strength of these various effects. This paper by the OECD provides evidence on the short-term competitiveness impacts of the German electricity tax introduced in 1999. To mitigate the effects on Germany’s electricity intensive industries, firms using more electricity than specified thresholds benefited from reduced electricity tax rates. The econometric analysis in this paper– a regression discontinuity design – shows no robust effects in either direction of the reduced electricity tax rates on firms’ competitiveness. Firms subject to the full tax rates, but otherwise similar to firms facing reduced rates, did not perform worse in terms of turnover, exports, value added, investment and employment. This questions the existence and extent of such tax reductions. The paper is available to download on the OECD website.
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