Economic Instruments - Charges and taxes
Groundwater Extraction Tax (Netherlands)
Groundwater Extraction Tax, Netherlands Background Drinking water in the Netherlands is produced from groundwater as well as from surface water. One of the goals of water policy is to reduce the amount of drinking water produced from groundwater relative to that produced from surface water. However, groundwater-based drinking water is in general less expensive. The groundwater tax therefore reduces the price difference between the two kinds of drinking water. Introduced: January 1995 Aims The primary aim of the groundwater tax is to raise revenue. Introduction of the groundwater tax made it unnecessary to raise other taxes (e.g. labour taxes). Introduction of taxes with an environmental base also fits into the policy of greening the fiscal system. The secondary aim of the tax is to generate a positive environmental effect. Dutch water policy aims at conserving water to secure future water supply and to mitigate detrimental environmental effects of the extraction of groundwater and the production of drinking water. In particular the impact of changes in the geohydrological regimes on terrestial ecosystems. Design The tax applies to the abstraction of groundwater by water works or by other entities (industry; agriculture) and aims to protect the scarce groundwater resource in the Netherlands, which is the source of 70 per cent of the total water supply (the remaining 30 per cent being extracted from rivers and other surface waters) (Ecotec, 2001). The tax is levied from the suppliers of drinking water (water companies), which can pass the tax on to the consumers. For the purposes of the tax, groundwater is defined as "sweet groundwater", i.e. water with less than 300 milligrams of chloride per litre. Tax Rates There are three tax rates (VROM, 2006): - general for extractions € 0.1810 per m3
- for groundwater infiltrated into the same aquifer from which it was extracted € 0.00 per m3
- for a combination of river bank filtration and
- artificial recharge € 0.0586 per m3
Infiltrated groundwater is typically surface water that is infiltrated through sand dunes or other geological layers and is then abstracted. A reduced rate applies to industries up to 2001 and agriculture undertaking their own abstractions. Even at the reduced rate this resulted in a price increase of more than 100% for self extracted groundwater, relative to costs of extraction (Vermeend and van der Vaart, 1998). Exemptions If surface water is infiltrated in the aquifer and extracted again as groundwater by pumping or drainage, the proprietor may ask for a rebate of the groundwater tax. This infiltration rebate amounts to € 0.1516 per m3 which results in a net tariff for artificial recharge works of € 0.0294 per m3 (VROM, 2006) The exemptions are (VROM, 2006): - groundwater used for sprinkling and irrigating land, if less than 40.000 m3 per year;
- groundwater extracted for draining a building site as well as test extractions, if less than 50.000 m3 per month is extracted for no more than 4 successive months;
- small pump capacity, if the pump capacity is equal to or less than 10 m3 groundwater per hour;
- sanitation of polluted groundwater;
- extraction in cases of emergency (e.g. by the fire department or for the cooling of temporary installations).
Two further exemptions are motivated by environmental reasons. There is an exemption on the use of groundwater to rinse reusable packaging, e.g., deposit return bottles for soft drinks and beer. There is also an exemption for cold-heat storage projects, if the extracted groundwater is returned to the same water layer in a closed system. On 1 January 1995, when the tax was introduced, the rate for other, not drinking water, companies was 50% of the rate for water companies. The reason for this lower rate for other companies was that they were at that time already making costly investments in water saving in the context of the Action Plan on Water Saving. A higher tax burden would reduce the financial possibilities for making such investments. In 1999 it was decided that this differentiation in the rates was not necessary any more and that the differentiation could be abandoned in two steps, to be implemented in 2000 and in 2001. The zero rate for water extracted and infiltrated again in the same aquifer - as practised for cooling water and the drainage of building pits - is motivated by the fact that these extractions cause no or only very minor negative environmental effects. The lower rate (introduced in 2000) for the combination of river bank filtration and artificial recharge is motivated with the argument that, from an environmental point of view, this type of extraction is more preferable than direct extraction of groundwater. Institutional Arrangements The tax is administered by the Ministry of Finance and the Central Environmental Tax Unit in Rotterdam. The administrative costs of the scheme are insignificant. There are about 44 water companies, which are subject to the tax, and who pass it on to their customers' bills. With regard to industry and agriculture no figure is available on the number registered, but the tax authorities describe the system as simple to administrate (Ecotec, 2001). Use of Revenues The revenue is allocated to the general budget. Monitoring and Enforcement Monitoring of water abstraction is done by the water companies, and in the case of other abstractors self-monitoring is in place, with sample control. Performance The revenue raised by the groundwater tax is estimated to be about € 169 million in 2005 (CROM, 2006). The exemptions and reduced rates in place, affecting mainly industry and agriculture (e.g. the exemption related to small pumping capacity of 10 cubic metre per hour) have considerably reduced the (potential) environmental effectiveness of the tax by creating room for environmentally-damaging practices (Ecotec, 2001). For example, the pumping capacity exemption created an incentive for farmers to use several smaller pumps, thereby reducing their capacity and not paying the tax. In terms of environmental effects, this resulted in an overexploitation of groundwater. It is thus fair to state that the groundwater tax has a limited environmental effect. Despite the main fiscal objective of the tax, some estimates of the (groundwater consumption) price elasticities have been produced. The original assessments range widely: from 0.05 to 0.30, from inelastic to medium elasticity levels In 1997 a first evaluation of the groundwater tax was made and sent to Parliament (Vermeend and van der Vaart, 1998). It seems that water savings by industry were found to develop in line with expectations, e.g. a decline in consumption between 2-12 % of the 1995 consumption levels. The Green Tax Commission found elasticities to be of the magnitude of -0.1 hence rather inelastic demand. The decrease in groundwater consumption that could be expected from the implied response amounts to only half of the goal set by policy-makers for reduced groundwater abstraction. The precise effect of the tax on demand from households (which account for 52 per cent of total revenue from the tax) is unclear. For SME's and industries supplied by water works the groundwater tax results in a price increase of about 40% when assessed against the water supply tariffs. For industry with self-extraction of groundwater the price increase is relatively more substantial, e.g. of the order 113%. This is due to the low costs of self-extraction. For Dutch industry as a whole, the revenue collected by the groundwater tax amounts to 0.03 per cent of turnover, or 0.08 per cent of value added. In 1996 it was equivalent to 0.33 per cent of pre-tax profits in industry (calculated on basis of CBS, 1998: 8) (Ecotec, 2001). There were some complaints about the tax during the decision-making process, in particular from water-intensive industries such as beer- and soft-drink producers and dairies. Drawbacks For households the groundwater tax results in a 27 per cent price increase, measured against average water tariffs excluding sewage costs. Households pay about 52 per cent of the groundwater tax revenue. The possible regressive effects of the tax are unclear (Ecotec, 2001) though it is clear that on average water accounts for a higher proportional of total household expenditure, the lower the level of income. Apart from the possible regressive impact of the tax on poor households, the main equity issue seems to have been the partial exemption offered to industries with self-extraction. The Green Tax Commission recommended abandonment of this exemption, and it expects the main effect to be a beneficial substitution in the supply of low-quality water by the water companies for industrial use (Ministry of Finance, 1998). With regard to the exemption for companies that use groundwater to rinse packaging, there were provisions that made it possible to apply the exemption both to companies with self-extraction and to those supplied by the water companies. Hence, the competition and trade issues are of minor importance.
Related Instruments The Dutch Groundwater Act empowers the provinces to levy a groundwater charge. The revenue from this charge is earmarked for provincial expenditures in the field of water resources policy. The rate differs over provinces but is comparably low. The total revenue from the provincial charges amounts to about € 14 million. There is no formal relationship between these two taxes: they have a different objective, a different legal base and are levied by a different level of government. References VROM, 2006. Environmental Tax on Tap Water. Netherlands Ministry of Housing, Spatial Planning, and the Environment. http://international.vrom.nl/pagina.html?id=9472 Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States. In association with CESAM, CLM, University of Gothenburg, UCD, IEEP http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm Leder, A., 1996, Taxes with an environmental base and the Dutch green tax commission, 159-170, in Environmental Taxes and Charges: national Experiences and Plans, Papers from the Dublin workshop, Dublin: European Foundation for the Improvement of Living and Working Conditions. Vermeend, W. and van der Vaart, J., 1998, Greening taxes: The Dutch model, Deventer: Kluwer. Ministry of Finance, 1998, The Dutch Green Tax Commission: A summary of its three reports 1995-1997, Haague: www.minfin.nl/uk/taxation/tax_home.htm (31/1/
Groundwater Extraction Tax, Netherlands Background Drinking water in the Netherlands is produced from groundwater as well as from surface water. One of the goals of water policy is to reduce the amount of drinking water produced from groundwater relative to that produced from surface water. However, groundwater-based drinking water is in general less expensive. The groundwater tax therefore reduces the price difference between the two kinds of drinking water. Introduced: January 1995 Aims The primary aim of the groundwater tax is to raise revenue. Introduction of the groundwater tax made it unnecessary to raise other taxes (e.g. labour taxes). Introduction of taxes with an environmental base also fits into the policy of greening the fiscal system. The secondary aim of the tax is to generate a positive environmental effect. Dutch water policy aims at conserving water to secure future water supply and to mitigate detrimental environmental effects of the extraction of groundwater and the production of drinking water. In particular the impact of changes in the geohydrological regimes on terrestial ecosystems. Design The tax applies to the abstraction of groundwater by water works or by other entities (industry; agriculture) and aims to protect the scarce groundwater resource in the Netherlands, which is the source of 70 per cent of the total water supply (the remaining 30 per cent being extracted from rivers and other surface waters) (Ecotec, 2001). The tax is levied from the suppliers of drinking water (water companies), which can pass the tax on to the consumers. For the purposes of the tax, groundwater is defined as "sweet groundwater", i.e. water with less than 300 milligrams of chloride per litre. Tax Rates There are three tax rates (VROM, 2006): - general for extractions € 0.1810 per m3
- for groundwater infiltrated into the same aquifer from which it was extracted € 0.00 per m3
- for a combination of river bank filtration and
- artificial recharge € 0.0586 per m3
Infiltrated groundwater is typically surface water that is infiltrated through sand dunes or other geological layers and is then abstracted. A reduced rate applies to industries up to 2001 and agriculture undertaking their own abstractions. Even at the reduced rate this resulted in a price increase of more than 100% for self extracted groundwater, relative to costs of extraction (Vermeend and van der Vaart, 1998). Exemptions If surface water is infiltrated in the aquifer and extracted again as groundwater by pumping or drainage, the proprietor may ask for a rebate of the groundwater tax. This infiltration rebate amounts to € 0.1516 per m3 which results in a net tariff for artificial recharge works of € 0.0294 per m3 (VROM, 2006) The exemptions are (VROM, 2006): - groundwater used for sprinkling and irrigating land, if less than 40.000 m3 per year;
- groundwater extracted for draining a building site as well as test extractions, if less than 50.000 m3 per month is extracted for no more than 4 successive months;
- small pump capacity, if the pump capacity is equal to or less than 10 m3 groundwater per hour;
- sanitation of polluted groundwater;
- extraction in cases of emergency (e.g. by the fire department or for the cooling of temporary installations).
Two further exemptions are motivated by environmental reasons. There is an exemption on the use of groundwater to rinse reusable packaging, e.g., deposit return bottles for soft drinks and beer. There is also an exemption for cold-heat storage projects, if the extracted groundwater is returned to the same water layer in a closed system. On 1 January 1995, when the tax was introduced, the rate for other, not drinking water, companies was 50% of the rate for water companies. The reason for this lower rate for other companies was that they were at that time already making costly investments in water saving in the context of the Action Plan on Water Saving. A higher tax burden would reduce the financial possibilities for making such investments. In 1999 it was decided that this differentiation in the rates was not necessary any more and that the differentiation could be abandoned in two steps, to be implemented in 2000 and in 2001. The zero rate for water extracted and infiltrated again in the same aquifer - as practised for cooling water and the drainage of building pits - is motivated by the fact that these extractions cause no or only very minor negative environmental effects. The lower rate (introduced in 2000) for the combination of river bank filtration and artificial recharge is motivated with the argument that, from an environmental point of view, this type of extraction is more preferable than direct extraction of groundwater. Institutional Arrangements The tax is administered by the Ministry of Finance and the Central Environmental Tax Unit in Rotterdam. The administrative costs of the scheme are insignificant. There are about 44 water companies, which are subject to the tax, and who pass it on to their customers' bills. With regard to industry and agriculture no figure is available on the number registered, but the tax authorities describe the system as simple to administrate (Ecotec, 2001). Use of Revenues The revenue is allocated to the general budget. Monitoring and Enforcement Monitoring of water abstraction is done by the water companies, and in the case of other abstractors self-monitoring is in place, with sample control. Performance The revenue raised by the groundwater tax is estimated to be about € 169 million in 2005 (CROM, 2006). The exemptions and reduced rates in place, affecting mainly industry and agriculture (e.g. the exemption related to small pumping capacity of 10 cubic metre per hour) have considerably reduced the (potential) environmental effectiveness of the tax by creating room for environmentally-damaging practices (Ecotec, 2001). For example, the pumping capacity exemption created an incentive for farmers to use several smaller pumps, thereby reducing their capacity and not paying the tax. In terms of environmental effects, this resulted in an overexploitation of groundwater. It is thus fair to state that the groundwater tax has a limited environmental effect. Despite the main fiscal objective of the tax, some estimates of the (groundwater consumption) price elasticities have been produced. The original assessments range widely: from 0.05 to 0.30, from inelastic to medium elasticity levels In 1997 a first evaluation of the groundwater tax was made and sent to Parliament (Vermeend and van der Vaart, 1998). It seems that water savings by industry were found to develop in line with expectations, e.g. a decline in consumption between 2-12 % of the 1995 consumption levels. The Green Tax Commission found elasticities to be of the magnitude of -0.1 hence rather inelastic demand. The decrease in groundwater consumption that could be expected from the implied response amounts to only half of the goal set by policy-makers for reduced groundwater abstraction. The precise effect of the tax on demand from households (which account for 52 per cent of total revenue from the tax) is unclear. For SME's and industries supplied by water works the groundwater tax results in a price increase of about 40% when assessed against the water supply tariffs. For industry with self-extraction of groundwater the price increase is relatively more substantial, e.g. of the order 113%. This is due to the low costs of self-extraction. For Dutch industry as a whole, the revenue collected by the groundwater tax amounts to 0.03 per cent of turnover, or 0.08 per cent of value added. In 1996 it was equivalent to 0.33 per cent of pre-tax profits in industry (calculated on basis of CBS, 1998: 8) (Ecotec, 2001). There were some complaints about the tax during the decision-making process, in particular from water-intensive industries such as beer- and soft-drink producers and dairies. Drawbacks For households the groundwater tax results in a 27 per cent price increase, measured against average water tariffs excluding sewage costs. Households pay about 52 per cent of the groundwater tax revenue. The possible regressive effects of the tax are unclear (Ecotec, 2001) though it is clear that on average water accounts for a higher proportional of total household expenditure, the lower the level of income. Apart from the possible regressive impact of the tax on poor households, the main equity issue seems to have been the partial exemption offered to industries with self-extraction. The Green Tax Commission recommended abandonment of this exemption, and it expects the main effect to be a beneficial substitution in the supply of low-quality water by the water companies for industrial use (Ministry of Finance, 1998). With regard to the exemption for companies that use groundwater to rinse packaging, there were provisions that made it possible to apply the exemption both to companies with self-extraction and to those supplied by the water companies. Hence, the competition and trade issues are of minor importance.
Related Instruments The Dutch Groundwater Act empowers the provinces to levy a groundwater charge. The revenue from this charge is earmarked for provincial expenditures in the field of water resources policy. The rate differs over provinces but is comparably low. The total revenue from the provincial charges amounts to about € 14 million. There is no formal relationship between these two taxes: they have a different objective, a different legal base and are levied by a different level of government. References VROM, 2006. Environmental Tax on Tap Water. Netherlands Ministry of Housing, Spatial Planning, and the Environment. http://international.vrom.nl/pagina.html?id=9472 Ecotec, 2001. Study on the Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States. In association with CESAM, CLM, University of Gothenburg, UCD, IEEP http://europa.eu.int/comm/environment/enveco/taxation/environmental_taxes.htm Leder, A., 1996, Taxes with an environmental base and the Dutch green tax commission, 159-170, in Environmental Taxes and Charges: national Experiences and Plans, Papers from the Dublin workshop, Dublin: European Foundation for the Improvement of Living and Working Conditions. Vermeend, W. and van der Vaart, J., 1998, Greening taxes: The Dutch model, Deventer: Kluwer. Ministry of Finance, 1998, The Dutch Green Tax Commission: A summary of its three reports 1995-1997, Haague: www.minfin.nl/uk/taxation/tax_home.htm (31/1/
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