Charges and Taxes

Introduced

The tax was first proposed in 1974 and federal law on the German wastewater tax (Abwasserabgabengesetz) was passed in 1976. The tax regime remains regulated by this law as amended in 1986, 1990 and 1994. The federal law had to be transposed into Länder legislation, and the tax came into effect in the majority of Länder in 1981, with some following in 1982-83. Upon unification, the tax regime was extended to the five new Länder with effect from 1991, and in the case of industries not liable to previous GDR-wastewater taxes, from 1993. According to the original law, the rate of the tax was scheduled to increase from 12 DM to 40 DM from 1981 to 1986. It was subsequently increased to 50 DM in 1991, 60 DM in 1993 and 70 DM in 1997.

Aims

The purpose of the tax was to make dischargers, private and municipal, comply with the prescribed standards. In the past there were considerable problems with non-compliance. The tax is effectively a penalty tax for non-compliance with standards. Despite the reduced exemptions since 1999, the character of the tax has not fundamentally changed.

Design

Scope

The tax is levied on a 'damage unit', which is determined as an equivalent of 50kg of chemical oxygen demand (COD), 25kg nitrogen, 3kg phosphorus, 2kg organic halogens, 20g mercury, 100 g cadmium, 500 g chromium, 500 g nickel, 500 g lead or 1,0000 g zinc (RIZA, 1995). Industry and municipalities are charged on direct discharges into rivers, lakes, the sea and groundwater whilst indirect discharges are not charged (OECD 1997, pp40) The charging system is based on a formula, under which pollution units are defined, broadly equivalent to the pollution generated by one individual (OECD 1997: 40).

Rate

The charge has gradually increased, and between 1981 and 1993 the charge rose from DM12/unit to DM60/unit (OECD 1997: 40) with an increase to DM70 in 1997 (Tindale & Holtham 1996: 29).

Since January 1, 1997, the tax rate has stood at 70 DM (36 EUR) per damage unit. A damage unit represents either 50 kg of chemical oxygen demand (COD), 25 kg nitrogen, 3 kg phosphorus, 2 kg organic halogens, 20 g mercury, 100 g cadmium, 500 g chromium, 500 g nickel, 500 g lead, or 1,000 g zinc (See RIZA, 1995b: 102 for full details). 50 kg of COD translates into about 2.5 inhabitant equivalents (i.e.), so that the rates are 1.4 euro per kg of nitrogen and 12 euro per kg of phosphorus (Speck et al., 2004). Since 1997, The charges are based on permits rather than actual emissions, but sources can reduce their payments through abatement measures or construction/improvement of sewage treatment plants (OECD 1997: 41) Dischargers are able to ‘offset the costs of investment in pollution control equipment against charges' (OECD 1997: 41).

Coverage

The tax affects only direct dischargers, i.e. discharges from industries and municipal sewage outlets. Indirect dischargers are affected by the tax via the ordinary wastewater user fee. There are about 8,000 municipal sewage treatment plants and 4,000 industrial direct-dischargers (Hitchens et. al., 1998: 166). The latter belong to Germany's largest industries. The tax interacts with standards for sewage discharges in a fairly complex way. The tax is reduced when standards are adhered to, and further reduced if dischargers manage to keep their effluent at a quality level that exceeds that set in the regulations, provided that the target for this improved performance has been set in advance and is subsequently verified.

Allocation of Revenue

The revenue raised by the tax is spent by the Länder authorities on municipal sewage treatment and on Länder administration of water quality programmes. The practice varies from Länder to Länder, but in the main, the revenue is recycled for support in investments in municipal sewage treatment plants. The Federal Environment Agency (Umweltbundesamt) estimates that 60 per cent of the revenue is derived from municipalities and 40 per cent from industry (RIZA, 1995: 107).

Exemptions

In the first decade of the tax regime, a special 'härteklausel' allowed for a reduction or even annulment of the tax. According to a BMI-report from 1983 the federal authorities received requests from a range of industries, including fish processing, paper- and pulp, kali industry, pectine industry and 7 others, who asked for exemptions or derogations. The BMI was in favour of a restrictive policy towards exemptions, and it seems that a special arrangement was reached only with the paper- and pulp industry (BMI, 1983: 30). The possibility for obtaining exemptions according to the härteklausel was removed in 1989.

Institutional Arrangements

In 1982 several Länder spent about 50 per cent of the revenue on administration, while one (Bavaria) accordingly spent more on administration than the revenue earned (Hitchens et. al., 1998: 163-164). In the mid-1980's administration costs were reduced to a level of 25-30 per cent (Hitchens, et al, 1998). In the 1990's the administrative costs were brought down to a level of about 10 per cent of the revenue. In 1998 the share was 10,6 per cent or 76 million DM (EUR 38.9 million) (Bundesministerium, 2000: 31).

Performance

The tax provided a revenue of 164MEURO (DM320 million) in 1996. (Tindale & Holtham, 1996: 29). Between 1981 and 1998, the total revenue raised increased by 320% from 87.4 MEUR to 368 MEUR in 1998, due to the steep increase in tax rate from 12 DM to 70 DM per damage unit (Ecotec, 2001).

Ex ante evaluation suggested ‘three-quarters of the private enterprises and two-thirds of the municipalities surveyed had increased, accelerated or modified their abatement-measures for water pollution in anticipation of the charge,'(Barde & Smith, pp24), and of these respondents, two fifths were acting solely in response to the charge (OECD 1997: 41). Behavioural changes by firms to reduce the quantity of charged emissions can lead to possible benefits through reduced emissions of uncharged pollutants and ‘various types of "soft effect" in terms of changes in attitudes and awareness of companies, municipalities, and their employees' (OECD 1997: 41).

The main effect from the tax lies in its impact on compliance with standards. A secondary effect is a more general incentive to reduce discharges liable to the tax. Compliance rates for public sewage treatment plants were reported to be very high following the introduction of the tax (Ecotec, 2001). Many companies have found it cheaper to improve water use in production processes, than to introduce or extend sewage treatment (Bucksteeg, 1991). The burden of the tax depends on whether the discharger is in compliance with the standards. For public sewage treatment plants that do not comply with the BAT standard, the effect of the tax is to increase costs by up to 10 per cent of total operating costs. For plants that comply the cost share of the tax is only about 2 per cent. In addition to this there is a risk to the sewage manager in cases of non-compliance, which entails the need for extra finance after the ending of the budget year (Rudolph, 1989).

A comprehensive comparative study of environmental costs in two water-intensive industrial sectors, dairy and meat production, was carried out by Hitchens et. al. (1998) in Germany, Ireland and Italy. The main finding of the study was that similar industries face different costs for sewage in the same country, depending on local tariff structures and depreciation schemes etc. However, the costs for sewage tended to be generally higher for German firms than for firms in Italy and Ireland. The costs of sewage were in average 1.02 EUR/m3 in (Western) Germany while it was 0.44 EUR/m3 in Ireland and 0.33 EUR/m3 in Italy (ibid. 92). Costs in the dairy industry were 0.87EUR/m3 in Germany and 0.25-0.26 EUR/m3 in Ireland and Italy. The main reason for the difference is not the German wastewater tax, but the more advanced treatment applied in Germany, a difference that is expected to narrow as full implementation of the Urban Wastewater Directive proceeds in all Member States. German dairy companies were on average less water intensive than the Irish and Italian counterparts (ibid.; 84-85). Output per litre of water used was twice as high in German firms as in Irish and Italian ones. This finding suggests that German dairy producers had responded to the higher factor costs of water by minimizing use, suggesting that the price has an inducement effect on technological choice.

Drawbacks

Disadvantages include a ‘lack of systematic ecological rationale for the relative levels of charge applied to different substances, and the lack of regional differentiation in the charge, to reflect differences in the ecological vulnerability of different areas,' (OECD 1997: 41). In terms of efficiency the system does not result in cost-minimisation due to the dual operation of charges and permits; there is the possibility of distorted competition between direct and indirect dischargers; the use of revenue to subsidise abatement measures may not be necessary in all cases and some firms may initiate abatement without the incentive of a subsidy; ‘the reduction in the charge applicable to enterprises which ‘overcomply' with the permit requirements reduces the tax burden on residual units of pollution, thus weakening the dynamic incentive function of the charge'(OECD 1997: 41).

References

Barde & Smith, 1997, 'Do Economic Instruments Help the Environment?', The OECD Observer, No.24, Feb/Mar 1997, pp22-26. Available at: http://www.oecd.org//publications/observer/209/ART_IDXE.HTM

Bundesministerium für Umwelt, 2000, Die Förderung des Umweltschutzes im deutschen Abgabenrecht; einschliesslich des ökologischen Steuerreform, draft, Berlin: BMU.

BMI (Der Bundesminister des Innern), 1983, Erfahrungsbericht zum Abwasserabgabengesetz, Bonn, 41 p.

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

Hitchens, D., et. al., 1998, The Firm, Competitiveness and Environmental Regulations: A Study of the European Food Processing Industries, Cheltenham: Edward Elgar.

OECD, 1997, Evaluating Economic Instruments for Environmental Policy: 40-41, OECD: Paris. Available at http://www.oecd.org//env/policies/publications.htm#eistrpub

RIZA, 1995, Waste water charge schemes in the European Union, Part 1-2, Lelystad: RIZA.

Rudolph, K.-U., 1989, Zur Kostenstruktur der kommunalen Abwasserentsorgung im Hinblick auf die Bedeutung der Abwasserabgabe, pp. 1412-1415, Korrespondenz Abwasser, no. 12/89.

Tindale S. and G Holtham, 1996, Green Tax Reform, Pollution Payments and Labour Tax Cuts, S, Institute For Public Policy Research, London.

Useful Information Sources

The Federal Ministry of the Environment:  http://www.bmu.de/english/aktuell/4152.php

German Environmental Agency: http://www.umweltbundesamt.de/index-e.htm

Green Budget Germany: http://www.eco-tax.info/4fakten/index.html

http://www.bmu.de/files/pdfs/allgemein/application/pdf/umweltabgabenber.pdf from the Min of Finance, 2000: descriptive paragraphs on water resource management in Germany.

http://www.eco-tax.info/4fakten/index.html German Eco- Tax website

http://www.umweltbundesamt.de/water/index.htm waste water info

http://www.umweltbundesamt.org/wsektor/wasserdoku/english/doku_e.pdf - the german water sector overview - policies and experience

http://www.eeb.org/activities/water/making-WFD-work-February05.pdf - overview of waste water WFD give contacts for germany : Micheal Bender and Tobias Schafer, Grune Liga e.V. Bunderkontakstelle Wasser, wasser@grueneliga.de

http://www.bmu.de/files/pdfs/allgemein/application/pdf/waste.pdf see page 10 for performance

Information Request

As it is the aim of this website to provide information which is as accurate, comprehensive and up-to-date as possible, please contact us with any additional information or studies on this topic and we will add it to the website.

Email contact: louise.dunne@ucd.ie

 

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).

 

Water tax rates under the Environmental Taxation Act €

1998 2000 2005* 2006* 2007 2008 2009

	1998	2000	2005*	2006*	2007	2008	2009
Groundwater Tax
Normal Tariff	15.5	16	18.1	18.26	18.55	18.83	19.15
Infiltration discount (1)	12.7	13.4	15.16	15.3	15.54	15.77	16.04
Tap water tax (2)	-	12.9	13.2	14.7	14.9	15.1	15.4

Source: Ecorys, 201;  Vewin 2010: 26; Vewin 2006:21

 

 

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) and €172 million in 2006 (Ecorys, 2011). 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.

According to Ecorys (2011), in the Netherlands in the 1990s drinking water was obtained from groundwater and surface water on a ratio about 2/3-1/3, plus a small

amount of dune water. From 1996-2006, the use of surface water increased by 3.7 percentage points to 39.2%. The use of groundwater dropped 2.4 percentage points to a 60% share and the share of natural dune water dropped by 1.3 percentage points to 0.8%

 

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

Ecorys, 2011. The role of market based instruments in achieving a resource efficient economy. http://ec.europa.eu/environment/enveco/taxation/pdf/role_marketbased.pdf

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/

Vewin (2006) Water supply statistics

Vewin (2008) Dutch drinking water statistics

Vewin (2010) Dutch drinking water statistics 2008; Vewin no 2009/95/6259

http://www.vewin.nl/SiteCollectionDocuments/Publicaties/Drinkwaterstatisti

eken%202008/Vewin_DutchDrinkingwaterstatistics2008_lr.pdf

 

VROM, 2006. Environmental Tax on Tap Water. Netherlands Ministry of Housing, Spatial Planning, and the Environment. http://international.vrom.nl/pagina.html?id=9472