The Platform for Collaboration on Tax (PCT) – a joint initiative of the IMF, OECD, UN and World Bank Group – released a new report on carbon metrics of its partners. The report aims to help policymakers, businesses and other stakeholders strengthen their understanding of different carbon pricing metrics of the four largest international organizations.
Carbon pricing has emerged as the policy strategy to monetize the cost of the emission of carbon dioxide and other greenhouse gases, such as the damage caused by climate change. In the last decade, international organizations have developed diverse metrics on carbon pricing. The PCT’s new report, “Carbon Pricing Metrics: Analyzing Existing Tools and Databases of Platform for Collaboration on Tax (PCT) Partners,” showcases this rich array of approaches of the PCT Partners (the IMF, OECD, UN and the World Bank Group) and provides a comparison of various metrics, including other carbon pricing metrics. The study shows that the existing metrics of the PCT Partners complement each other and give a comprehensive picture of the carbon pricing landscape. According to the report, the PCT Partners concur on a crucial message: Energy prices are poorly aligned with climate, environmental and health costs. Carbon pricing signals to date are insufficient.
This report was prepared under the PCT’s environmental taxation/climate and tax workstream, which brings together experts from the four international organizations. Following the release of the report, the PCT Partners will hold a launch event in September 2023 with expert speakers, who will discuss the key takeaways from the report.
The full report can be reached here.
For questions and comments, please contact the PCT Secretariat at taxcollaborationplatform@worldbank.org 
Compliments of the OECD, IMF, World Bank Group and the UN.The post OECD, IMF, WB, UN | The Platform for Collaboration on Tax Releases – New Report on Carbon Pricing Metrics first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

European Central Bank | 6 September 2023

Frontloading green investment significantly reduces medium-term costs and risks facing households and firms
Not expediting green transition drags down firms’ profitability and households’ purchasing power while pushing up credit risk for banks
Further delaying transition means missing Paris Agreement goals and exacerbating impact of costly physical risks

The European Central Bank (ECB) today published the results of its second economy-wide climate stress test. The results show that the best way to achieve a net-zero economy for firms, households and banks in the euro area is to accelerate the green transition to a rate that is faster than under current policies.
“We need more decisive policies to ensure a speedier transition towards a net-zero economy in line with the goals of the Paris Agreement. Moving at the current pace will push up risks and costs for the economy and financial system. There is a clear need for speed on the road to Paris,” says ECB Vice-President Luis de Guindos.
The stress test analyses the resilience of firms, households and banks to three transition scenarios, which differ in terms of timing and ambition:

an “accelerated transition”, which frontloads green policies and investment, leading to a reduction in emissions by 2030 in line with the goals of the Paris Agreement;
a “late-push transition”, which continues on the current path, but does not speed up until 2026 (and is still intense enough to achieve Paris-aligned emission reductions by 2030);
a “delayed transition”, which also starts only in 2026, but is not sufficiently ambitious to reach the Paris Agreement goals by 2030.

The results show that firms and households clearly benefit from a faster transition. While a speedier transition initially involves greater investment and higher energy costs, financial risks decrease significantly in the medium term. Both profits and purchasing power are less negatively affected as the frontloaded investment in renewable energy pays off earlier and ultimately reduces energy expenses. In the accelerated transition, green investment by euro area firms rises to €2 trillion by 2025, while amounting to only €0.5 trillion in the other two scenarios. In the late-push transition, green investment catches up with the accelerated transition by 2030, as they both reach a total of €3 trillion, while it remains lower in the delayed transition. For it to catch up, green investment needs to be increased swiftly, putting firms at higher risk, particularly in energy-intensive sectors such as manufacturing, mining and electricity, with debt levels rising and profits falling around twice as much as for the average euro area firm.
If firms are at risk, so are the banks that lend to them. Banks are exposed to the highest credit risk if the transition has to be rushed at a later stage and investment is required quickly at higher costs. In the late-push transition, banks can expect their credit risk to rise by more than 100% by 2030 compared with 2022, while in the accelerated transition, the increase is only 60%.
Moreover, delaying the transition, and not acting at all, leads to even higher costs and risks in the long run. While it entails less investment overall, missing emission reduction targets exacerbates the impact of physical risk on the economy and the financial sector significantly.

Chart 1
More ambitious emission reduction targets driven by timely and intensive investment lead to lower credit risk for banks in the medium term

Source: ECB calculations based on Orbis, Urgentem, Eurostat, Network for Greening the Financial System, Broad Macroeconomic Projection Exercise (BMPE) projections, International Renewable Energy Agency (IRENA, 2021) and Intergovernmental Panel on Climate Change (IPCC, 2022) data.
Notes: Panel a) displays euro area cumulative investment across time, representing the debt acquired by euro area firms in each scenario between 2023 and 2030. Panel b) presents median corporate loan portfolio probabilities of default for significant institutions in the euro area.

The second economy-wide climate stress test follows up on the results of the first economy-wide stress test exercise published in September 2021. It complements the ECB Banking Supervision climate stress test, which analysed risks for individual banks from a bottom-up perspective in July 2022, by having a wider scope and looking at firms, households and the banking sector from a top-down perspective. The ECB’s economy-wide climate stress is part of its climate agenda and ongoing work to improve understanding of climate-related risk.
Compliments of the European Central BankThe post ECB | Faster green transition would benefit firms, households and banks, ECB economy-wide climate stress test finds first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Digitalization, done right, can equip governments to improve revenue collection and spending efficiency.

International Monetary Fund – September 7, 2023

Digitalization is a transformative force as powerful as the advent of the printing press in the 15th century or electricity in the 19th. Yet some governments have been slow to harness the potential of digital technology to improve delivery of public services and strengthen public finance.
A two-pronged policy approach is required—connecting unconnected households to the internet and accelerating and strengthening the adoption of digital solutions in the public sector. We outline strategies for pursuing these policies in a new staff discussion note on government technology, or govtech.
Encouraging digital adoption
Emerging and developing countries have the most potential to leapfrog their development trajectory by adopting digital technologies. These countries lag considerably behind in internet connectivity, a key enabler for adopting and using digital technologies. Globally, about 2.7 billion people still need to be connected. Within countries, a digital divide persists across age and gender. Bridging this divide and benefiting from digitalization takes adequate digital infrastructure.
Our estimates show that $418 billion of investment in digital infrastructure is needed to connect unconnected households. The bulk of these investment needs are in emerging market and low-income developing economies, with the latter’s requirements estimated at 3.5 percent of GDP. Government support can be crucial in achieving universal connectivity by incentivizing or directly investing in building internet infrastructure, especially in regions where profitability remains challenging.

In addition to infrastructure, affordability and digital literacy are crucial. Internet subscription costs remain high in low-income developing countries, where, relative to average incomes, the average cost is nine times the amount citizens in advanced economies spend. To make internet access more affordable, governments can consider offering discounts or vouchers on subscription fees. Additionally, promoting digital literacy programs is essential to overcome reluctance among specific populations, particularly older individuals, to embrace new digital technologies.

The power of govtech
Digitalization enables governments to leverage technology to enhance revenue collection, improve efficiency of public spending, strengthen fiscal transparency and accountability, and improve education, health-service delivery, and social outcomes. These can be achieved through better decision-making processes, adoption of international standards and practices, transformation of public financial management processes and systems, and improved taxpayer and trader services to support voluntary compliance and trade facilitation.
Adopting govtech in fiscal operations can strengthen public finance on both revenue and spending sides. IMF staff analysis shows that e-filing, e-invoicing and electronic fiscal devices could lead to a significant increase in tax revenues. For example, the adoption of e-invoicing and electronic fiscal devices could improve revenue mobilization by up to 0.7 percent of GDP. Digitalization’s impact on revenue administration is enhanced by expanding digital connectivity and ensuring sufficient staffing and expertise among tax officials. Similarly, the automation of budget payments using digital technologies is associated with more budget transparency. Our analysis suggests that digitalization is generally associated with an improvement in the efficiency of expenditure.
Digitalization can also improve the effectiveness of social spending and the quality of public service delivery. Digital interventions, such as providing students with equipment and software, can improve education outcomes. In healthcare, govtech can help improve quality of care, increase the coverage of underserved populations, and optimize resource utilization. Electronic health records, telemedicine, and digital platforms for patent licensing, procuring medicine, and monitoring infectious diseases are areas of digital innovation in health care.
Digitalization can also help strengthen social safety nets through better identification, verification of eligibility, and provision of delivery mechanisms. For example, integrating digital ID and creating extensive socio-economic data can enable governments to better target and accurately verify beneficiaries receiving social assistance.
But these benefits from digitalization can materialize only if it is done right. Implementing large digitalization programs is a complex undertaking and requires careful planning, adequate resources, political support, and appropriate change management processes. Digitalization may require changes in regulations and established processes, adequate staffing and expertise among officials, and strong safeguards for data security and privacy to protect sensitive information. Without adequate safeguards, implementing complex digital solutions could even be counterproductive and facilitate corruption.
By adopting an approach to digitalization where citizens’ needs are the primary focus and engaging in close collaboration with stakeholders, govtech can help overcome these challenges and unlock its full potential to enhance public services for society. The IMF stands ready to support countries through its capacity development in implementing govtech solutions for public finance.

Authors: David Amaglobeli, Ruud de Mooij, Mariano Moszoro
Compliments of the IMF

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Policy brief by John Springford , Sander Tordoir | Published 12 June 2023.

CER study raises concerns about wasteful European subsidies, as shipping costs increasingly discourage imports from faraway countries

European policy-makers are worried about losing out to subsidised production in the US and China in the booming global market for green technologies. A new CER policy brief, ‘Europe can withstand American and Chinese subsidies for green tech’, shows that the EU can be competitive in green goods and should use subsidies to producers with caution.
According to the analysis, the EU has a sizeable share of global exports in green goods, although not as large as China’s – and the US is languishing behind both. China’s share of global exports in ‘low carbon technology (LCT)’ goods has exploded, from 23 per cent in 2019 to 34 per cent last year, but the EU’s share has also grown from 19 per cent to 23 per cent last year, while the US is stuck on 13 per cent of the global market.
The CER also shows that the EU should continue to excel in domestic production of some of these green technologies, because supply chains are shortening as technologies mature, and companies are expanding production nearer to consumers to reduce shipping costs. Across six key categories of green goods that are at the heart of US, Chinese and EU green industrial policy (electric vehicles, batteries, heat pumps, solar, wind turbines and electrolysers), the pull of geographical distance on trade increased significantly in almost all cases between 2017 and 2022. For example, for every 1 per cent increase in distance between two trade partners, exports of electric vehicles fell by 1.3 per cent in 2022, up from 0.9 per cent in 2017.
The EU should be cautious about directly subsidising green production, as the US and China are doing. In a world where distance between trade partners is increasingly important, and where markets for green technologies are rapidly maturing, money will be put into companies that would have robust demand for their products anyway. A subsidies race may also distort the EU single market, weaken incentives to innovate, and create excess production capacity, while any protectionist backlash risks slowing the green transition by driving up the prices of inputs that the EU needs to decarbonise.

Commenting, one of the report’s authors, John Springford, said: “The market for many green goods are nascent, and it is unsurprising that the EU’s policies to cut emissions has led to skyrocketing demand for green tech that EU manufacturers cannot yet fulfil – but they will over time.”
Sander Tordoir, the other author, said: “The EU should focus its subsidies on sectors where short-term help is needed to help infant European industries achieve scale, such as hydrogen, and to avoid dependencies on other countries in markets for goods in which global oligopoly or duopoly might arise, like wind turbines.”
SUMMARY OF THE RESULTS:

In the global market for green technologies, many European countries are worried about losing out to subsidised production in the US and China. However, the EU has a sizeable share of global exports in green goods, although not as large as China’s – and the US is languishing behind both.
Across six categories of green goods that are at the heart of US, Chinese and EU green industrial policy (electric vehicles, batteries, heat pumps, solar, wind turbines and electrolysers), in almost all cases the negative impact of geographical distance on trade increased significantly between 2017 and 2022. The EU should continue to excel in domestic production of some of these green technologies, because supply chains are shortening as technologies mature, and companies are expanding production nearer consumers to reduce shipping costs.
All this suggests that the EU should be cautious about directly subsidising green production, as the US and China are doing. In a world where distance between trade partners is increasingly important, and where markets for green technologies are rapidly maturing, money will be put into companies that would have robust demand for their products anyway. A subsidies race may also distort the EU single market, weaken incentives to innovate, and create excess production capacity. Any protectionist backlash from other trade partners could slow the green transition by driving up the prices of inputs that the EU needs in order to decarbonise.
The EU should focus its subsidies on sectors where short-term assistance is needed to help infant European industries, such as hydrogen, achieve scale. It should also prioritise support to markets for goods, like wind turbines, in which a global oligopoly or duopoly is likely to arise, and in which a dependence on China would be risky. That way, the EU will help new businesses to grow while minimising handouts to those that do not need them.

Download the  complete report here.

Compliments of the Centre for European Reform  CER.

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Blog post by Luis de Guindos, Vice-President of the European Central Bank | Moving towards carbon neutrality as quickly and boldly as possible is by far the best way to slow down climate change. It may take more effort in the short run, but in the long run it will cost less overall, says ECB Vice-President Luis de Guindos. We need to reach carbon neutrality to avoid existential risks to nature, people and our economies. And we need to start making changes soon. Procrastinating may be easier and less costly today, but means we will pay a higher price tomorrow: the damage to our environment and economies from rising temperatures will be much more severe. In fact, the sooner and faster we complete the necessary green transition, the lower the overall costs and risks. This is one of the main outcomes of our second economy-wide climate stress test. Let me talk you through the findings.
The ECB economy-wide climate stress test is a tool that allows us to measure the future impact of climate risk on companies, households and the financial system. Its top-down modelling ensures a harmonised approach and provides unprecedented coverage of companies and financial institutions in the euro area.[1] It uses granular datasets, particularly data on firms’ geographical location and their greenhouse gas emissions. This allows us to identify firms that are vulnerable to transition and physical risk across sectors and regions. The results of the first ECB economy-wide climate stress test exercise were published in September 2021.[2] The first exercise focused on how physical and transition risks increase the probability of companies defaulting on their debt. It showed that the short-term costs of an early green transition are always more than offset by the long-term benefits of avoiding the physical risks of a “hot house world” in which the green transition does not happen.
This second economy-wide climate stress test exercise builds on the previous one, but also focuses on the timing and ambition of transitioning towards net zero and its financial consequences for companies and households in the context of a changing macroeconomic environment. More specifically, it asks two questions. Given today’s circumstances, what are the costs and risks associated with a transition to net-zero emissions in the short and medium-term? And what impact would the different transition pathways have on the economy and the financial system?
What’s new in our top-down climate stress testing framework
We have upgraded and added several features to our stress testing framework since 2021. First, we have constructed new short-term transition scenarios based on the climate scenarios of the Network for Greening the Financial System.[3] Second, we have developed new climate risk models that account for recent developments in the European energy sector, particularly the increase in energy prices triggered by Russia’s invasion of Ukraine. Third, we have calculated the investment needed to successfully transition towards net-zero emissions in a more granular way.
We designed three transition scenarios covering the period until 2030. The “accelerated transition” scenario assumes a jumpstart of the transition with rapid and severe increases in energy prices. Investment in renewable energy sources in the short term leads to a reduction in emissions by 2030. This would be compatible with the long-term temperature targets of the Paris Agreement (+1.5°C increase relative to pre-industrial levels).
In the other two scenarios, current macroeconomic and geopolitical conditions lead to a delay in green transition efforts until the end of 2025. In the “late-push transition” scenario, the green transition starts in 2026 and is intense enough to achieve emission reductions by 2030. The expected results are comparable to those in the accelerated transition, but they come at a higher cost, as the policies needed to achieve them are more ambitious and abrupt. In the “delayed transition” scenario, the transition also starts in 2026 but is more gradual and slower than in the late-push transition. It is therefore not ambitious enough to achieve emission targets in line with the Paris Agreement goals by 2030.
The green transition and potential ways forward
Under the three scenarios, how would greenhouse gas emissions, global temperatures and investment efforts develop? Chart 1, panel a) shows the historical and projected emission pathways compared with a baseline scenario that assumes that nothing will be done beyond currently implemented policies. In the long term the temperature increase in the delayed transition scenario is substantially higher than in the other two scenarios at 2.6°C compared with 1.5°C relative to pre-industrial levels. A delayed transition is therefore expected to lead to much higher physical risk in the long term via more frequent and more intense wildfires and floods than we are already currently experiencing.[4]
The transition towards net zero requires substantial investment in energy-efficient and renewable energy, such as solar and wind energy, as well as in phasing out fossil fuels. Chart 1, panel b) presents the total required investment based on bottom-up estimates for the three scenarios. An accelerated or late-push transition would require companies and households to invest significant funds from the very start of the transition, with green investment adding up to around €3 trillion by 2030. Under the delayed transition, the reduced efforts made until 2030 would result in a smaller increase in the funds needed. However, emission reductions would be lower and accompanied by heightened physical risk in the long term owing to the failure to meet the net-zero target of the Paris Agreement.

Chart 1
Emission pathways and green investment required in the three transition scenarios

Source: ECB calculation based on Orbis, Urgentem, Eurostat, NGFS and International Renewable Energy Agency (IRENA; 2021).
Notes: In panel a), historical aggregated data on emissions are provided by the European Environment Agency and are available until 2020. Quarterly emissions data for 2021 and 2022 are taken from Eurostat and aggregated at yearly frequency to complete the timeseries. Temperature increases refer to the year 2100. Emission pathways until 2050 correspond to the NGFS’s Net Zero 2050 (+1.5°C), the nationally determined contributions (NDC) scenario (+2.6°C) and current policy scenario (>+3°C). In panel b), green investment consists of investment in: i) renewable-based energy, and ii) carbon mitigation activities. Cumulated green investment is based on bottom-up estimates for the 2.9 million European non-financial corporations covered in the climate stress test exercise.

The short and medium-term financial impact of transition risk
The results of the second exercise show that an accelerated transition scenario would lead to the lowest financial risk and lowest long-term physical risk. In all three scenarios, the probability of default of banks’ loan portfolios increases in the short term owing to transition risk (Chart 2, panel a). The accelerated and delayed transitions would lead to similar risk levels by 2030, but banks’ credit risk is expected to increase further in the delayed transition after 2030 because physical risk will develop more severely in the long term.
A late-push transition would be the most severe in the medium-term because of the higher costs of the green transition and the greater impact on companies’ profitability and debt. Expected losses in 2030 under the late-push transition would be almost double those under a baseline scenario (with no further transition risk). A late-push transition would be particularly detrimental for those banks most vulnerable to transition risk. Such banks could face expected losses of 2% of their loan portfolios[5] compared with losses of only 1% for the median bank.
The impact of the green transition will differ greatly across economic sectors (Chart 2, panel b). Energy-intensive sectors such as mining, manufacturing and electricity will experience the strongest effects on their credit risk because they produce the highest emissions and, as such, will come under the most pressure to reduce their carbon footprint and invest in renewable-based energy sourcing and production (particularly the electricity sector).

Chart 2
Accelerated transition leads to lower credit risk and is aligned with the Paris Agreement goals

Source: ECB calculations based on Orbis, Urgentem, Eurostat, NGFS, International Renewable Energy Agency (IRENA; 2021) and Intergovernmental Panel on Climate Change (2022).
Notes: Panel a) shows the median probabilities of default (PDs) of corporate loan portfolios and total expected losses of significant banks in the euro area. Corporate loan portfolio PDs are calculated as the average borrower-level PD, weighted by their loan size. The baseline scenario comprises NGFS current policies only, with no additional transition risk, and serves as a benchmark scenario. In panel b), tail changes represent percentage point changes in borrower-level PDs for the 75th percentile firm in each sector and scenario. ICT stands for the Information and Communication Technology sector.

Green policy measures to achieve net zero
Financing the transition towards a carbon-neutral economy is one of the most pressing challenges facing Europe today. The results of the new climate stress test exercise show that the earlier the transition happens, the lower the costs and risks for the economy and financial system. The effective and coordinated mobilisation of green finance is more necessary than ever to support the European Union’s efforts to take the lead in the transition towards net zero. Here are some of the policy measures that will help achieve this goal.

Phasing out fossil fuels – moving away from high emission and polluting energy sources towards renewable-based energy is essential to achieve the Paris Agreement goal of net-zero emissions. Carbon policies, if well-designed, can compress the demand for fossil fuels and stimulate the production of cheaper renewable energy sources, while containing inflationary pressures.[6]

Filling the green investment gap – firms would greatly benefit from progress towards a capital markets union (CMU), which would help them undertake the massive amounts of green investment required. The CMU would facilitate cross-border access to funds, strengthen risk-sharing, avoid fragmentation and foster integration[7]. There is a need for sustainable finance products, such as green loans and bonds, and funds with environmental, social and governance standards. It is also important to prevent the “greenwashing” of funds.[8]

Setting up reliable transition plans – companies and financial institutions need to align their business models and operations with transition targets. This requires immediate and long-term planning in the form of credible and transparent transition plans. To further foster the green transition, transition plans compatible with EU policies implementing the Paris Agreement should become legally binding and publicly disclosed.[9]

Designing prudential climate tools – the green transition is a potential source of systemic risk, as certain regions are more vulnerable to climate risks with potential spillover effects across sectors and to the financial system. We therefore need tools to address such risks, involving both microprudential and macroprudential measures.[10]

Conclusion
The first top-down economy-wide climate stress test showed that the short-term costs of an early green transition are always more than offset by long-term benefits stemming from the reduced physical risks. By including new elements in the original framework and focusing on transition risk over the next eight years, the second climate stress test exercise shows that acting immediately is more effective and comes at a lower cost in terms of financial stability, transition costs and physical risks. Early and strong policy action – designed properly and implemented timely – is required to mobilise funds for green investments and to support Europe’s transition towards a carbon-neutral economy. If we act now, it will be better all round – for nature and our economies. Let’s take the fast-track to Paris before it is too late.
Compliments of the European Central Bank.The post ECB | Need for speed on the Road to Paris first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Blog post by Fabio Panetta, Member of the ECB’s Executive Board | With rising geopolitical tensions and urgent global challenges such as the climate and digital transitions, Europe needs to bolster its resilience to shocks and invest strategically. In order to achieve this, we need to work together, as a more integrated Europe is better positioned to realize shared goals in a fragmented global economy.
Central to this strategy is the creation of an integrated European capital market — a vision set out by the European Commission in 2015, and commonly known as the capital markets union (CMU).
A fully functioning CMU would both enhance Europe’s economic structure and benefit the euro area. It would do this in three main ways:
It would allow us to reap the benefits of euro area-wide capital markets, and facilitate greater risk-sharing across member countries. At present, barriers between national markets are deterring cross-border investment, leaving European firms and households largely reliant on national funding, as well as overly exposed to domestic economic shocks. By eliminating these barriers, the CMU would help investment flow across the euro area, which would diversify risk and mitigate the effects of local shocks.
There is also a pressing need for the CMU to complement traditional banking channels in financing the innovation vital for Europe’s future growth — notably in the energy and technology sectors. Equity funding and specialized forms of investment, such as venture capital, are typically more suitable than debt funding for the financing of innovation, since such projects often involve high levels of risk and uncertain returns, making it difficult to commit to regular debt repayments.
Finally, a fully functioning CMU would be beneficial for the implementation of the European Central Bank’s (ECB) monetary policy. By fostering deep, liquid and integrated capital markets, the CMU would support the timely, smooth and even transmission of monetary policy to firms and households.
Since the Commission launched its CMU action plan in 2015, progress has been made. For example, the European Union has adopted legislation to develop EU securitization markets, and thereby enhance firms’ access to funding. It has also further harmonized prudential rules for investment firms, and eased investment conditions for European venture capital to promote risk capital funding.
Additional steps are also being taken under the 2020 CMU action plan to simplify the rules for the public listing of EU companies, harmonize national insolvency regimes and address issues related to the taxation of financial instruments, which hamper cross-border investment and make equity funding less attractive than debt financing.
But despite this progress, the results are not yet satisfactory. Europe’s capital market remains fragmented across national borders, and ECB analysis shows that financial integration in Europe is still much lower than before the global financial crisis.
Moreover, Europe’s capital markets are less developed than those of other advanced economies. In the euro area, bond markets as a percentage of GDP are three times smaller than in the United States. And although equity represents firms’ main source of funding in both jurisdictions, in the euro area it is mainly unlisted, while in the U.S. most equity is listed, opening firms up to a greater pool of potential investors.

Chart 1
Sources of external financing of non-financial corporations in the euro area and the United States

(2022; ratio to GDP)

Sources: ECB (euro area accounts); OECD and ECB calculations.

Still, Europe does have a prominent role in certain market segments, such as the green bond sector. But the market for green bonds remains niche, representing less than 3 percent of the global bond market. Moreover, as the green transition accelerates, Europe’s “green advantage” might fade if we don’t make progress with the CMU. For example, venture capital activity, shown to be pivotal for funding green innovation and decarbonization, remains limited in the euro area. And there are signs that Europe’s green bond market is becoming increasingly fragmented, pointing to a lack of common standards and obstacles to cross-border investment.
All of this suggests that simply addressing specific barriers to market integration may not be sufficient to establish a genuine CMU. We must keep our eyes on the broader picture, and there are two critical blind spots in the development of a genuine CMU.
The first is the lack of a permanent European safe asset.
Historically, mature capital markets have been built around a public safe asset. In the U.S., for example, capital markets developed alongside the issuance of federal bonds.
A risk-free benchmark is necessary for critical financial activities. It would enable better pricing of risky financial products, such as corporate bonds or derivatives, encouraging the development of such products. It would provide a common form of collateral that would promote centralized clearing activity and cross-border collateralized trading in interbank markets. It would also help diversify bank and non-bank exposure. And it would support the euro’s international role, helping to attract foreign investors.
Establishing such a permanent European safe asset would be a game changer, but it hinges on Europe having a standing fiscal capacity with a borrowing function. Without that, building a deep and competitive CMU will prove much more difficult.
The second blind spot is the lack of a complete banking union, which restricts European banks to operating in one or just a few national markets.
Banks play a crucial role in the functioning of all major capital markets. They operate — and often have a leading role — in crucial segments like asset management, bond underwriting and trading, initial public offerings and financial advice. They are active traders in securities markets and often provide market-making services. Thus, it is difficult to envisage a genuine CMU without the key players being able to operate throughout the euro area.
The global landscape is evolving rapidly, and Europe must keep pace, if not lead, that change. To be successful, it needs a genuine — and complete — CMU.
Compliments of the European Central Bank.The post ECB | Europe Needs to Think Bigger to Build its Capital Markets Union first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Recent years have seen growing interest in differences between labour and capital income taxation. New stylised effective tax rates show that governments almost always
tax the capital income individuals receive more favourably than wage income. But that is only part of the story, because governments also usually tax labour and capital income at the firm level. After accounting for firm-level taxes, capital is still taxed more favourably than labour in many OECD countries, but in others, the reverse is true.
Interest in the taxation of labour and capital income is growing
Many governments tax labour and capital income differently, in line with prevailing theoretical views that capital should be taxed more favourably than labour. But recent academic findings have challenged these views, with some studies supporting better alignment of the tax treatment of capital and labour. The concentration of capital income among high income earners and concerns about inequality also are driving greater interest in the topic.
Governments tax individuals’ capital income more favourably than labour income, benefitting high earners
In most countries, when looking at taxes payable by individuals at hypothetical high income levels1 (including personal income taxes and employee social security contributions), stylised effective tax rates(ETRs)reveal that dividends or capital gains from shares are taxed more favourably than wage income. Reasons include
that capital income may be taxed under a separate tax rate schedule (e.g. at lower flat rates), may be exempt from tax or employee social security contributions, or attract special tax credits. This preferential tax treatment of capital income generally benefits high income earners who earn a greater share of their income from capital sources. In some countries, the gap between ETRs on labour and capital income also rises with income – the higher the income level, the more preferential the tax treatment of capital
income compared to labour income.
The gap between labour and capital income taxation tends to be smaller when accounting for taxes paid by firms
Governments also levy firm-level taxes on labour and capital income. Firm-level taxes on profits (corporate income tax) are often higher than firm-level taxes on wages (employer social security contributions and payroll taxes), adding to the total tax burden on capital relatively more than on labour. Even after accounting for the combined effect of these firm-level taxes and taxes paid by individuals on wage and dividend income, the tax treatment of dividend income is more favourable than that of labour income in many OECD countries. But the gap between the two is generally smaller than when considering only taxes paid by individuals. However, for some countries and income levels, the opposite result is evident – wage income is tax-preferred after accounting for firm-level taxes.
The differential tax treatment of labour and capital income affects the efficiency and equity of tax systems
The results show that capital income is tax-preferred compared to labour income in many OECD countries, affecting the equity and efficiency of tax systems. Different ETRs for capital income and labour income reduce horizontal equity, since taxpayers earning the same income from different sources are taxed differently. Capital income is concentrated at the top of the distribution, so high earners benefit disproportionately from preferential capital income tax treatment, reducing vertical equity. Differential tax treatment between labour and capital income can also create distortions that may reduce the efficiency of tax systems. Balancing these implications with other policy objectives such as promoting savings and investment is a key challenge for policy makers.
This work highlights the need for further analysis
Differential tax treatment between labour and capital income can open the door to strategies to minimise tax, including income shifting, capital gains deferral and the strategic timing of income realisation. Upcoming OECD work will delve further into how individuals, particularly those with higher incomes, use such strategies to minimise the taxes they pay. Future work will also consider the pros and cons of different tax policy options that governments may consider to enhance the efficiency and equity of their personal income tax systems.
The full article with tables can be read here.
Compliments of the OECD.
 The post OECD | The Taxation of Labor vs. Capital Income: Focus on High Earners first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.