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You are here: Home / Articles / Cutting deficits and protecting the environment

Cutting deficits and protecting the environment

Europeans consume more natural resources than Europe’s environment can produce. Our consumption undermines the capacity of European ecosystems to provide goods and services and puts severe strain on the global environment.

 Image © Daniel Rocal (flickr.com)

Unfortunately, market prices do not take into account the full economic value of many goods and services we obtain from our environment. From clean air and water to timber, food and strolls in nature, we often pay for only a fraction of the benefits we receive.

Recent studies, including the European Environment Agency’s State and Outlook Report 2010 (SOER 2010), underline that we cannot look at environmental issues in isolation. To preserve and manage our natural capital wisely, Europe needs to reshape its economy and improve resource efficiency.  Environmental tax reform is one of the measures that could contribute to Europe’s transition towards a greener economy.

What is environmental tax reform?

The idea behind environmental taxation is to impose charges on ourselves, and thereby reduce the pressure we put on the environment. When the revenue collected from such taxes (on the use of energy, emissions of air pollutants, land use, etc.) is used to reduce or avoid other taxes, it is called ‘Environmental Tax Reform’.

Where taxes on environmentally harmful goods and services are used to reduce the tax burden on activities we want to encourage, such as employment and investment, it is possible to secure a ‘double dividend’: an improved environment and a better performing economy.

Case study: Ireland

To explore the economic potential of environmental taxes, the European Environment Agency (EEA) has focused on an individual member state – Ireland – that is currently struggling with budget deficits. Several environmental tax experts came to Dublin to present their experiences. The Symposium participants identified a number of opportunities where environmental performance could be significantly improved, while at the same time generating revenues. Some of the opportunities of direct relevance to Ireland as well as their potential are listed below.

Environmental taxation is already widely used in Ireland. The poster child of this approach is the plastic bag levy, which reduced the use of such bags in Ireland by over 90 % within a week of its introduction. However, Ireland has also recently introduced a CO2-tax for the part of fossil fuel use not subject to emissions trading. The below proposals would provide a significant relief – up to €5 billion – for the Irish budget.

The ‘polluter pays principle’ provides that those using most resources are taxed according to their environmental impact. Without such charges, high income groups will always benefit as they use more resources and environmental services of all sorts.

Lower income groups have a proportionately smaller environmental tax burden but still face a challenge to meet their financial obligations. Such groups could be offered means to reduce consumption. In the case of water consumption, for example, there are very low cost investments with immediate effects. Alternatively, they could be provided some form of income support — a ‘green cheque’.  

The ‘polluter pays principle’ also applies to businesses, requiring them to pay for the impact of their activities on the publicly owned environment. Environmental tax reform would also create the price signals and markets to catalyse the emergence of a new generation of clean technology businesses.

Potential New Environmental Taxes applicable in Ireland, 2011-2014, Million € [1]

Water Supply and Waste Water Treatment (subsidies removed)

Charge Category

2011

2012

2013

2014

Comment

User charges for water supply

250

500

750

1,000

Domestic sector free of charges in Ireland. Based on recovery of operating and (later) capital costs. Special provisions for those on low incomes

User charges for effluent and water discharge

57

114

171

228

same

Total

307

614

921

1,228

 

Environmentally related taxes

Pollution and resource taxes

2011

2012

2013

2014

Comment

Water abstraction levy

21

42

64

85

 

Applying Danish rates and system, whereby pipe leakage could be reduced from 30-40% to 10%

Levy on aggregates levy

79

79

79

79

 

Sand, gravel, crushed rock. Applying UK rates for reduced volume + 25% recycling.

Tax on packaging

35

45

55

70

 

Applying Danish rates for glass bottles and by weight for other waste streams.

SO2

29

59

88

118

 

Applying rates applicable in Denmark

NOx

78

155

233

311

Applying rates applicable in Sweden

GHG-nitrogen

23

45

68

90

15 € per CO2-eq for N2O of mineral fertilisers

Sum

265

425

587

753

 

Transport taxes

2011

2012

2013

2014

Comment

Re-calibration of VRT and extension to commercial

200

300

300

300

Data as to number of commercial vehicles etc. required for more accurate revenue estimates.

Air travel tax

55

55

55

55

Apply UK rate of 14 € for longer flights; lower rate for short flights at 3 € per passenger

HGV vignette scheme

56

56

112

112

Applying Germany’s approach and rates.

Sum

311

411

467

467

 

Energy taxes

2011

2012

2013

2014

Comment

Increasing excise duty on petrol and diesel

54

98

131

153

UK levels. Revenues netted out for the expected reduction in tank tourism from N Ireland and for differences in VAT rates.

CO2 tax, non-ETS

21

42

64

85

Increase CO2-tax to level in Sweden of 22€/tCO2

CO2 tax, offshore

21

42

63

85

Apply Norwegian system for taxation of offshore emissions from flaring etc. (0.05 €/Nm3)

Electricity tax

2

4

6

8

Introduce EU minimum rate for domestic sector (1.3 €/GJ)

Energy tax

59

118

178

237

Introduce new energy tax with minimum rate of 1.3 € per GJ - similar to EU minimum for electricity

Sum

107

214

321

429

 

Total environmentally-related taxes

733

1,140

1,496

1,788

 

 Land Value tax (resource rent)


2011

2012

2013

2014

Comment

Land Value Tax

500-750

1,000-1,500

1,500-2,250

2,000-3,000

 

Applying rates applicable in Denmark ( for ‘Grundskyld’)

Grand total


2011

2012

2013

2014

Comment

All sources

1,540-1,790

2,754-3,254

3,917-4,667

5,016-6,016

 

  [1] The potential for environmental taxes in Ireland based on experiences gained with environmental taxes in different European countries - with a gradual implementation over a period of four years.

 

 

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European Environment Agency (EEA)
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Phone: +45 3336 7100