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Green fiscal reform can create jobs and stimulate innovation across the EU

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Increasing some tax rates and removing subsidies on environmentally harmful products and services can boost economic growth if the revenue generated is then used to relieve the tax burden on employment and investment.

 Image © Nancy Sims

Throughout Europe people are clearly very concerned that solutions to the crisis should be fair, so it is apt to make polluters pay the costs that they currently impose on the rest of society.

Jacqueline McGlade, EEA Executive Director

The findings come from a series of studies from the European Environment Agency (EEA) looking at the potential for fiscal reform in four EU countries affected by the current economic crisis.

Proposals for environmental fiscal reform received a positive reaction when presented to government representatives in Portugal recently, the latest country to be analysed by EEA. Since 2010, similar analyses have been undertaken and presented for Spain, Italy and Ireland.

Environmental fiscal reform (EFR) can encourage growth by reducing taxation on labour and investment – for example, income tax and corporation tax – and shifting the tax burden to the production and consumption of environmentally-harmful goods and services. Another feature of EFR is removing harmful subsidies, for example, those given for fossil fuels, and using the revenues saved to stimulate renewable energy and resource-efficient technologies.

Studies have demonstrated that environmental taxes can achieve environmental objectives at the same time as raising revenues. Modelling shows that they also have a less negative effect on GDP compared to other types of taxes, such as direct taxes, for example income tax, or indirect taxes such as value added tax. This crucial feature of environmental taxes means countries could use them to support either fiscal consolidation or to reduce other taxes.

Environmental taxes can change behaviour, encouraging consumers to redirect their consumption towards less taxed commodities. Such incentives would likely create both low and highly skilled jobs, for example in the recycling and energy efficiency sectors. The shift in taxation can also stimulate innovation in the longer term.

Jacqueline McGlade, EEA Executive Director, said: “European governments are looking for effective ways to create sustainable growth. Environmental fiscal reform is an idea whose time has come. Throughout Europe people are clearly very concerned that solutions to the crisis should be fair, so it is apt to make polluters pay the costs that they currently impose on the rest of society.”

Potential in Portugal

  • Portugal had the highest share of environmental taxes as a percentage of GDP of any Member State in the late 1990s. By using environmental tax approaches currently implemented in other EU Member States, Portugal could revert to this level, raising additional revenue of €3 billion.
  • Opportunities for Portugal include taxing diesel and petrol cars equally, and bringing in new taxes on a variety of goods including drinks packaging, shopping bags and pesticides. Further revenue raisers could include air travel taxes, an air pollution charge for heavy-goods vehicles and a royalty for old hydropower and other natural resources.
  • Environmentally harmful subsidies could be cut, the report says. Portugal spends more than most other Member States on subsidising private company cars. Portugal could also cut more than € 200 million of other environmentally-harmful subsidies, the report says.

Environmental taxation and the removal of environmentally harmful subsidies have been repeatedly emphasised as potentially integral parts of the European Semester. The measures can contribute to a wider fiscal consolidation process in Member States, while helping to restructure economies in line with resource-efficiency objectives.

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European Environment Agency (EEA)
Kongens Nytorv 6
1050 Copenhagen K
Denmark
Phone: +45 3336 7100