- Although the 5th Environmental Action
Programme of the EU in 1992 recommended the greater use
of economic instruments such as environmental taxes,
there has been little progress in their use since then at
the EU level. At Member State level, however, there has
been a continuing increase in the use of
environmental taxes over the last decade, which
has accelerated in the last 5-6 years. This is primarily
apparent in Scandinavia, but it is also noticeable in
Austria, Belgium, France, Germany, The Netherlands and
the United Kingdom.
- Evaluation studies of 16 environmental
taxes have been identified and reviewed in this report.
Within the limitations of the studies, it appears that
these taxes have been environmentally
effective (achieving their environmental
objectives) and they seem to have achieved such
objectives at reasonable cost. Examples of particularly
successful taxes include those on sulphur dioxide and
nitrogen oxides in Sweden, on toxic waste in Germany, on
water pollution in The Netherlands, and the tax
differentials on leaded fuel and 'cleaner' diesel fuel in
- Taxes, such as the potential negative impacts on competitiveness; on employment, Most barriers to implementation, especially of energy (particularly on specific sectors or regions); and on low income groups can be overcome by:
- careful design,
- the use of environmental taxes and respective revenues as part of policy packages and green tax reforms
- gradual implementation;
- extensive consultation; and information.
The mitigation of potential negative impacts can be ensured through the above measures, as recent experience in Scandinavia has demonstrated. The overall competitiveness of countries may be improved by well designed taxes which can spur innovation and stimulate structural change, though the latter remains speculative.
- As environmental concerns
move from point-source emissions and problems, such as
industrial emissions from pipelines and chimneys, to
include more diffuse and mobile sources of pollution,
such as solid waste, or from the agricultural and
transport sectors, there is increased scope for the
greater use of taxes, as well as other market
based instruments, at both Member States and EU level.
- If environmental taxes are well designed and implemented to exploit the advantages described above, they could deliver improvements in four key areas of public policy:
- the environment;
- innovation & competitiveness;
- employment, and
- the tax system.
These are the main conclusions of a report on environmental taxes by the European Environment Agency (EEA), requested by the European Parliament. The report provides an overview of the main issues involved in environmental taxes, with a particular focus on their environmental effectiveness and on the political barriers to their implementation. It provides illustrative examples of environmental taxes only; comprehensive reviews are available from OECD (1995).
Why environmental taxes?
The main reasons for using environmental taxes are:
- they are particularly effective instruments for the internalisation of externalities, i.e., the incorporation of the costs of environmental services and damages (and their repairs) directly into the prices of the goods, services or activities which cause them; contributing to the implementation of the Polluter Pays Principle and to the integration of economic and environmental policies;
- they can provide incentives for both consumers and producers to change their behaviour towards a more 'eco-efficient' use of resources; to stimulate innovation and structural changes; and to reinforce compliance with regulations;
- they can raise revenue which may be used to improve environmental expenditures; and/or to reduce taxes on labour, capital and savings.
- they can be particularly effective policy tools to tackle current environmental priorities from such 'diffuse' pollution sources as transport emissions (including air and maritime transport), waste (e.g. packaging, batteries), and chemicals used in agriculture (e.g. pesticides and fertilisers).
Types of environmental taxes
In order to facilitate measuring the effectiveness of environmental taxes they have been classified into three main types, according to their main policy objectives:
- cost-covering charges - e.g.
designed to cover the costs of environmental services and
abatement measures, such as water treatment (user
charges) and which may be used for related environmental
expenditures (earmarked charges):
- incentive taxes - designed to
change the behaviour of producers and/or consumers: and
- fiscal environmental taxes- designed primarily to raise revenues.
In many cases a mixture of these three functions can be observed in practice.
The development of environmental taxes has generally been from cost-covering charges in the '60s and '70s, to combinations of incentive and fiscal environmental taxes in the '80s and '90s, and then their more recent integration into 'green tax reforms', where taxes on 'bads' such as pollution replace some taxes on 'goods' such as labour.
Who is using environmental taxes?
The current trends concerning environmental taxes (here divided into taxes on energy and other environmental taxes) can be summarised as follows:
- environmental taxes, (non-energy taxes according to the European Commission classification of DGXXI), represented only 1,5% of total EU taxes in 1993; in only a few countries do environmental taxes represent a larger proportion (Netherlands 5.1%; Denmark 4%); taxes classified as energy taxes, however, represented a larger proportion (5,2% for the EU on average) and up to around 10% in Portugal and Greece and 6-7% for Italy and the UK);
- general trends of taxation since 1980 show an increase in labour taxes and a decrease of capital taxes, while the share of energy and environmental taxes remained relatively stable, with a slight increase in energy taxes;
- although there has been little progress in implementing environmental taxes at EU level, considerable progress has been made at Member State level, particularly in northern European countries;
- several countries are currently implementing environmental taxes in 'green tax reforms', using the new tax revenues to lower other taxes, such as labour taxes.
Do environmental taxes work?
Table 1 summarises the results of the review and qualitative assessment of the small number of evaluation studies available on environmental taxes. The main conclusions are:
- the taxes evaluated revealed environmental benefits and, in most cases appear to be cost effective within the constraints of the evaluation performed;
- Examples of particularly effective taxes are those on Swedish air pollution; on Dutch water pollution; and the NOx charge and tax differentiation schemes for vehicle fuels in Sweden.
- incentive taxes are, in general, environmentally effective when the tax is sufficiently high to stimulate abatement measures;
- a significant contribution to the environmental effectiveness of the cost-covering charges is provided by the use of revenues for related environmental expenditures.
- Taxes can work over relatively short periods of time (2-4 years), and so compare favourably with other environmental policy tools, though with energy taxes (as with some regulations), they can take 10-15 years to exert substantial incentive effects.
- Evaluating a tax and its environmental impact is not easy. Taxes are often part of a policy package that is hard to disentangle: therefore the effectiveness of the tax 'per se' cannot always be clearly identified.
In addition, taxes can have multiple environmental effects and secondary benefits that could improve policy in four key areas the environment, innovation and competitiveness, employment and the tax system.
Summary of an assessment1 of selected environmental taxes2
|Instrument||Environmental effect||Incentive effect||Remarks on overall effectiveness|
|Fiscal environmental taxes|
|Sulphur tax (S)||+++||+++||Average S-content of fuels dropped considerably (40%) over 2 years and consequently significant S emission reductions were achieved. Although being a fiscal environment tax it had strong incentive effect, probably due to high tax rate.|
|CO2 tax (S)||?/+||?||Shift in district heating from fossil fuel to bio-fuels over 2 years; increased competitiveness of combined heat and power production|
|CO2 tax (N)||++||?||Partial analyses indicates some effects such as reduction of total CO2 emissions of 3-4% in 2-3 years from rising trend.|
|Tax on domestic flights (S)||+||?||Some impact on acceleration of replacement of combustion chambers by one airline and on emissions generally over 1-3 years.|
|Waste Charge (DK)||++||?||Evaluation ongoing; dramatic increase of reused demolition waste from 12-82% over 6-8 years; and decrease in waste production; tax rate nearly doubles cost of waste disposal|
|Tax differential on unleaded petrol||+++||+++||Tax differential substantially contributed to phasing out of lead over 5-7 years; differential apparently covered costs of unleaded petrol production - strong incentive effect|
|Tax differential on 'cleaner' diesel (S)||+++||+++||Tax differential induced dramatic increase of market share of 'cleaner' fuel complying with stricter environmental standards in 3-4 years. Tax rebates for such fuels provide strong incentives as they reduced production costs to a level lower than those of standard fuels.|
|Toxic waste charge (D)||++||++||Reduction in waste production of at least 15% in 2-3 years. Planned capacities for incineration were consequently reduced.|
|N0x charge (S)||+++||+++||Design and tax rate provided incentive for monitoring and abatement measures in liable plants contributing to reduction of NOx emissions by 35% in 2 years; successful strengthening of permit policy.|
|Fertiliser charge (S)||+||?||One of the factors, within context of the agricultural reform policy, contributing to decreased use of artificial fertilisers over 5-10 years|
|Water pollution charge (F)||+||+||Tax-bounty system and sector contracts may have had some positive environmental impacts over 10-12 years; revenues of charge are modest|
|Water pollution charge (D)||+||+||Positive impact on applying for and issuing of lower-pollution permits. Early announcement contributed to stepping up construction of wastewater treatment capacity.|
|Cost-covering charges; user charges|
|Water pollution charge (NL)||+++||+||Charge created funds for increase of treatment capacity; although the tax incentive was low, use of the revenue for extending treatment capacity contributed to a substantial improvement of water quality over 10-15 years.|
|Household waste charge (NL)||+||?/+||Fairer distribution of costs of household waste management; variable rates may have provided incentive for reduction of waste (10-20% less waste / head)|
|Cost-covering charges; earmarked changes|
|Battery charges (S)||++||0||Charge renders recycling of Pb-batteries feasible; collection rate in 1993 was 95% (60% in 1989), for other batteries effect is still unclear.|
|Aircraft noise charge (NL)||+||0||Satisfactory in terms of fund-raising; allowed for covering cost of sound insulation measures around airport.|
absent or negligible effect
- The incentive effect evaluation is based on the evidence found on tax payers being encouraged to reduce pollution, mostly due to significant differentials between the tax rate and the cost of abatement measures (or a proxy). The environmental effectiveness is based on the evidence on environmental benefits derived from the tax. The question marks indicate lack of evidence.
- Brief details of each tax reviewed are included in Annex II.
There are several important political barriers to the introduction of environmental, particularly energy, taxes:
- the perceived impacts on competitiveness, and often on employment, particularly in some sectors/regions;
- the perceived impacts on low-income groups (i.e. the poor may pay proportionally more than the rich);
- perceived conflicts between national taxes and EU, or world trade, rules;
- the EU unanimity rule when voting on fiscal measures;
- perceptions that the taxes have to be high if they are to work;
- the perceived conflict between changing behaviour (i.e. less tax) and maintaining revenues;
- existing subsidies and regulationsetc. that provide environmentally perverse effects; and
- other policies and cultures which negate or inhibit environmental taxes.
This report finds that most barriers to implementation can be overcome by:
- the removal of environmentally perverse subsidies and regulations:
- careful design of the taxes and of mitigation measures;
- the use of environmental taxes and their revenues as part of policy packages and green tax reforms;
- gradual implementation;
- extensive consultation; and
EU compatibility and unanimity voting need to be addressed.
The overall competitiveness of countries may be improved by well designed taxes which can spur innovation and possibly encourage structural change.
1. Greater use of environmental taxes
While the need to change production and consumption patterns has gained wide acceptance since the Rio Summit in 1992, the report for the review of the Fifth Environmental Action Programme (5th EAP) 'Environment in the Europe Union 1995' published by the EEA at the end of 1995, concluded that, three years after the publication of the 5th EAP ". . . most production and consumption trends remain unchanged...". Environmental taxes, among other policy instruments, can help achieve such structural changes, by correcting price signals and market distortions. They should therefore be used more extensively.
The use of environmental taxes can be expanded in 3 main ways:
- their extension to more European countries;
- increasing their harmonisation and compatibility at the EU level;
- developing new tax bases, increasingly based on input materials as well as on emissions, and extended to new or expanded tax bases such as water resources, minerals, hazardous chemicals, transport (air and maritime), land use and tourism. The physical resource flows through the economy like energy, minerals and the profits from land use could yield substantial tax revenues for green tax reforms.
2. Careful design and implementation
The benefits of environmental taxes and the potential for their increased use is considerable, but careful design and implementation is necessary to realise these gains in practice. The box below without pretending to be exhaustive, summarises some points for the successful implementation of environmental taxes.
3. More and better evaluation
While the theoretical evaluation of environmental taxation is a well developed field, adequate evaluations of practical experiences with such taxes is still comparatively rare. Consequently, decision making processes may be impaired by lack of feedback information on the performance of different policy options. Improving this situation implies increased evaluation efforts, greater availability of reliable data, and evaluation mechanisms designed into the policy package. The need to integrate evaluation with tax design has been recognised by OECD, which has agreed on methodological guidelines for economic instrument evaluation. (OECD 1996 forthcoming).
4. More research - especially of policy packages and externalities
Environmental taxes often work best when part of a policy package aiming at addressing one (or more) environmental problems, but the interaction of several policy tools is then complex. Further analysis and understanding of these issues could be extremely helpful for future policy making. Particularly worthwhile would be the development of a framework addressing the potential applicability of different policy tools according to a typology of environmental problems.
Finally, in order to improve the design of environmental taxes, research is needed in areas such as economic modelling and the evaluation of externalities, in particular in relation to their distributional aspects.
More research is clearly needed, but sufficient is already known to justify much further policy development on environmental taxes.
Checklist for the successful implementation of environmental taxes:
- Studies in advance investigating the potential effects of the tax/policy package, in particular the calculation of the abatement costs in each sector, equity implications; and the benefits and costs of improving ecoefficiency.
- Early and greater involvement of tax/fiscal authorities;
- Extensive consultations with stakeholders and the public;
- Early announcement of environmental taxes;
- Their introduction within a policy package of complementary measures:
- Gradual imposition of the tax;
- Recycling of revenues to:
tax payers, e.g for environmental measures, via rebates or investment incentives, provision of information and training;
related sectors (e.g some revenues of a waste tax going to the waste sector);
reduce other taxes such as taxes on labour.
- Increasing incentive effect, via:
gradually increasing the real price signal over long periods;
gradually reducing exemptions;
- Evaluation measures designed into the tax system.