15. Environmental taxes

15. Environmental taxes

indicator	policy issue	DPSIR	assessment
environmental taxes compared with total tax revenue	any progress in the use of environmental taxes?	response

Since 1980, revenues from environmental taxes have been increasing slowly. In 1997, they were slightly less than 7 % of total taxation and contributions paid by employees and employers to social security funds (social contributions). Taxes on polluting activities and products in the EU are small and have not increased significantly over the past 15 years. With the exception of Denmark and the Netherlands, energy taxes produce more than half of the revenue from environmental taxes in EU Member States. Energy and transport taxes provide more than 90 % of the total revenue from environmental taxes in most countries.

Environmental taxes are increasingly seen as efficient and effective instruments of environmental policy. These taxes take account of external environmental effects of economic activities and thus create fairer prices (i.e. ‘getting the price right’) for activities, products and services that consume natural resources and/or pollute the environment. Increasing the prices of such commodities through environmental taxes is generally expected to reduce consumption and thus relieve some of the pressures on the environment.

Ideally, progress in the use and impact of environmental taxes should be measured against their environmental effectiveness and economic efficiency. This requires advanced analysis and, as yet, not many results are available. A planned EEA report is expected to provide more information (EEA, in press).

The relative price increase of taxed products and activities can be taken as a first indication of the potential effect of taxes. For example, the real price of energy products (Figure 3.5) has decreased (as explained in Chapter 3), although revenue from energy taxes has increased (Figure 15.2). Chapter 5 gives information on fuel prices.

The indicators in this Chapter give an overview of the trend in environmental tax revenue.

15.1. Tax revenues

New environmental taxes help to relieve some of the burden of other direct taxes such as income tax and social contributions in achieving a fixed amount of total tax revenue. ‘Ecological tax reform’ is generally assumed to have a positive economic impact; it reduces the cost of labour and may increase employment. The term ‘double dividend’ is used to describe this alleged positive economic impact in combination with better pricing of environmental effects.

Many EEA member countries apply environmental taxes to a wide range of activities, products and services, e.g. energy, transport, polluting substances, packaging, waste products and chemicals. Surveys and studies carried out during the past decade suggest that the use of taxes and charges is increasing (OECD, 1989, 1994, 1999; European Commission/DG Environment, 1998; EEA, in press).

However, the ratio of revenue from environmental taxes to revenue from other taxes and social contributions in EU Member States is still small (Figure 15.1). Environmental taxes are defined as energy taxes (including taxes on transport fuels), transport taxes and ‘dedicated’ pollution taxes. Between 1980 and 1997, this revenue ratio grew slowly from 6 % to slightly over 7 %. Although revenue from other taxes and social contributions also increased during this period, their growth was smaller than the growth of environmental taxes. This change indicates that the tax burden on economic activities is shifting slightly towards products and activities with a negative environmental impact and away from other tax bases such as labour. Progress can be detected, but it is marginal. However, the revenue data includes only fiscal taxes such as excise duty on petrol, and excludes environmental charges such as water pollution charges which can yield substantial revenues.

Figure 15.1: Ratio of revenue from environmental taxes to revenue from other taxes and social contributions, 1980-1996

Source: Eurostat
Note: Environmental taxes are defined as energy taxes (including taxes on transport fuels), transport taxes and dedicated pollution taxes.

The ratio of revenue from environmental taxes to revenue from other taxes and social contributions is small, but increasing slowly.

The increase in the share of environmental taxes in total tax revenue — in particular due to increasing energy taxes — could point to a growing role for environmental taxes as instruments of environmental policy. However, there are several possible reasons for the increased revenue. Revenue will generally increase when the number of taxes increases or if tax rates are higher — both are positive for the environment. Evidence for these developments is provided by OECD surveys (OECD, 1989, 1994, 1999). Revenue will also increase if the magnitude of taxed polluting activities increases or if more polluting products are sold — a negative development for the environment; these trends are also quite likely. During the period covered by Figure 15.1, there has been a general growth in the economy and in the two economic sectors — energy consumption and transport — which provide most (about 90 %) of total environmental tax revenue.

The question then is whether environmental taxes have an incentive impact. Despite the lack of information on the environmental effectiveness of taxes and charges, there is some evidence that environmental taxes do work (e.g. EEA, 1996, in press; OECD, 1999). If this is true, it means that in the absence of environmental taxation, polluting activities would have risen more than they actually did (assuming other policy measures affected the same actors equally).

Figure 15.2: Environmental taxes as a percentage of total taxes and social contributions, 1980-1997

Source: Eurostat
Note: Energy taxes include taxes on transport fuels. The latter make up more than three-quarters of energy taxes.

 The increase in revenue from environmental taxes is caused by a growth in energy taxes. The revenue from ’dedicated’ pollution taxes is small and not increasing.

The slight increase in the share of environmental taxes in total tax revenues and social contributions is mainly due to the increase in energy taxes from about 4 % to 5 % (see Figure 15.2). Transport taxes remained constant and pollution taxes made only a marginal contribution.

As shown in Figure 15.3, the contribution of environmental taxes to total tax revenues and social contributions varies widely between EU Member States: it ranges from 5 % in Austria to 10 % in Portugal. Energy taxes dominate, with pollution taxes significant only in Denmark, France and the Netherlands. Transport taxes are as important as energy taxes in Denmark, Ireland and the Netherlands, but much less important in France and Italy (where tolls are charged on major motorways) and in Sweden. Despite its lower tax levels, Luxembourg receives a large amount of revenue from fuel taxes due to ‘fuel tourism’ from neighbouring countries.

Figure 15.3: Revenue from environmental taxes in EU Member States as a percentage of total revenue from taxes and social contributions, 1997

Source: Eurostat

‘Dedicated’ pollution taxes are significant only in Denmark, France and the Netherlands.

15.2. Indicator improvement

A general evaluation of progress in environmental taxation cannot easily be achieved using indicators. Current data is insufficient for the advanced analysis required to measure effectiveness and efficiency in quantitative terms. However, some improvement in the indicators could be achieved in the near future. A breakdown of tax revenues according to number of taxes, tax rates and level of polluting activities and products would be helpful. More information on the relative price increases of taxed products and activities due to environmental taxes could provide a better indicator of the effectiveness of these taxes than their total revenues.

The indicators in this Chapter include only fiscal taxes (i.e. payments into the public purse). For a complete analysis, the significant environmental charges (i.e. payments for environmental services) imposed by many Member States should be included, but available data is incomplete and inconsistent.

15.3 References and further reading

European Commission (1996). Manual: statistics on environmental taxes. European Commission, Brussels.

European Commission (1997b). Communication on environmental taxes in the single market. COM(97)9. European Commission, Brussels.

European Commission/DG Environment (1998). Database on environmental taxes in the European Union Member States, plus Norway and Switzerland. http://europa.eu.int/comm/dg11/enveco/database.htm.

EEA (1996). Environmental taxes: implementation and environmental effectiveness. European Environment Agency, Copenhagen.

EEA (in press). Environmental taxes and charges: tools for integration and environmental policy. European Environment Agency, Copenhagen.

OECD (1989). Economic instruments for environmental protection. Organisation for Economic Co-operation and Development, Paris.

OECD (1994). Managing the environment: the role of economic instruments. Organisation for Economic Co-operation and Development, Paris.

OECD (1999). Economic instruments for pollution control and natural resources management in OECD countries: a survey. Organisation for Economic Co-operation and Development, Paris.

OECD (1999). Consumption tax trends. Organisation for Economic Co-operation and Development, Paris.