Green budgets: the potential for economic instruments to power environmental change

News Published 16 Sep 2011 Last modified 21 Jun 2016
2 min read
Photo: © Images_of_Money
The budget is one area where governments can influence our interaction with the environment – encouraging beneficial behaviour, and discouraging environmental destruction. As a conference on environmental fiscal reform opens at the European Environment Agency (EEA), we consider the potential for using financial carrots and sticks to improve the environment.

Ireland is one of the wettest countries in Europe, with up to 225 wet days per year in some areas. But even Dublin, capital of the 'Emerald Isle', has suffered from water shortages. A lot of water was being wasted, as tap water was free of user charges so there was little incentive for people to use water sensibly. Demand increased to such high levels that Ireland considered investing hundreds of millions of euros in new water transfers.

However, the Irish government will soon introduce water pricing, which aims to achieve two objectives – cutting water consumption, so making new water transfer infrastructure less urgent, while also providing a new revenue stream. Low income groups could be compensated directly ('green checks' for instance), which will be more effective than providing free access to common goods. In addition, this may in fact be more equitable - rich people have more bathrooms, bigger gardens and larger cars to wash, so they benefit relatively more if not the resource is properly priced.

This example illustrates the potential for improving the environment using economic instruments, which is the topic of a conference hosted by the European Environment Agency (EEA), 15-16 September, 2011.

The conference will focus on using environmental fiscal reform to drive innovation in European companies, encouraging both production and consumption of environmentally friendly and energy efficient products. In addition, it will consider ways of positively communicating environmental fiscal reform. Conference speakers include Connie Hedegaard, European Commissioner for Climate Action, and Jacqueline McGlade, Executive Director of the EEA.

Economic instruments and environmental innovation

Economic instruments such as taxes, user-charges, deposit-refund systems and emissions trading are among the strongest tools available for integrating environmental concerns directly in the operation of a market economy. They may not always guarantee that very specific quality measures are met, but the mechanisms can help businesses, industry and consumers make more sustainable choices. Moreover, implementation can be much smoother than imposing detailed regulations.

Indeed, such policy innovation can drive technical innovation, urgently needed across Europe. Presently Europe imports far more materials and energy for its consumption than it exports, with an environmental and an economic cost. As these raw materials are becoming more expensive, it is doubly important to decouple this consumption from economic growth.

Europe also needs increasingly comprehensive systems for recycling of materials, products and waste to take advantage of the raw materials that have been brought to Europe.

In addition to more general discussion on environmental fiscal reform, the conference also includes a number of special sessions looking at the revision of the Energy Tax Directive. The conference is co-organised by Green Budget Europe and the Danish Ecological Council. Sponsors include the EEA, the European Environmental Bureau (EEB), Rockwool International and thinktank Concito.