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EXECUTIVE
SUMMARY
Main Conclusions
- 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.
- 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:
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:
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:
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:
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 |
Incentive Charges | |||
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. |
Legend | +/++/+++ 0 ? |
small/medium/high effect absent or negligible effect unknown effect |
Political Barriers
There are several important political barriers to the introduction of environmental, particularly energy, taxes:
This report finds that most barriers to implementation can be overcome by:
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.
Recommendations
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:
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:
For references, please go to https://www.eea.europa.eu/publications/92-9167-000-6-sum/page002.html or scan the QR code.
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