Cutting deficits and protecting the environment

Unfortunately, market prices do not take into account the full economic value of many goods and services we obtain from our environment. From clean air and water to timber, food and strolls in nature, we often pay for only a fraction of the benefits we receive.

Recent studies, including the European Environment Agency’s State and Outlook Report 2010 (SOER 2010), underline that we cannot look at environmental issues in isolation. To preserve and manage our natural capital wisely, Europe needs to reshape its economy and improve resource efficiency.  Environmental tax reform is one of the measures that could contribute to Europe’s transition towards a greener economy.

What is environmental tax reform?

The idea behind environmental taxation is to impose charges on ourselves, and thereby reduce the pressure we put on the environment. When the revenue collected from such taxes (on the use of energy, emissions of air pollutants, land use, etc.) is used to reduce or avoid other taxes, it is called ‘Environmental Tax Reform’.

Where taxes on environmentally harmful goods and services are used to reduce the tax burden on activities we want to encourage, such as employment and investment, it is possible to secure a ‘double dividend’: an improved environment and a better performing economy.

Case study: Ireland

To explore the economic potential of environmental taxes, the European Environment Agency (EEA) has focused on an individual member state – Ireland – that is currently struggling with budget deficits. Several environmental tax experts came to Dublin to present their experiences. The Symposium participants identified a number of opportunities where environmental performance could be significantly improved, while at the same time generating revenues. Some of the opportunities of direct relevance to Ireland as well as their potential are listed below.

Environmental taxation is already widely used in Ireland. The poster child of this approach is the plastic bag levy, which reduced the use of such bags in Ireland by over 90 % within a week of its introduction. However, Ireland has also recently introduced a CO2-tax for the part of fossil fuel use not subject to emissions trading. The below proposals would provide a significant relief – up to €5 billion – for the Irish budget.

The ‘polluter pays principle’ provides that those using most resources are taxed according to their environmental impact. Without such charges, high income groups will always benefit as they use more resources and environmental services of all sorts.

Lower income groups have a proportionately smaller environmental tax burden but still face a challenge to meet their financial obligations. Such groups could be offered means to reduce consumption. In the case of water consumption, for example, there are very low cost investments with immediate effects. Alternatively, they could be provided some form of income support — a ‘green cheque’.  

The ‘polluter pays principle’ also applies to businesses, requiring them to pay for the impact of their activities on the publicly owned environment. Environmental tax reform would also create the price signals and markets to catalyse the emergence of a new generation of clean technology businesses.

Potential New Environmental Taxes applicable in Ireland, 2011-2014, Million € [1]

Water Supply and Waste Water Treatment (subsidies removed)

Environmentally related taxes

 Land Value tax (resource rent)

Grand total

  [1] The potential for environmental taxes in Ireland based on experiences gained with environmental taxes in different European countries - with a gradual implementation over a period of four years.