Designing tax systems for a green economy transition

The report, ‘Environmental taxation and EU environmental policies’ gives an overview of market-based instruments (MBIs), such as taxes, recycling fees, polluter-pays schemes or emissions trading permits, created under EU environmental legislation. It also analyses the current design and application of environmental taxes in EEA member countries and considers future prospects.

Energy, carbon and vehicle transport are the areas where environmental taxes are most commonly used and where the largest amount of revenue is generated. The analysis shows that resource and pollution taxes exist in the majority of the Member States and their  revenue is limited, but they have a big potential to change behaviour towards circular economy and resource efficiency

The report stresses the value that environmental taxes play in decoupling pollution and resource use from economic development. For example, in Sweden, GDP has grown by 58% between 1990 and 2013 since the introduction of a carbon dioxide tax that contributed to a 23% reduction of greenhouse gas emissions over the same period.

Such taxes also contribute to healthier living and can spur eco-friendly technology and innovations that generate wealth and jobs. These in turn help Europe’s goal in moving toward a low-carbon and resource-efficient economy and in supporting the EU’s policies on growth, competitiveness and jobs and its Europe 2020 strategy aims. Environmental taxes are less distorting towards economic behaviour compared with labour and corporate taxes. They also have lower evasion rates and administrative costs.

Looking ahead, the report considers that improving environmental performance alongside demographic changes poses systemic challenges for policy makers in the field of taxation. New low-emission and low-carbon technologies in the industrial and transport sectors can lead to the erosion of the current tax bases in European countries. For example, the Dutch car registration tax scheme has influenced car buyers to purchase smaller, lower carbon emitting vehicles, which in turn has led to a reduction in tax revenues. Transport fuel tax revenues will also decrease when petrol and diesel sales fall as the EU moves towards its climate policy targets. At the same time, the share of the population that is elderly (> 65) will increase while the level of labour supply (age group 15-64) will decrease in most countries leading to a potential reduction in revenues from labour taxes.

The report recommends considering these and related challenges such as economic competitiveness and distributional implications together when policymakers study the potential for tax-shifting programmes between labour and environmental taxes in the design of resilient, long-term tax systems for a future green economy.

Other key findings

• The report identifies 18 binding and 24 non-binding market-based instruments like levies, permits or taxes based on EU environmental legislation currently in force across EEA member countries.
• Environmental tax revenue at the EU-28 level increased by 9.5% in real terms between 2002 and 2014 (an average increase of 0.8% per year).
• There are differences between EEA member countries in terms of environmental tax revenues. In 2014, Denmark had the highest revenues percentage to GDP (4.1%) followed by Slovenia (3.9%), Croatia (3.9%) and Greece (3.7%). The EU 28 Member State average stood at 2.5% in 2014 compared with 2.3% in 2008.

Environmental tax revenues as a percentage of GDP in EU Member States, Norway and Switzerland, 1995–2014