What measures can be considered when greening the tax system? The integration of environmental concerns into fiscal systems can be achieved if existing distortionary direct or indirect taxes, tax provisions and subsidies likely to have negative environmental impacts are identified and removed. Existing taxes can be restructured in an environmentally-friendly manner (for instance by restructuring energy and transport related taxes which have negative environmental implications); and new eco-taxes, e.g., on polluting products, can be introduced, as appropriate.

In most OECD countries, revenues from eco-taxes is still limited. In the European Union eco-tax revenues accounted for about 6% of total tax revenue (energy taxes are included in this figure). Concern has been raised about the sustainability of eco-tax revenues. On one side a reduction of tax bases related to environmentally-harmful products or activities can be desirable if the tax resulted in reduced environmental burden. However, tax policies are subject to a number of constraints - such as efficient, sustainable revenue raising. It is obvious that products which remain in the market in the longer run are preferentially products subject to eco-taxation (for instance, energy products or transport activities).

In countries where unemployment and labor taxes are both high, the reduction of labor taxes could result in higher employment. Some payroll tax reductions could be financed by new or increased eco-taxes, thus providing a "double dividend" in terms of both improved environmental protection and lower unemployment. The OECD experts state, however, that the evidence from model simulations regarding the existence of a double dividend is mixed and particularly on the degree of flexibility in labor markets. In order to realize a significant employment benefit, substantial cuts in the taxation of labor are needed, hence, broad tax bases for eco-taxes would be needed to make up the revenue shortfall caused by reduced labor taxes. This could probably only be secured by increased taxation of energy products and/or transportation.

Not only taxes, but any policy measure that is intended to improve the environmental situation will likely have distributional effects. Taxes are, however, more visible than many other policy instruments and may lead to vocal concern about their possible regressive effects. However, the OECD authors state that at their present levels, eco-taxes do not seem to have any significant regressive impacts. Only in some simulation models involving significant carbon taxes modest regressivity was indicated. Concerning options for reducing unacceptable effects of eco-taxes on income distribution, the OECD experts recommend to give preference to compensation options (aid given to particular groups ex post). Mitigating the effects ex ante should be as far as possible avoided as it would work against the original objectives of the taxes.

The report concludes the present knowledge and debate about greening tax systems as follows: Economic instruments, in particular eco-taxes, are only one policy instrument within complex environmental policy packages. However, there is growing evidence that eco-taxes can be effective in terms of environmental protection, when properly designed and implemented. Eco-taxes can contribute to a better integration of environmental and economic policies than regulatory instruments. Reducing distortionary taxes and direct subsidies and introducing appropriate adjustments in tax systems, in particular in the energy, transport and agriculture sectors, could bring about in the medium and long term not only environmental benefits but also economic benefits (increased economic and environmental efficiency). Therefore the countries should examine the opportunities for greening their tax systems taking into account their specific economic, fiscal and environmental context. Taking up internationally concerted action would minimize undesirable competitiveness effects.

Environmental Taxes and Green Tax Reform, OECD 1997, p. 57, US$10. OECD Mail Orders, 2, rue Andre-Pascal, 75775 Paris Cedex 16, France. Tel: +33-1-45248200, Fax: +33-1-49104276, E-mail: Compte.PUBSINQ@oecd.org.