Although the Fifth Environmental Action Programme published in 1992 recommended the greater use of economic instruments such as environmental taxes, the review of it carried out in 1995 concluded that there has been little progress in their use at the EU level. At the Member States level, however, there has been a continuing increase in the use of environmental taxes over the period of 5-6 years, primarily apparent in Scandinavian countries.Based on the request of the European Parliament, the European Environmental Agency (EEA) prepared the report "Environmental Taxes". The report provides an overview of the main issues involved with environmental taxes with a special focus on their effectiveness and on political barriers to their implementation. 16 environmental taxes used in Member States have been evaluated.
The development of economic instruments has generally been from cost-covering charges in the '60s and '70s, to a combination of incentive and fiscal functions in the '90s, and now to "green tax reforms" where taxes on "bads" such pollution replace some taxes on "goods" such a labor. According to their main policy objectives the report classifies three main types of taxes: cost-covering charges, incentive taxes, and, fiscal environmental taxes. In many cases, a mixture of these three functions can be observed in practice.
Addressing the issue of effectiveness of environmental taxes is a very complex and not an easy task. The report summarizes the result of the assessment of 16 examples of environmental taxes used by Member States with regards to their environmental effectiveness. The results show that principally these taxes have been effective. Instruments found to be effective are incentive taxes with sufficiently high rates and fully cost-covering charges with revenues earmarked to environmental expenditure. Examples of particularly effective taxes are the water pollution charge in the Netherlands as well as the Sulfur tax, NOx charge and the tax differentiation scheme for vehicle fuel of Sweden.
Among most significant political barriers to the introduction of environmental taxes, the report indicated the impact on competitiveness and low income groups, perceived conflicts between national taxes and EU or WTO rules, existing subsidies and regulations that provide environmentally harmful effects, and, differences in policies and cultures in Member States. The report finds that most barriers to implementation can be overcome by:
In the section of recommendations, the report underlines that environmental taxes can be expanded in more European countries and that an increase in harmonization and compatibility at the EU level is essential. There is also substantial need for more research, especially of policy packages, externalities and economic modeling, particularly in relation to the distributional aspects.
Special attention is paid to green budget reform, which also means using new tax revenues to lower existing taxes such as labor taxes. The report indicates that such a development should be increasingly based on input materials, emissions, and, new or expanded taxes on water resources, minerals, hazardous chemicals, transport, land use and tourism. Physical resource flows through the economy such as energy and minerals could also yield substantial tax revenues for green budget reform.
The EEA report concludes that if environmental taxes are well designed and implemented they could deliver improvements not only for the environment but also to innovation and competitiveness, employment and the tax system.
European Environmental Agency (1996): Environmental Taxes - Implementation and Environmental Effectiveness. Environmental Issue Series NO.1. 63pp, price ECU 10 excluding VAT. Contact the Office of Official Publications of the European Union in Luxembourg or country sales offices for ordering.