Ekins, 1999 P. Ekins, European environmental taxes and charges- Recent experience, issues and...

Ecological Economics 31 (1999) 39–62

SURVEY

European environmental taxes and charges: recentexperience, issues and trends

Paul Ekins *Department of En6ironmental Social Sciences, Keele Uni6ersity, Staffordshire ST5 5BG, UK

Received 3 March 1998; received in revised form 12 April 1999; accepted 3 May 1999

Abstract

The use of environmental taxes and charges in OECD countries increased by over 50% between 1987 and 1994.While revenues raised by environmental taxes and charges remain small relative to overall taxation, they comprise arising proportion in most European countries. Several European countries have either undertaken or are consideringsystematic shifts in taxes away from labour and onto the use of environmental resources. Potential negative effectson competitiveness, and regressive distributional effects, are the major cause of concern with regard to theintroduction of environmental taxes. A number of ways of mitigating such effects exist and have been implemented.© 1999 Elsevier Science B.V. All rights reserved.

Keywords: Environmental tax; Systematic shift; Negative effects; Distributional effects; Competitiveness

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1. Introduction

Environmental policy in the 1970s and 1980swas almost wholly driven by systems of regula-tion—of emissions and environmental quality, ofprocesses and technologies—which are sometimesdescribed as instruments of command andcontrol.

However, during the 1980s the interest of policymakers in environmental taxes, and other market-based instruments of environmental policy (for

example, tradable permits or deposit refunds) waskindled by a number of factors:1. Increased awareness of the power and poten-

tial of markets and a new orientation towardsmarkets in public policy.

2. Increased recognition of the limitations of gov-ernment in general, and of traditional com-mand and control systems of environmentalregulation in particular.

3. Increased concern that such systems were notadequately coping with environmental prob-lems but were imposing substantial economiccosts, leading to a new interest in other instru-ments that might offer more cost-effective en-vironmental policy.

* Tel.: +44-1782-583093; fax: +44-1782-584144.E-mail address: [email protected] (P. Ekins)

0921-8009/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved.

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P. Ekins / Ecological Economics 31 (1999) 39–6240

4. Desire to make further progress with the im-plementation of the polluter pays principle, tointernalise environmental costs into the pricesof the relevant products and activities, andincreased desire, as part of a more cost-effec-tive approach, to integrate environmental pol-icy into other policy areas.

In short, it became increasingly recognised thattraditional regulatory environmental policy, de-spite some successes, was not managing to preventfurther unacceptable environmental damage, andit was feared that the costs of attempting to makeit do so would be great. Economists had long saidthat in many areas (but not all) environmentalgoals could be achieved more cost-effectivelythrough appropriate taxes and charges. In thenew market-oriented atmosphere of the 1980s,with its associated consciousness of cost and theneed for competitiveness, policy makers began totake them seriously.

One of the early indications of this change wasthe emphasis given to economic instruments inenvironmental policy by the report of the WorldCommission for Environment and Developmentin 1987. Another impetus was provided in theearly 1990s, when recession resulted in unemploy-ment moving up the public policy agenda; whilecontinuing globalisation and intensifying competi-tion in global markets focused attention on theimpact of tax-benefit systems on competitiveness.Both these developments resulted in increased in-terest in the possibility that a green tax reform,whereby environmental taxes replace employers’taxes on labour, could achieve an employmentdividend as well as an environmental dividend ofimproved environmental quality. A substantialquantity of theoretical research into and mod-elling of this issue, discussion of which is beyondthe scope of this paper (but see Ekins, 1997), hasso far proved inconclusive. However, enough of ithas indicated the likelihood of at least a smalldouble dividend for this to remain one of thekeenest areas of policy making interest in environ-mental taxation. The OECD (1996, pp. 71) hasconcluded on this issue: ‘Evidence suggests that asignificant revenue-neutral cut in social securitycontributions could increase employment over themedium term in those countries where wages andprices are sticky.’

In the context of the European Communities,the new interest in economic instruments wasboth reflected in and amplified by the Commis-sion’s Task Force Report on the environment andthe internal market from 1989, the European Par-liament’s hearing on economic instruments inJune 1990, as well as the decision in Rome by theEnvironment Council in September 1990 to de-velop a proposal for a European carbon-energytax. Both the European Council’s Dublin declara-tion from 1990, as well as the Fifth Environmen-tal Action Programme from 1992 (EC, 1992)pointed more formally to the need for adoptingsuch new approaches in the use of policy instru-ments, while the Delors’ White Paper on Growth,Competitiveness and Employment signified thewider positive macro-economic implications ofsuch an environmental policy.

The rather limited progress in the use of eco-nomic instruments at the EU level since then cansometimes give the impression that these instru-ments have been more characterised by discussionand rhetoric than practice. However, such animpression underestimates the significance of thedevelopments that have taken place at the na-tional level during the last 5–6 years.

In a number of countries the use of economicinstruments has spread widely, among EU mem-ber states in particular in the Benelux and theScandinavian countries, but also to some extent inlarger European countries such as the UK,France, Italy and Germany. In transitionaleconomies, such as Poland, Hungary and Estonia,environmental charges and taxes, despite manyimplementation problems, are seen as a promisingmechanism to integrate economic and environ-mental policies (OECD, 1994a). In Asianeconomies with rapid industrialisation, such asTaiwan, Korea, Malaysia, Thailand and Singa-pore, market-based instruments have over the last5 years become frequently applied alongside thetraditional command-and-control regulations stillprevailing in these countries (OECD, 1994b).

At the EU level the Packaging Waste Directivehas provided leeway for individual member statesto apply economic instruments in this field, until amore harmonised approach is defined, but apartfrom the minimum excise rates that have been

P. Ekins / Ecological Economics 31 (1999) 39–62 41

settled, this is about the only progress that canbe noted. The reason for this development isnot least that the use of economic instruments istied in with the wider issue of tax policy at theEuropean level. The EU is a supra-national in-stitution in which the harmonisation of taxes re-quires unanimity among member states, andwhile common environmental taxes, such as aEurope-wide CO2 tax, would represent a stepforward in the integration process, they havenot received unanimous support. The present ef-forts at the EU-level are thus targeted towardsimproving the conditions for individual memberstates that wish to take the opportunity of theadvantages for environmental policy implemen-tation offered by the use of economic instru-ments, although a proposal for minimumharmonised excise duties on energy has alsobeen put forward.

The purpose of this paper is briefly to set outthe rationale for environmental taxes, to classifythem so that their purpose and motivation canbe understood, and to identify the environmen-tal themes towards which they are directed (Sec-tion 2). The paper then provides an overview ofthe national applications of economic instru-ments in industrialised countries. The OECDhas produced comprehensive listings of the ap-plication of economic instruments based on sur-veys in 1987 and 1992 (OECD, 1989, 1994c),and a further listing in 1997 (OECD, 1997a).While this paper updates this information tosome extent, using a database recently producedfor the European Commission (ECDGXI, 1999),it also offers some observations on the acquiredimplementation experiences with economic in-struments, including where countries have exper-imented with a more general tax shift fromlabour to resources and pollution and green taxreform (Section 3). Tax rates and revenues,where given, are converted into ECU to providecomparability, using ECU exchange rates thatexisted in 1997, and which are set out in Ap-pendix A. Section 4 addresses the major issuesthat are raised by the imposition of environmen-tal taxes, including effects on competitivenessand distribution. Section 5 concludes.

2. Classification of environmental taxes

2.1. The rationale for en6ironmental taxes andcharges

Since the birth of modern environmental policyin the early 1970s, the industrialised countrieshave endorsed the polluter pays principle. OECDcountries embraced the principle in 1972, it wasrecommended by the Council of Ministers in theEuropean Community’s First Environmental Ac-tion Programme in 1973, and at the intergovern-mental conference in 1985, it was laid down in theTreaty of Rome. Its original intention was to putrestrictions on subsidies for environmental protec-tion and to ensure that polluters paid the costs ofsuch protection made necessary by their activities.A wider interpretation, sometimes put on theprinciple, is that polluters should pay the costs ofthe environmental damage they cause. Either in-terpretation justifies the appropriate imposition ofenvironmental taxes and charges. A distinctionbetween taxes and charges is drawn in the nextsection.

The basic rationale for the use of taxes andcharges in environmental policy is provided by theexistence of environmental externalities: impactson the environment, and perhaps thence on peo-ple, which are side-effects of processes of produc-tion and consumption and which do not enterinto the calculations of those responsible for theprocesses. Where the effects are negative, exter-nalities are costs. By levying a tax or charge onthe activity giving rise to the effect, the externalcost can be partially or wholly internalised. Thereis increasing evidence that environmental exter-nalities, in terms of their effects on human health,buildings and ecosystems are now very substan-tial, especially in such areas as transportation,which increases the inefficiency and inequity ofnot internalising them, and the desirability ofdoing so.

Provided the tax or charge is levied on thecause of the environmental damage (for example,on emissions to air, water or land) in such a waythat a reduction in the cause (for example, areduction in the volume or toxicity of the emis-sion) reduces the tax liability, then there will be an


incentive for the cause to be reduced. A producerfacing an emissions tax will seek to abate theemissions or change to inputs or processes thatcause them less or not at all. Such tax as is paidwill increase the price of the relevant product,giving consumers the incentive to switch awayfrom it. Moreover, the incentive to reduce thetaxed effect is operative at all levels of the effect,unlike with conventional environmental regula-tion, when the improvement incentive ceases tooperate once the regulatory standard has beenreached.

Given that producers and consumers will prob-ably not cease entirely the activities that are beingtaxed, the taxes and charges will raise revenues.These may be used to address environmentalproblems directly; or they may be used to sub-sidise producers or consumers to shift to moreenvironmentally-benign activities, providing a sec-ond incentive for environmental improvement; orthey may serve to prevent regressive effects fromthe taxes and charges, by compensating those onlow incomes; or they may be applied to othergovernment purposes, allowing, for the same levelof government expenditure, other taxes to bereduced.

The essential elements of environmental taxesand charges are therefore that:1. They incorporate the costs of environmental

damage into the prices of the goods, servicesor activities which give rise to them.

2. Thereby they create incentives for producersand consumers to shift away from environ-mentally-damaging behaviour, so reducing thedamage.

3. Because each producer faces the same incen-tive, they act to equalise the marginal cost ofenvironmental improvement across the taxbase, thereby achieving the improvement atleast cost.

4. For producers they may act as a spur toinnovation even in the short term. When en-ergy, water and raw materials, as well as solid,liquid or gas emissions become taxed, tax-payers will develop new modes of production,transportation, housing, energy use and gen-eral consumption to reduce their liability. Thestimulus to such an ‘ecological modernisation’

is significant both to sustainability and to longrun international competitiveness, where to-morrow’s products depend on today’sinnovations.

5. They raise revenues which can be used for avariety of purposes, some of which improvethe environment or give further incentives todo so. Alternatively the revenues may be usedto reduce labour taxation with the objective ofincreasing employment, or to correct undesir-able distributional effects.

2.2. Classifying en6ironmental taxes and charges

Classifying environmental taxes is rather a com-plex task, due to both the different forms they cantake and the different functions they can perform.The following classification distinguishes betweenthe incentive and revenue-raising functions of atax, and between the main uses to which therevenues can be put.

2.2.1. Cost-co6ering chargesIronically the earliest experience of environ-

mental taxes actually arose from the implementa-tion of traditional regulatory environmentalpolicy. Regulating emissions to land or watercosts money. In accordance with the polluter paysprinciple, it seemed appropriate that the regula-tion should be paid for by those being regulated.Hence the first category of environmental taxesand charges, still important today, is that of cost-covering charges, whereby those making use ofthe environment contribute to or cover the cost ofmonitoring or controlling that use.

Cost-covering charges can be of two types: usercharges, where the charge is paid for a specificenvironmental service (for example, treating thewaste-water, disposing of the waste of the charge-payer, or covering the administrative costs ofregulation); and earmarked charges, where therevenue from the charge is spent on related envi-ronmental purposes but not in the form of aspecific service to the charge-payer (for example,general water treatment or land remediation). Thelevel of a cost-covering charge is determined bythe service it is intended to deliver or the otherpurposes to which its revenues will be put.


2.2.2. Incenti6e taxesAn environmental tax may be levied purely

with the intention of changing environmentallydamaging behaviour, and without any intentionto raise revenues. Such a tax may be termed anincentive tax. The level of an incentive tax can beset by one of two considerations. Where both thecost of the environmental damage, and the eco-nomic benefit deriving from it, per unit of thecause of damage (i.e. the marginal damage costand the marginal benefit) can be reliably calcu-lated, then the tax should be set at the level atwhich the marginal cost and benefit are equal.The tax will then be the optimal tax. This mightbe termed the optimal approach to incentivetaxes. Where it is not possible to estimate themarginal damage cost, or the numbers generatedare too uncertain, then the tax can be used as aninstrument, probably one among others, toachieve environmental objectives set according toother criteria (for example, environmental sustain-ability or the precautionary principle). In contrastto the optimal approach, this may be termed theinstrumental approach to incentive taxes (in theliterature this has been termed the ‘standard pric-ing’ approach, following the paper which firstdescribed it, Baumol and Oates, 1971).

2.2.3. Re6enue-raising taxesIt may be that a tax will change, and be in-

tended to change, behaviour but will still yieldsubstantial revenues over and above those re-quired for related environmental regulation (i.e.the tax is not a cost-covering charge). Such rev-enues may be desirable to government in them-selves; or they may be the means of bringingabout a desired tax shift away from fiscal relianceon, for example, high marginal rates of incometax or high non-wage labour taxes on employers.Environmental taxes, the principal purpose ofwhich is to raise significant revenues, are heretermed revenue-raising taxes.

Clearly these three types of environmental taxare not mutually exclusive: a cost-covering chargemay have incentive effects, as may a revenue-raising tax, or the revenues from a revenue-raisingtax may be partially used for related environmen-tal purposes. But there is a two-fold reason for

classifying environmental taxes and charges intothese three types. First, the classification clarifiesthe main objective of a tax, over and above thegeneral objective of all environmental taxes, thatof environmental improvement. These objectivesmay not be entirely consistent. For example, acharge that covers the cost of related environmen-tal policy may not be at a sufficient level, or maynot be designed, to have an incentive effect. Anincentive tax may be so successful at changingbehaviour that it ends up raising substantially lessrevenue than was anticipated (the Swedish SO2

tax fell into this category, see EF, 1996, pp. 114,OECD, 1997b, pp. 30).

Secondly, the intention behind a particular kindof tax will, to a large extent, determine the level atwhich it should be set. A cost-covering chargeneeds to cover the costs of related environmentalregulations, but no more. An incentive tax needsto be set at the appropriate optimal or instrumen-tal level. As to the required level of revenue-raising taxes, they obviously need to be set suchthat they will generate the desired quantity ofrevenue.

It is therefore important, both for the choice ofwhat is to be taxed and at what level that, theobjective of the tax according to this classificationis determined in advance.

2.3. En6ironmental taxes in relation toen6ironmental problems

In the European Environment Agency’s (EEA)Report for the Review of the European Commis-sion’s Fifth Environmental Action Programme(EEA, 1995), the EEA’s key conclusion was:‘Without accelerated policies, pressures on theenvironment will continue to exceed humanhealth standards and the often limited carryingcapacity of the environment. Actions taken todate will not lead to full integration of environ-mental considerations into economic sectors or tosustainable development’ (EEA, 1995, pp. 1). Afurther conclusion was that ‘the efficiency issue(i.e., maximising the environmental benefits andminimising the economic costs) is hardly ad-dressed’ (EEA, 1995, pp. 2) in current approachesto environmental policy.


The rationale behind environmental taxes sug-gests that they have a potentially important roleto play in both economy-environment policy inte-gration, by seeking to incorporate environmentalcosts into prices, and in achieving cost-effective-ness in environmental policy, by equalising mar-ginal abatement costs across polluters, as notedearlier. It has also been seen that the revenuesaccruing from environmental taxes can be used tomake environmental improvements beyond theirincentive effects, or to achieve other goals ofpublic policy while allowing other taxes to bereduced.

Environmental problems are inter-related. Of-ten a single pollutant will contribute to severaldifferent environmental problems. Reducing thispollutant is therefore likely to ameliorate severalproblems, although the effects from combinationsof pollutants can be complex and no automaticrelationship of this kind can be assumed. TheEC’s Fifth Environmental Action Programmegrouped key environmental concerns into envi-ronmental themes. In reviewing the Fifth Envi-ronmental Action Programme, the EEA Reportassessed environmental progress, and the key EUenvironmental measures, against these themes

(EEA, 1995, Chapter 4, pp. 45–116, and Ap-pendix A, pp. 145–147). It is interesting also tosee how the main environmental taxes andcharges which have been introduced relate tothese environmental themes, which are climatechange, ozone depletion, acidification, air pollu-tion and quality, waste management, urban issues,inland water resources, coastal zones and marinewaters, risk management, soil quality, nature andbiodiversity.

Specific taxes are described in more detail in thenext section, but Table 1 illustrates in a generalway some of the multiple effects which can beexpected from a range of environmental taxes.

2.3.1. Carbon/energy/fuel taxesThe principal environmental motivation behind

the introduction of carbon/energy/fuel taxes hasbeen the desire to control CO2 emissions, themain greenhouse gas responsible for global warm-ing and climate change. In mitigating climatechange, these taxes also reduce environmentalrisks and threats to ecosystems. Reduced fossilfuel use also leads to the reduction in pollutingemissions apart from CO2, such as SO2, NOx,particulates and volatile organic compounds,

Table 1Multiple impacts of some environmental taxes

Waste tax Tax difference on unleaded CFC taxSurplus manurePRIVATE Carbon/energy/ NOx/SO2 taxtax petrolfuel tax

Climate change �b ��a �� Ozone depletion

� ��Acidification��Air pollution/ � ��

quality��Waste manage-

ment�Urban issues ��Inland waters ��

Coastal/marine �waters

��Risk manage- �ment

Soil quality �� Nature/biodiver-

sity

a ��, the main target of the environmental tax.b �, other environmental themes where the tax is likely to have an effect.


which between them contribute to acidification,poor air quality, especially in urban areas, andeutrophication of inland waters. Because of themultiple environmental externalities caused byburning fossil fuels, they are a principal target ofenvironmental taxation, with the significant ex-ception of aviation fuel and international marinefuel. There are increasing calls that these fuels tooshould be taxed, on an internationally harmonisedbasis.

2.3.2. NOx/SO2 taxIt can be seen from Table 1 that even single

pollutants like NOx and SO2 are implicated in anumber of environmental problems, includingacidification, poor air quality, again particularlyin cities, eutrophication of inland waters and ef-fects on ecosystems.

2.3.3. Waste taxWaste taxes seek to promote more effective,

sustainable waste management through a reduc-tion in the amount of waste going to landfill andincreased recycling and waste reduction. By re-ducing the amount of landfilled waste, they willreduce the emission from landfill sites of methane,a greenhouse gas contributing to climate change;they will reduce the amount of pollutants leachinginto groundwater; and they will reduce the noise,smell and loss of amenity that frequently occuraround landfill sites. If the tax leads to reductionsin incinerated as well as landfilled waste, concernsabout possible toxic pollution from incinerators(for example, from dioxins) will be allayed as well.

2.3.4. Surplus manure taxSurplus manure derives from intensively farmed

livestock, and its main environmental impact isthe pollution of inland waters. Thence it affectscoastal waters. Ecosystems are also affected inboth fresh and marine environments. Surplus ma-nure also has negative effects on soil quality.Farm animals are major emitters of the green-house gas methane, so that taxing surplus manuremay be expected to have a positive (if small) effecton this cause of climate change.

2.3.5. Tax differential on unleaded petrolThis tax differential is mainly aimed at improv-

ing air quality by reducing lead levels, which isprincipally a concern in urban areas. However,reducing lead emissions from motor cars will alsoreduce lead pollution of soil and water. Becausethe effects of lead pollution are still subject tosubstantial uncertainty, reducing it will also di-minish the risks associated with that uncertainty.

2.3.6. CFC taxThis tax is mainly aimed at the problem of

ozone depletion with its consequences for humanhealth. It therefore contributes to managing therisk involved in ozone depletion, not least withregard to possible effects on ecosystems. CFCs arealso a greenhouse gas.

Broadly, the level of an environmental taxshould reflect the severity of the environmentalproblem to which it is directed. The fact that anenvironmental tax can have beneficial effects on anumber of environmental problems should betaken into account when the rate of the tax isbeing set.

3. Current tendencies and practices

3.1. En6ironmental taxes in practice

This section of the paper describes current prac-tice in the levying of environmental taxes andconsiders how this may develop in the future. Acomprehensive database of environmental taxesand charges in EU-15, plus Norway and Switzer-land, has been developed with European Commis-sion funding (hereafter referred to as ECDGXI,1999). The database may also be found on theEuropean Commission’s website at http://eu-ropa.eu.int/comm/dg11/enveco/index.htm. Com-prehensive lists of environmental taxes andcharges can also be found in OECD (1994c, 1995,1997a). Much of the basic information in thissection is taken from these sources.

The review of environmental taxes and chargesin this section does not seek to be comprehensive.Rather Table 2 here presents selected environmen-tal taxes and charges according to the classifica-

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Table 2Classification of selected environmental taxes and charges

Pollution Products DepletionType of taxor charge

WaterPRIVATE SpaceAir Fossil fuels MineralsWater Soil Waste Noise

Waste-water Water sup-Cost-cover- Wasteing chargescharges ply charge

(Var) (D, UK)(Var)charges:usercharges

AircraftEmission Waste-waterCost-cover- Surplus ma- Batteries tax Landfillchargescharge (F) (DK, S)ing noise tax charge (D)nure tax (B,(Var) (Var)NL)charges:

earmarkedcharges

Landfill taxOptimal in-centive (UK) (totaxes 4.99)

Waste taxInstrumental Unleaded Minerals taxCongestionNOx tax (S)incentive (DK) landfill charge (I) (C, DK)petrol (Var)taxes producttax (UK)

taxes (Var)(after 4.99)Fuels tax Waste tax Uranium taxRevenue- Groundwater Congestion

(NL) CFC extraction(NL)(NL) road charge (N)raisingtax (DK,taxes fuel duty charge (NL)US)(UK)


tion given in Section 2, in order to elucidate whythe taxes were imposed, what was their intendedobjective, and what was the justification for boththe tax rate and the tax base. Section 4 thenconsiders the major issues that arise in connectionwith the taxes’ implementation.

The intention behind Table 2 has been to selectthe clearest example of a particular kind of tax orcharge, but even so, as will be seen from thediscussion below, several taxes actually span sev-eral categories. However, for the reasons givenabove, it seems important to classify them underthe principal motivation for their introduction (inaddition to benefiting the environment). For sev-eral of the taxes listed, their motivation seemsinseparably mixed. For example, a charge may beexplicitly intended to have incentive and cost-cov-ering functions. Such mixed motives are identifiedin the following discussion of the instruments. Ingeneral, it may be noted that, almost by defini-tion, revenue-raising environmental taxes are al-ways introduced with an incentive effect in mindas well, but it is envisaged that the shift in be-haviour will not be so large or so fast as topreclude the generation of substantial revenues.

The rows of Table 2 give the three types ofenvironmental tax or charge, with cost-coveringcharges split into user charges and earmarkedcharges, and incentive taxes split according to theoptimal/instrumental distinction, as discussed ear-lier. It is interesting how, up until April 1999,there was only one example of an optimal tax (theUK landfill tax), the rate of which was explicitlybased on a calculation of externalities. Thereafter,with the increase in the tax rate, even this becameinstead an instrumental incentive tax (see below).This seems to illustrate the difficulty of giving amonetary value to environmental costs, and theuncertainty of such monetary valuations. It alsoreflects policy makers’ desire to use environmentaltaxes and charges to achieve environmental policygoals rather than some notional state of economicoptimality.

The columns of Table 2 distinguish between theenvironmental problems towards which environ-mental taxes and charges are directed. Most gen-erally these are pollution of the environment anddepletion of resources. Within pollution, a distinc-

tion is made between waste, noise, and emissionsto air, water and soil, following the classificationin OECD (1994c) (p.56).

Economic theory suggests that, for maximumefficiency, an environmental tax should be leviedactually on the substance that is causing the envi-ronmental problem (for example, the actual emis-sions to air, water or land). However, it may beeither technically difficult (with small or diffuseemitters) or expensive to carry out the monitoringof emissions that an emissions tax entails, so thatit may be more appropriate to tax a proxy for theemissions if one exists. Such a proxy may be aninput into a product or process that is related tothe environmental damage (for example, the car-bon in fossil fuels is closely related to the CO2

emissions that contribute to global warming); or itmay be a product itself (for example, batterieswhich contain heavy metals). The productscolumn in Table 2 therefore relates to the taxationof products which either deplete resources orwhich contribute in some way to pollution, wherethe taxation of the pollution itself is either infeasi-ble or more expensive.

The depletion columns in Table 2 relate to taxeswhich seek to limit resource-depletion, either byensuring that consumers pay the full costs ofextraction where they might not otherwise do so;or by ensuring that the full economic rent of theresource, reflecting its scarcity, is included in itsfinal price; or by encouraging the use of secondaryrather than primary materials where the extrac-tion of the primary material is associated withunaccounted environmental damage; or by raisingthe price of the resource to encourage conserva-tion. Of course, if markets for resources wereperfect, and their prices captured all the internaland external costs of extraction, and the scarcityrents, there would be no need for taxes on re-source depletion. However, where this is not thecase, as sometimes with water, landfill and roadspace, and quarrying, these taxes become justifiedon the grounds of economic efficiency.

Given that an early concern of environmental-ists was that the world would (relatively) soon runout of oil and other fossil fuels, it is notable thatthere are no depletion taxes on fossil fuels toencourage their conservation. Policies for such


conservation are today motivated by a desire toreduce the post-combustion emissions of fossilfuels, rather than to conserve the resource per se,indicating how perceptions of environmentalproblems have changed in the last 25 years. Oilmarkets probably do capture scarcity rents, andmarkets do not perceive oil to be scarce. On thecontrary, there are substantially more fossil fuelsunderground than can be accommodated, afterthey are burned, in the atmosphere, if a stableclimate is to be maintained. However, the taxeson fossil fuels to reduce emissions have the sameconserving effect as if they were depletion taxes.

The following discussion relates to the taxesand charges in Table 2, proceeding down eachcolumn. The letters in brackets in the table are theusual initials of OECD countries, with Var stand-ing for various countries. Unless otherwise refer-enced, the information about particular taxesbelow is taken from OECD (1994c, 1995, 1997a),or from the database ECDGXI (1999).

1. Emission charges (F). France’s charges onpolluting atmospheric emissions (SO2, NOx,HCl, H2S, VOCs), introduced in 1985, areEurope’s earliest air emission charges. Rev-enues (FF 169 [ECU 25.8] million in 1994,FF 220 [ECU 33.5] in 1996) are spent onatmospheric pollution prevention, reduction,monitoring and control.

2. NOx tax (S). The Swedish NOx tax, an-nounced in 1990 and introduced in 1992, ispayable, on a per plant basis according to theplant’s emissions, by a relatively small groupof large producers of heat and power for finaluse (initially those producing more than 50GWh per year, with the threshold lowered to25 GWh per year in 1997). Revenues fromthe charge of SEK 40 [ECU 4.7] per kg NOx

are recycled to each charge-paying plant ac-cording to the proportion of the group’s en-ergy that the plant generated. The net effectis for each plant to seek to minimise its NOx

emissions per unit of energy output. Perhapsas a result of this, at least in part, totalenergy output from the plants has increasedeven as their NOx emissions have declined.By 1995 NOx emissions from the plants perunit of energy input had fallen by 60% from

1990s level. Illustrating the potential impor-tance just of announcing an environmentaltax, between the year of announcement of thetax and its introduction emissions of NOx

from taxed installations fell by 35% (Cansierand Krumm, 1997, p.63). However, theseemissions only comprised about 6.5% of Swe-den’s NOx emissions, most of which comefrom motor cars.

3. Fuels tax (NL). The Netherlands has tworevenue-raising taxes on energy use. The gen-eral fuels tax, introduced in 1992, and thesmall energy users’ tax, introduced in 1996,are two of five taxes with an environmentalbase. The fuels tax is based on the carbonand energy contents of different fuels withlower rates on or total exemptions of energy-intensive industries. The revenue from thefuels tax goes into the general budget and itsrevenues in 1997 were expected to be HLF2.1 [ECU 0.96] billion the following year(OECD, 1997b, p.25). The small users’ taxwas designed with special consideration givento distributional concerns, as will be dis-cussed in Section 4.

4. Road fuel duty (UK). The United Kingdomgovernment made a commitment in 1993, aspart of its CO2 reduction programme, toincrease road fuel duties, then about 60% ofthe price of road fuels, by 5% per annum inreal terms until further notice. This was in-creased to 6% p.a. by the new Labour Gov-ernment in 1997. The increase for petrol inthe 1998 budget amounted to 4.9p [ECU0.066] per litre, or 22.2p [ECU 0.3] per gal-lon, when duty comprised about 80% ofpetrol’s retail price. The first evidence of anincentive effect appeared in 1995, with theoverall demand for petrol and derv (diesel)falling by about 1% from the previous year,but over the subsequent 2 years it increasedby 5.0% (CE, 1999, pp. 80, 82).

5. Waste-water charges (Var). Most OECDcountries have charges for the treatment anddisposal of either sewage or other water-car-ried effluents or both, with examples of bothuser charges and earmarked charges. Chargesfor sewage are normally based on water


usage and may or may not be related tovolumes discharged; those on other effluentsare more often based on actual measurementsof pollution load. For example, both Belgiumand Germany base their charges on a menuof different pollutants, weighted to derivegeneral ‘pollution units’ (see Smith, 1995, pp.26 for the German weights). While wastewater charges are always used to cover asso-ciated treatment costs, Andersen (1994)found, in a detailed comparison of the sys-tems of France, Germany and the Nether-lands, which have charges related topollution load or volume, and Denmark,which does not, that the charges can havesignificant incentive effects. This was mostapparent in the Netherlands, for institutionalreasons and because of the higher level of thecharge.

6. Surplus manure tax (B, NL). Both Belgiumand the Netherlands levy surplus manurecharges on the basis of emissions of phospho-rus and/or nitrogen in excess of environmen-tally acceptable maximum manure loads perhectare. Because it is surplus manure that isbeing taxed, this is a genuine pollutioncharge, in contrast to the fertiliser chargeslevied by Norway, Sweden and the USA,which are (input) product taxes and thereforebelong in the products column.

7. Waste charges (Var). Practically all OECDcountries levy user charges to cover the costsof the collection and disposal of waste. In thegreat majority of them the charge to house-holds is unrelated to the quantity of waste,and therefore has no incentive effect. Forfirms, charging based on quantity is morecommon, but by no means universal, exceptwhere firms dispose of their own waste tolandfill sites. More interesting from the pointof view of environmental taxes are thosecases where taxes are imposed on top of theseuser charges, as discussed next.

8. Landfill tax (UK). The UK landfill tax wasintroduced at £7 [ECU 9.5] per tonne foractive waste and £2 [ECU 2.7] per tonne forinert waste in October 1996. As noted earlier,the £7 rate was motivated by a study of the

externalities relating to landfilled waste(DOE, 1993), but this link with economictheory was broken when the tax rate foractive waste was raised in the 1998 Budget to£10 [ECU 13.5] from April 1999. The chargeis payable by operators of landfill sites, whomay pay up to 20% of their due tax tospecially sanctioned environmental trusts forthe purposes of land remediation. The re-maining tax revenues have been used to re-duce employers’ National Insurancecontributions. The tax is also part of the UKGovernment’s strategy of driving waste upthe hierarchy of disposal options, away fromlandfill, although it remains to be seenwhether it is high enough to do this. This taxtherefore has elements of all three types ofenvironmental tax.

9. Waste tax (DK). The Danish waste tax wasintroduced in 1986 at DKK 40 [ECU 5.4] pertonne, a level rather below the initial UKrate. However, by 1998 this had risen oversevenfold to DKK 335 [ECU 45] per tonnefor landfill (DKK 260 [ECU 35] for incinera-tion). This increase has not been related toany calculation of externalities. Rather thetax is used as an instrument of environmentalpolicy to help achieve the goals set out inDenmark’s Waste Action Plan (MOE, 1992),which specifies target levels for reductions inlandfill through recycling, reuse and wastereduction. These targets in turn do not derivefrom a cost-benefit analysis, but are the resultof considerations of what is required toachieve sustainable development. The rev-enues from the Danish tax go into the generalstate budget. Since 1993 they have been used,as part of the green tax reform, to reducedirect taxation. Because the Danish wastecharge was introduced in 1986, it is possibleto assess its effectiveness in meeting its envi-ronmental goals. According to recent evalua-tion studies (Christensen, 1996; Andersen,1998), waste delivered to landfill sites in Den-mark fell by 26% between 1987 and 1996.Between 1985 and 1993 landfill fell from 39to 26% of the waste stream, while recyclingincreased from 35 to 50% over the same


period (Christensen, 1996, pp. 5), and to 61%by 1995. Within this, the reuse of construc-tion waste rose from 12 to 82%. While theother instruments in the Action Plan, includ-ing voluntary agreements and regulations,will undoubtedly have contributed to theseresults, the waste charge is likely also to haveplayed a major role.

10. Waste tax (NL). The Dutch waste tax, intro-duced in 1995, is another of the Netherlands’taxes with an environmental base. The chargerate in 1998 for combustible waste was HFL64.2 [ECU 29.4] per tonne. Like the UK andDanish taxes, the tax is intended to reducethe amount of waste going to landfill. How-ever, as with all the Dutch taxes with anenvironmental base, its principal purpose isrevenue-raising.

11. Aircraft noise tax (Var). Belgium, France,Germany, Japan, the Netherlands, Norway,Portugal, Sweden and Switzerland all have acharge on aircraft noise. With the exceptionsof Japan and Portugal, revenues from the taxare used for noise abatement. None of thecharges has an incentive effect.

12. Batteries tax (DK, S). Both Denmark andSweden levy a charge on batteries. The rev-enues are used to fund collection and/or recy-cling of old batteries. In Sweden the charge isalso intended to contribute to the govern-ment’s objective of phasing out the use oflead and mercury entirely (OECD, 1996, pp.25, 27).

13. Unleaded petrol tax differential (Var). Practi-cally all OECD countries which still allowleaded petrol (Japan, Sweden and USA donot, nor will the UK from January 2000)have a tax differential between leaded andunleaded petrol. Although, as with all envi-ronmental taxes, it is difficult to disentanglethe effects of taxes from other policy instru-ments that are introduced at the same time,the OECD (1997b, pp. 26) considers that ‘it iswidely acknowledged that the tax was suc-cessful in accelerating the substitution of un-leaded gasoline for leaded.’ As an example ofthis substitution, between 1986 and 1992 theshare of unleaded petrol in Germany went

from 11 to 88%. Many OECD countries alsovary their car sales tax in accordance withsome aspect of the vehicle’s environmentalperformance (for example, fuel efficiency inUSA and Canada, emissions standards inGreece, Germany and several others).

14. Product taxes (Var). There is a wide varietyof incentive taxes on different products indifferent countries, in addition to those al-ready mentioned, including pesticides (Bel-gium, Denmark, Sweden), beveragecontainers (Belgium, Finland, Norway, Swe-den), plastic bags (Denmark, Iceland) andcertain packaging (Belgium, Denmark). Theintention of such taxes in Belgium is purelyincentive-based: by changing the relativeprices of goods, in particular by increasingthe prices of less environmentally desirableproducts in a situation where some moreenvironmentally desirable substitutes exist,the tax is intended to bring about a shiftaway from less to more environmentally de-sirable consumption. It is acknowledged,hoped for even, that revenues from the taxeswould be small because this would indicatethat the desired incentive effect was working.Currently taxes have been imposed on alldrink containers, throw-away cameras andrazors, industrial packaging, batteries, somepesticides and phytopharmaceutical productsand paper. It is too soon to judge the incen-tive effects of these taxes, although potentialmarket sensitivities to them have been illus-trated by a number of cases where producershave withdrawn goods from the market orotherwise modified their behaviour on theexpressed intention of introduction of thetax, but before its implementation. The softsignalling effect of the discussions prior toimplementation of the tax may be at least asimportant in the tax’s significance as the ac-tual price discrimination.

15. Uranium tax (NL). The Dutch Governmentis introducing a tax on uranium in 1997 atthe rate of HFL 31.95 [ECU 14.6] per gramas another of its taxes with an environmentalbase. This will mean that nuclear electricitywill bear a similar tax to that generated byfossil fuels.


16. CFC tax (DK, US). Both Denmark and theUnited States tax ozone-depleting chemicalsincluding CFCs. The incentive effects of thetaxes are uncertain, because the products areunder stringent, quantity-reducing restric-tions from the Montreal Protocol. Indeed,two sources (OECD, 1994c,d) say that thepurpose of the US tax was actually to capturesome of the excess profits of companies dueto the production cut-back (and consequenthigh CFC prices). However, it seems that thefull extent of this cut-back was not antici-pated in the projections of revenue from thetax, which were forecast to rise from US$ 890[ECU 785] million in 1991 to US$ 1380 [ECU1217] million in 1996 (OECD 1994d, pp.114). In fact, 1991 revenues were US$ 886[ECU 781] million, but those in 1992 wereonly US$ 580 [ECU 511] million (OECD,1995, pp. 89). The US tax is interesting be-cause it is also applied to imports containingor manufactured with CFCs. Such border taxadjustments are discussed below in the sec-tion on environmental taxes and competitive-ness (Section 4).

17. Water supply charge (D, UK). Maintainingan adequate supply of water throughout theyear is becoming increasingly problematic ina number of countries. Many countries levycharges for water supply. In Germany 90% ofhouseholds pay a volumetric charge per m3

consumed. In the UK, by contrast, mosthouseholds pay a charge that is unrelated toconsumption. German household water con-sumption per head is thought to be 8–12%below that in the UK, and to have beenbroadly static for some time, whereas UKwater demand grew by 16% from 1980–1991(Smith, 1995, p.43)

18. Groundwater extraction charge (NL). Dutchprovinces have levied a groundwater extrac-tion charge since 1983. In 1995, as anothertax with an environmental base, the centralgovernment levied a further tax on ground-water of HFL 0.34 [ECU 0.16]/m3 for watercompanies and HFL 0.17 [ECU 0.08]/m3 forother large companies. Revenues raised bythe tax are estimated at HFL 310 [ECU 142]million for 1996.

19. Landfill charge (D). Germany is proposing tolevy a waste charge on landfill at rates thatare higher than the UK rate given under 8above (DM 15 [ECU 7.7] for inert waste,DM 25–75 [ECU 12.9–38.6] for other, non-hazardous waste, with much higher haz-ardous waste charges, see Smith, 1995, pp.60). While this tax is clearly intended, like theother landfill taxes already discussed, to re-duce the quantity of waste going to landfill,Smith considers that the relatively high taxrate is because ‘the proposed charge is in-tended to raise the cost of disposal to reflectboth the scarcity value of disposal space andthe present and future environmental exter-nalities involved in landfill disposal… (T)he‘scarcity rent’ argument for the Germancharge reflects the specific institutional rulesand relationships in Germany which preventappropriate charges being levied to coverlandfill scarcity.’ (Smith, 1995, pp. 60, 61).

20. Traffic congestion charges (I, N). Probablythe most important depletion of space, espe-cially in cities, is caused by motor traffic andis reflected in congestion on the roads. Theconventional economic solution to trafficcongestion is road pricing, whereby roadusers pay a charge that is temporally variedaccording to congestion conditions duringthe day. Road pricing has been under activediscussion and study for many years but,according to Button (1994, pp. 207–208), asyet ‘no form of what economists wouldstrictly call road pricing has been introducedinto any city in an OECD member country.’However, there has been some relevant expe-rience. In Norway the cities of Bergen,Trondheim and Oslo charge vehicles for en-try to the urban area. The schemes are in-tended to be revenue-raising and despitefairly low tolls they have generated substan-tial revenues for the city authorities. Theschemes have no time differentiation andthey have had little incentive effect. Cartraffic in Bergen declined by 6% in the firstyear (from a rising base) and that in the othercities fell by 5% at the outset, ‘but soonreturned to its pre-toll growth trend’ (Button,


1994, pp. 209). In Italy Milan has introduceda peak period area licensing scheme whereby‘car owners must buy a permit to take theirvehicles into the city, and it has been esti-mated that there has been a 50% reduction oftraffic in the urban centre, with some 16% oftrip makers delaying their travel, 36% park-ing outside of the control zone and 41%switching to public transport.’ (Button, 1994,pp. 210)

21. Minerals tax (DK). Denmark levies an exciseduty on the extraction and export of sand,gravel, etc. at the rate of DKK 5 [ECU 0.7]/m3, raising DKK 20 [ECU 2.7] million in1993. The Canadian province of Manitobaalso levies a charge on quarry minerals ofCN$ 0.10 [ECU 0.064]/tonne (OECD, 1995,pp. 86–87). The effect of the taxes will be toreduce demand for the minerals concerned,but it is not clear whether this is their inten-tion or whether they are really revenue-raising taxes or cost-covering charges.

This selection of environmental taxes illustratesmost of the motivations and characteristics ofthose instruments that have been introduced inrecent years, with the exception of the five carbonor carbon-energy taxes that have been so farintroduced, which are discussed in Section 4. Therest of this section goes in some detail into theextent to which environmental taxes have beenused explicitly as part of a green tax reform andthen summarises the recent trends in the use ofthese instruments.

3.2. Towards green tax reform?

The possibility of new environmental taxesraising substantial revenues, which can then beused to reduce other taxes which are perceived asdistortionary or otherwise undesirable has led toincreasing interest, as noted earlier, in the idea ofa double dividend from environmental taxation:the achievement of both environmental benefitsand gains in economic efficiency. The main moti-vation for trying to achieve these efficiency gainsis usually the desire to reduce unemployment or,at least, reduce the tax burden on labour. Thisidea of using the introduction of environmental

taxes to achieve a tax shift was behind the intro-duction of the taxes with an environmental basein the Netherlands and the tax reforms of severalNordic countries in the early 1990s. The idea wasalso endorsed by the UK Chancellor of the Ex-chequer in his 1994 Budget, when he stated:‘Taxes can play an important role in protectingthe environment… But I am determined not toimpose additional costs on business overall… Inbrief, I want to raise tax on polluters to makefurther cuts in the tax on jobs.’ (Clarke, 1994, pp.35). Chapter 10 of the Delors White PaperGrowth, Competitiveness, Employment went evenfurther: ‘If the double challenge of unemploy-ment/environmental pollution is to be addressed,a swap can be envisaged between reducing labourcosts through increased pollution charges.’ (EC,1993, pp. 150)

Green, sometimes called Ecological, Tax Re-form has thus come to mean a systematic shift ofthe tax burden away from labour and, perhaps,capital, and onto the use of environmental re-sources. In 1997 the OECD (1997b, pp. 35) re-ported that seven OECD countries hadimplemented such a tax shift to a varying extent:for example, Sweden shifted SEK 15 [ECU 1.75]billion in 1991; Denmark had shifted DKK 12.2[ECU 1.6] by 1998; and Finland plans to shiftFIM 5.6 [ECU 0.96] in a reform that started in1997. Belgium, Denmark, the Netherlands, Nor-way, Sweden have investigated the idea of GreenTax Reform through special government commis-sions (OECD 1997b, pp. 25). The remits andpreliminary work of these commissions were de-scribed in papers presented to the workshop onEnvironmental Taxes and Charges, organised inDublin in February 1996 by the European Foun-dation for the Improvement of Living and Work-ing Conditions (EF) and reported in EF (1996).All the countries concerned bring to their differ-ent commissions a lot of common experience, interms of energy taxation, early experimentationwith carbon taxes and a variety of other greentaxes, and a long-standing commitment to envi-ronmental improvement and sustainable develop-ment. They had all arrived more or lesssimultaneously at a similar point, asking whetherthey had essentially done green taxes, or whether


a more fundamental approach to structural taxa-tion reform could yield further economic andenvironmental benefits.

A basic question for all the commissions iswhether the potential exists for these countries topush on with implementing green taxes more andmore widely on a unilateral basis, or whethersome wider EU action is now necessary to takethe process forward. Denmark is one of the coun-tries with the most experience of environmentaltaxation. Although there is no evidence that greentaxes have damaged Danish competitiveness, thepaper by Kristensen in EF (1996) expresses theview that ‘in view of the competition aspects, it isessential to the enterprises that the (European)Community is prepared to act as well.’ (Kris-tensen, 1996, pp. 134).

An Environmental Tax Commission was estab-lished by the Norwegian Government in 1990and, as a result of its first series of recommenda-tions in 1992, a number of green taxes were bothproposed and introduced. Subsequently the Nor-wegian Green Tax Commission was set up in 1994specifically to examine the opportunities to re-structure the tax system to make the use of labourless costly, by replacing taxes on labour withgreen taxes, taxes on resource rents and withother taxes as appropriate. The Commission wasalso charged to identify all those subsidies thathave an environmentally damaging effect.

From its simulations, using the substantial Nor-wegian modelling expertise in this area, the Com-mission concluded that the prognosis for a greentax reform, in which the revenues from greentaxes are recycled by reducing payroll taxes, isgood in both the short and medium term. By 2000CO2 emissions are down by 3.7% (6.0% by 2010),employment is up by 0.3% (0.7% in 2010), unem-ployment is down by 0.2% (0.3% by 2010), con-sumer prices are down by 0.6% (1.2% by 2010)and output is down by 0.1% (but up by 0.2% by2010) (Moe, 1996, Table 3, pp. 185). The emissionreduction is significant. The other numbers aresmall but, by 2010 at least, all economically posi-tive. The Commission considers it plausible that,in a situation of unemployment, green tax reformwill yield ‘positive effects on both overall employ-ment and environment in a medium-term perspec-tive (5–15 years)’ (Moe, 1996, pp. 186).

As with the Norwegian Green Tax Commis-sion, the Dutch Green Commission was estab-lished out of substantial experience withenvironmental taxes, most importantly the fivetaxes with an environmental base discussed inSection 3. In 1996 revenues from these taxes wereHFL 2.8 billion, or 1.8% of tax revenues, andwere expected to rise to 2.5% by 1998 (Leder,1996, pp. 160). The revenue-raising basis of allthese taxes, except the small energy users’ tax,with the revenues going to the general budget, is aconscious attempt to shift the base of generaltaxation, albeit slightly, towards the use of envi-ronmental resources. The Commission was set upin 1995 to discuss how to make further progressin this area. Its first report concentrated on thefiscal treatment of transport and advocated givingfurther encouragement to public transport andcycling. The second report focused on furtheropportunities for shifting taxation from labouronto use of the environment (with energy taxationremaining the basis of any such tax shift), and onthe opportunities for encouragement of environ-mental investment.

Sweden’s Green Tax Commission was also setup in 1995 and, again, has the issue of a green taxshift as its central agenda item, envisaging a possi-ble marriage between two areas of tax policy:environment and employment. In this context it isundertaking several special projects, includinganalysis of the development of energy and envi-ronmental taxes, the functioning of the labourmarket and investigations into possible impactson competitiveness and income distribution.

A series of similar concerns is under investiga-tion in Denmark, which is seeking ways of build-ing on the tax reform it enacted in 1993/94. Thisreform increased the energy tax rate on house-holds. On the grounds of economic efficiency, the1996 Energy Package increased the CO2 and en-ergy tax rates on Danish industry, with recyclingof the revenues back to industry, via reductions ofsocial security contributions, to limit effects oncompetitiveness. Modelling of the Danish EnergyPackage came up with results that are very similarto Norwegian modelling of its possible green taxreform: by 2005 CO2 emissions are down by 5%,employment is up by 0.1%, GDP is up by 0.1%.


Table 3Employment benefits from green tax reform in europea

Scenario Employment dividendStudy Region

Carbon/energy tax with 10% reduction in employers’ SSCbQuest 1992 1.0% increase after 7EU-12years

Quest 1992 EU-12 Target reductionc 3.0% increase after 7years

Hermes 1992 EU-6 As for row 1 0.64% increaseEnvironmental taxes recycled via employers’ non-wage labour costsEU-12 2.2 million jobs by 2010DRI 1994

MDM 1996 carbon/energy tax with reduced NICdUK 2.0% increase by 2005

a Source, Barker (1996), pp. 236.b SSC, social security contributions.c The reduction of SSC was targeted on the low paid.d NIC, National Insurance Contributions.

Again the environmental benefit is significantwhile the macroeconomic changes are small butpositive.

It may be noted that these employment resultsof green tax reform are very similar to those of anumber of other European modelling exercisespresented in Barker (1996, pp. 236) and repro-duced in Table 3. Of course, these results are notconclusive. Moreover, they would be verydifficult, if not impossible, to refute or confirmafter the tax shift had been introduced becauselevels of employment and unemployment are sub-ject to so many influences. But the possibility of asignificant gain in employment, as well as in termsof environmental sustainability, in a Europe inwhich unemployment and environmental degrada-tion are two of the most pressing acknowledgedproblems, makes green tax reform a policy optionthat is hard to ignore.

3.3. Trends in the introduction of en6ironmentaltaxes and charges

The OECD’s first review of the use of environ-mental economic instruments in member countries(OECD, 1989) identified about 150 instruments inuse in 1987, or 100 if subsidies, purely administra-tive charges and liability are excluded (OECD,1994c, pp. 22). However, the significance of theseinstruments was not very great. Only about athird may have had some incentive impact and theOECD (1994c) review concluded: ‘Basically, then,

in 1987 environmental policies in the OECDMember countries were command-and-controlpolicies with some financial and economic add-ons.’ (pp. 177).

By 1994 the number of instruments had in-creased by over 50%, with the most growth inproduct charges and deposit-refund systems (thelatter of which are outside the scope of this re-port). Moreover, five countries (those in Table 4)had introduced carbon or carbon-energy taxes(discussed in Cansier and Krumm (1997), pp.65–68), four countries had conducted a limitedgreen tax reform (Denmark, the Netherlands,Norway and Sweden), eight had set up officialtask-forces or commissions to explore further op-portunities for such reform, or for implementingenvironmental taxes in general, and a further sixhad announced an intention to make an increaseduse of economic instruments in environmentalpolicy. In 1997 Finland implemented a green taxreform. Italy did so in 1999, with half the rev-enues from its new carbon tax going to reducelabour taxes (ENDS, 1999). Germany also imple-mented a green tax reform in 1999.

Thus it is clear that, at the national level inOECD countries, economic instruments in generaland environmental taxes in particular, are com-manding greater attention than they were 8 or 9years ago. Given that the factors identified at thebeginning of this section that stimulated new con-sideration of environmental taxes in the first placeare as relevant now as they were then, if not more

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Table 4Percentages of taxes/excises, including energy taxes, with environmental implicationsa

Norway SwedenFinlandDenmark Netherlands

1993 1980 19931980 1980 19931993 1980 1993 1980

3.0Energy taxes (% of total tax revenue) 5.713.94 7.62 3.83 5.394.13 4.92 4.27 2.253.4 (1995) 5.1 (1995)4.7 (1995)4.3 (1995)

5253 49 66 71 73 8557 68 79Energy taxes (% of environmental tax revenue)Environmental taxes (% of total tax revenue) 6.127.5 8.64 10.75 5.27 6.347.3 7.21 5.4 4.34

2.94 4.07 4.92 2.57 3.171.942.66Environmental taxes (% of GNP) 3.41 3.65 2.47

a Source, OECD (1995); boxes 1–5, pp. 9–12, ECDGXI (1999) (1995 figures).


so, one may expect this attention to continue toincrease.

The other development since 1989, which hassignificantly retarded the pace of introduction ofenvironmental taxation, and limited the prospectsfor green tax reform, is the failure of the USgovernment to introduce its proposed BTU tax in1994, and of the European Commission to winacceptance for its EU-wide carbon-energy taxproposed in 1991. The European Commission’smost recent proposal, in March 1997, is for aharmonised minimum excise duty on energy prod-ucts across the EU. While still under discussion,the proposal cannot be implemented without theunanimous agreement of EU member states,which still looks unlikely to be achieved.

Apart from energy taxes, environmental taxesdo not tend to raise much revenue. Table 4 showsthat, even in those countries that employ environ-mental taxes most extensively, environmentaltaxes still only raise a small proportion of overalltax revenues, and that the majority of environ-mental tax revenues usually come from energytaxes. Moreover, despite the increased interest inenvironmental taxes since 1980, revenues fromboth energy taxes and environmental taxes as aproportion of total tax revenues have increasedlittle in these countries, if at all.

For reasons of competitiveness, it is verydifficult for individual countries to increase,through taxation, the price of an input as indus-trially important as energy. The failure to achievea minimum level of harmonisation of energy taxesacross Europe, and to introduce broad energytaxes in the US, which is the OECD’s largesteconomy and has its lowest energy prices, is un-doubtedly a major reason why green tax reformsto date have been limited.

4. Implementing environmental taxes: major issues

4.1. En6ironmental taxes and competiti6eness

Competitiveness at the level of the firm is theability of a firm to sell its goods in a competitivemarket. If the firm’s activities make intensive useof an environmental resource, for example, use a

lot of energy, then imposing a tax on that use ofthe environment may increase the firm’s costssubstantially. In this case, either the prices of thefirm’s goods will rise, or its profits will decrease,or both. The firm’s competitiveness will decline.

If the environmental tax is imposed nationallyin a small, open economy (as EU economiesgenerally are), then the whole sector in that econ-omy which makes intensive use of the taxed envi-ronmental resource may experience a decline incompetitiveness. Demand for that sector’s goodmay fall, exports from it decreasing and importsincreasing. Workers may lose their jobs. Somefirms may go out of business. Adjustments willtake place. Workers will move into other sectors.The country’s exchange rate may depreciate, im-proving the competitiveness of other exportingsectors, but also raising the price of imports andcausing inflation. Adjustment costs incurred bythe affected firms and workers, and by the socialsecurity system, may be substantial. Where thesector concerned is economically important,politicians are likely to be sensitive to these ef-fects. This is the issue that has become the singlemost important debating point concerning theintroduction of environmental taxes, and espe-cially carbon or energy taxes.

With regard to experience of past environmen-tal taxes and regulation, the record is relativelyconclusive and has been summarised by theOECD thus: ‘The trade and investment impactswhich have been measured empirically are almostnegligible.’ (OECD, 1996, pp. 45). However, thisis not necessarily going to be the case in future.Firstly, the environmental instruments applied sofar have been relatively modest compared to thosesometimes considered necessary to move towardsenvironmental sustainability. Secondly, the instru-ments have not predominantly been in the form ofgreen taxes. These may impose higher costs onseriously affected sectors because the firms con-cerned will pay for abatement (up to the level ofthe tax) and for residual emissions (although thesepayments should be regarded as transfers throughthe tax system rather than macroeconomic costsas such). Modellers of the imposition of carbontaxes have produced widely differing results fortheir impacts on trade and competitiveness, rang-


ing from small and positive to substantiallynegative.

Possible competitiveness effects are importantnot only because of their economic implications.Were they to lead to the relocation of production,with its associated environmental impacts, theycould also mitigate the environmental effective-ness of a tax. Of course, if the taxed environmen-tal effect is purely local, then the country levyingthe tax and losing the business through relocationwill experience local environmental improvement(and the country to which the activity is relocatedwill experience environmental deterioration). Butif the environmental effect is global (e.g. climatechange from CO2 emissions), such that it is inde-pendent of where emissions take place, then theleakage of emissions from one country to anothermay mean that there is no environmental gainfrom the tax at all.

Attempting to mitigate or compensate for com-petitiveness effects can distort or reduce the effec-tiveness of environmental policy in at least threeways:1. For economic efficiency all emitters of a taxed

emission should face the same tax rate. Yet,because of fears about competitiveness, the taxrate on high emission sectors can be well be-low that on smaller emission sectors or house-holds. This means in turn that, in order toachieve a certain emission reduction, the taxrate on lower emission sectors and householdsis higher than it would otherwise need to be,which introduces further inefficiency. For ex-ample, when Sweden restructured its CO2 taxin 1992, and reduced it substantially on indus-try and commercial horticulture, it raised itfrom SEK 250 to SEK 320 per tonne CO2 forother users in order to make up for the fall inrevenue (OECD, 1994d, pp. 95). The spread ofthe CO2 tax was then SEK 80 (for industryand horticulture) to SEK 320 for everyoneelse. This is a source of economic inefficiency.The inefficiency was reduced somewhat when,in 1996, the tax rate was raised to SEK 370[ECU 43] per tonne CO2, with industry andhorticulture receiving only a 50%, rather thana 75% reduction. The issue of exemptions fromenvironmental taxes is explored in more detailin Ekins and Speck (1999).

2. An environmental tax should be levied as closeto the actual environmental effect as possible.For CO2 emissions the most convenient andefficient tax base is the primary fuel source.Because different fossil fuels have differentcarbon intensities, a tax on these fuels basedon their carbon intensity will encourageswitching towards low carbon fuels. Such aneffect may be particularly important with re-gard to reducing carbon emissions from elec-tricity generation because electricity can begenerated using all the fossil, as well as somenon-fossil, fuels. Yet Finland, which initiallytaxed the fuel inputs into electricity accordingto their carbon content, has decided to taxelectricity directly because its system of taxingimports of electricity at some average levelbased on its domestic taxation, in order toneutralise the competitiveness effects, does notconform to EU trade regulations, which stipu-late that there may be no difference betweentaxes on domestic and imported like products.This is an example of free trade rules actingagainst environmental policy efficiency.

3. A core component of the rationale for envi-ronmental taxes is that, by bearing most heav-ily on the most environmentally intensivesectors, and therefore raising the prices ofthose sectors’ products, they encourage struc-tural change in the economy away from thosesectors. By taxing high energy, and thereforehigh CO2 emitting, sectors less heavily, or byreimbursing tax revenues, this incentive forstructural change is reduced.

There are two means of mitigating competitive-ness effects apart from exempting environmentallyintensive industries. One is through border taxadjustments, whereby environmental tariffs ensurethat imports pay a similar level of tax to domesticindustries, thereby neutralising any competitive-ness effects in the domestic market, while exportrebates ensure that taxed domestic industries’ability to compete abroad is unimpaired. Butthere are two problems with border tax adjust-ments. Firstly, it is very difficult to calculate whatthe environmentally appropriate tariffs on im-ports should be, especially when the environmen-tal tax base is an industrial input, such as energy,


rather than a final product. There are fears thatsuch tariffs would be abused for economic protec-tionist, rather than environmental protection, pur-poses. Secondly, border tax adjustments may runcounter to international trade rules (designed toprevent protectionism), especially where, becauseof a focus on industrial inputs or processes, theyend up treating domestic and foreign like prod-ucts differently. As mentioned earlier, however,the US tax on CFCs is levied on imports on thebasis of calculations of CFCs used in the imports’manufacture, as well as content, and the US hasyet to be challenged on the compatibility of thistax with World Trade Organisation rules. How-ever, CFCs may be a special case both becausethey are the subject of a widely supported multi-lateral environmental agreement, and becausethey are due to be phased out rapidly anyway. Itis likely that import tariffs based on imputedcarbon or energy content would not be so readilyaccepted.

The second means of mitigating competitive-ness effects is through the international harmoni-sation of environmental taxation. This is thetheoretically ideal solution. It was promoted bythe European Commission with regard to its car-bon-energy tax proposal in 1991, and is supportedby a number of EU countries. The argumentagainst it, based on the principles of sovereigntyand subsidiarity, is that countries have a right todetermine their own taxes. Failure to reach unan-imous agreement in the EU on this issue has leftthe EC proposal unimplemented, but even if ithad been agreed at the European level, therewould have been concerns about competitivenessat the OECD and global levels. The internationalharmonisation of environmental taxes, if it pro-ceeds at all, will clearly be a long and difficultprocess.

Despite the undoubted importance of competi-tiveness issues for a few, predominantly highlyenergy intensive sectors, these issues are oftenexaggerated with regard to environmental taxa-tion. Firstly, if the tax revenues are redistributedto industry, either directly (as with the SwedishNOx charges), or through the reduction of othertaxes on business (as with the UK landfill tax),business, and a country, as a whole need suffer no

loss of competitiveness at all, because environ-mentally intensive sectors’ loss of competitivenesswill be balanced by a gain in competitiveness inother sectors. Secondly, some business writers,such as De Andraca and McReady of the Busi-ness Council for Sustainable Development, em-phasise the competitive benefits to be gained byinnovation and eco-efficiency induced by stringentregulations and high prices of environmental re-sources. They state bluntly: ‘Concerns about pol-lution havens, free riders or an exodus of capitaland jobs from countries with tough standards areunsubstantiated’ (De Andraca and McCready,1994, pp. 70). On this view, if environmental taxesare imposed gradually in a pre-announced way,they could actually foster competitiveness by en-couraging the development of the resource-effi-cient products and processes that will be inincreasing demand as perceptions of the need tomove towards sustainable development intensify.

It is not possible to come to any general judge-ment at present as to how much weight to give tocontinuing business worries about the effects ofenvironmental taxation on competitiveness. Iffears about environmental degradation (and, spe-cifically with regard to carbon-energy taxation,about global warming) prove to be exaggerated,then industrialists’ caution may prove justified. If,on the other hand, environmental concerns in-crease and compel governments to take morestringent measures, including the imposition ofenvironmental taxes, then those companies andcountries which have already fostered a culture ofeco-efficiency and an innovative approach to envi-ronmental problems are likely to be well placed toprofit from the market opportunities that willthen be offered. If the coming age is one ofecological scarcity, then political and corporateleadership in the efficient use of resources and theachievement of environmental quality are likely topay dividends in terms of reputation, influenceand business success.

4.2. En6ironmental taxes and distribution

Environmental taxes, like practically any otherpolicy, will impose different costs and benefits ondifferent groups of people. Indeed, the concerns


with competitiveness discussed above arise be-cause of the uneven impact of environmentaltaxes, falling relatively heavily on environmentallyintensive sectors. As was seen, although the im-pact of the tax on business may be neutral overall,especially if the revenues taken from business arerecycled to it in some way, and some sectors maybenefit from the policy, there will also be losingsectors. Where the losing sectors are economicallyor politically significant, these distributional re-sults of the tax may increase the difficulty ofintroducing it.

Another group that is potentially vulnerable toenvironmental taxes is low income consumers andhouseholds. This is because some environmentallysensitive goods, such as energy or water, may berelatively more important in the expenditure orconsumption of low income groups than of richergroups. Studies such as Pearson and Smith (1991)have shown that the EC carbon-energy tax couldbe regressive (interestingly this study showed re-gressive effects only in Ireland and the UK; inFrance, Germany, Italy, the Netherlands andSpain the proportion of carbon tax payments tohousehold total expenditures is hardly related toincome, if at all (Pearson and Smith 1991, Figure5.2, pp. 43).

As with issues of competitiveness, these possibledistributional effects on low income groups war-rant serious political attention when environmen-tal taxes are being designed, if public support forthe taxes is to be secured. The inability of theBritish government in 1994 to raise VAT on do-mestic fuel from 8 to 171

2% was at least partly dueto concerns about the impact of this tax increaseon the poor. In retrospect, a more gradual imposi-tion of the tax, together with measures to offsetthe regressivity of the tax announced at the sametime as its imposition, might have made the taxeasier to introduce.

Two brief general points about these distribu-tional concerns may be made. The first, relativelyobvious but sometimes overlooked, is that withany tax that raises revenue from both the betterand the less well-off, it is always possible to fullycompensate the latter from the revenue raised.The second is that an effective compensationscheme may be complex and not easy to design in

order to avoid distorting secondary effects. Anexample of such distortions, where the compensa-tion is effected through the social security system,may be a reduction in the difference between lowwages and the benefit level, reducing the employ-ment incentive or, equivalently, increasing themarginal tax rate for low-income jobs.

One way of mitigating regressive distributionaleffects is to have a tax-free threshold for essentialuse of the taxed product. Another is to introducethe tax progressively, with higher taxation onsuccessive blocks of consumption. An example ofthe latter is the water tax at Setubal in Portugal,which has a progressive scale for charging house-holds for both water consumption and waste-wa-ter treatment. For a monthly water consumptionof 25 m3, the first 5 m3 are charged at ESC 67.5[ECU 0.34] per m3, the next 10 m3 at ESC 102.5[ECU 0.52] per m3, and the next 10 at ESC 162.5[ECU 0.83] per m3 (EF, 1996). Such a progressivescale clearly prevents charges bearing too heavilyon the essential use of water.

The Dutch small energy users’ tax (see (3) inSection 3, Table 2), introduced in 1996, was de-signed with special consideration given to distri-butional concerns. Revenues are recycledseparately to businesses and households, corre-sponding to their respective tax payments. Forbusinesses the recycling is mainly effected througha reduction in employers’ non-wage labour costs.For households, a tax-free threshold of energy usehas been introduced which avoids a regressiveburden on low-income households. In addition,households get income tax relief such that anaverage energy user in each of four income groupswill be made no worse off from the tax (higherand lower than average energy users in eachgroup will be worse and better off, respectively).It is likely that this transparent and specific rev-enue-neutrality, with regard to particular groupsas well as overall, contributed substantially to thetax’s acceptability in the Netherlands. It is alsothe major component in the government’s attemptto win social consensus on the tax, and in particu-lar to persuade employees not to claim furthercompensation for it in their wages than is alreadyin the recycling package. Any such double com-pensation would, of course, have negative


macroeconomic effects, risking a wage-price spi-ral, and abort any potential employment benefitsfrom the change in the relative prices of energyand labour facing low energy using businesses.

5. Conclusions

The 1990s have seen green taxes firmly estab-lished on the public policy agenda. Recommenda-tions for the internalisation of externalities or theuse of market-based instruments for economicefficiency, which languished for many years asarcane concerns of academic environmentaleconomists, are now the established concern ofMinistries of Finance and the Environment, ashas been seen. It is a development that results ina richer, more balanced approach to environmen-tal policy that is likely also to be more cost-effec-tive. This discovery of economic instruments forthe environment seems to have been driven by anincreasing awareness of the power and potentialof markets, and of the limited performance ofconventional environmental regulations, com-bined with the need of governments to find new,or different, sources of revenue.

The experimental phase in the imposition ofenvironmental taxes and charges is by no meansover. While a few countries now have substantialexperience in all kinds of green taxation—cost-covering charges, incentive-taxation, revenue-raising taxation—most still have considerablescope for adapting these to their own nationalcircumstances. Such adaptation appears to be cru-cial for the successful application of these taxes.The various national experiences show that thereis no one successful model. Rather the principlesof green taxation are implemented, and widelymodified, in accordance with national prioritiesand perspectives.

While business-environment bodies have beengenerally welcoming to the shift in environmentalpolicy that a greater use of economic instrumentsrepresents, this welcome has been cautious andhas been extended on two clear conditions. First,the introduction of economic instruments mustnot increase business’ overall burden of taxation.This condition can, in principle, always be met,

although it may be expected that governments,especially when in difficult budgetary circum-stances, will wish to retain the option of introduc-ing environmental taxes as new sources ofrevenue.

The second condition is that environmentaltaxes do not worsen business competitiveness. Forbusiness as a whole, this condition would be metby fulfilment of the first condition, whereby busi-nesses with lower environmental impact wouldgain at the expense of those with a higher envi-ronmental impact. For the latter sectors, however,there is the clear prospect of losses from environ-mental taxes, especially where the tax falls on aninput, such as energy, which comprises a signifi-cant proportion of a sector’s costs.

It must be remembered that this impact onenvironmentally intensive sectors is part of thefundamental purpose of environmental taxation,both to encourage the sectors to make more effi-cient use of environmental resources and to intro-duce new, less environmentally intensive productsand processes, and to encourage consumers toshift away from these sectors to less environmen-tally damaging products. The effect on producerscan in principle be achieved through voluntaryagreements, and there are a number of countrieswhere these have been substituted for environ-mental taxes to mitigate competitiveness effects invulnerable sectors. But exempting environmen-tally intensive sectors from environmental taxesblunts the effectiveness of the taxation from aconsumer point of view, and slows down thechanges in consumption, and therefore produc-tion, patterns that are widely considered necessaryif a process of sustainable development is to beachieved.

The Western European experience of green tax-ation could now develop in one of several differ-ent directions. Several countries clearly desire topush ahead with more ambitious schemes of greentax reform, but what they are likely to enactunilaterally is bound to be constrained by con-cerns about national competitiveness and distor-tions in the EU single market. However, if the EUwere to introduce minimum energy taxes and acarbon/energy tax along the lines of the EuropeanCommission’s 1991 proposal, as a majority of EU


countries seem to desire, a further range of oppor-tunities for unilateral innovation and experimen-tation would open up, and some of the moreambitious schemes for green tax reform mightstart to be implemented.

But it is still not clear whether and how such acommon introduction of taxes at the Europeanlevel will come about. For the present, it onlyseems certain that governments will continue tointroduce environmental taxation bit by bit, at-tracted by the combination that such taxationseems to offer of cost-effective environmental pol-icy and a source of government revenue, whichcan possibly be used to make some inroads intounemployment.

Acknowledgements

Special thanks are due to Stefan Speck, archi-tect of the EC-funded database on European envi-ronmental taxes and charges, for helping toensure that information in this paper was as up-to-date as possible at March 1999. Thanks arealso due to three anonymous referees, whose com-ments enabled this paper to be substantially im-proved. Remaining limitations are the author’salone.

Appendix A. ECU exchange rates used in theconversion of national currencies

Exchange rate 1997Country1 ECU corresponds to

OS 13.688AustriaBelgium BFR 40.079

CN$ 1.570CanadaDKR 7.442Denmark

Finland FMK 5.813FF 6.562FranceDM 1.945Germany

Greece DRA 309.475IRL 0.747IrelandLIT 1911.740Italy

Luxembourg LFR 40.079HFL 2.183Netherlands

Norway NKR 7.8002

ESC 195.850PortugalPTA 163.924SpainSFR 8.586SwedenSF 1.686SwitzerlandUKL 0.740UKUS$ 1.134USA

Sources: International Financial Statistics, vol.XL, International Monetary Fund, Washington,1998; and Excise Duty Rate Tables, EuropeanCommission DG XXI, Brussels, 1/1/1997.

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