Green Tax Policy in Europe
Results of Conference on Environmental Fiscal Reform
The German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety and the OECD sponsored a conference on June 27, 2002 in Berlin, Germany. The purpose of the conference was to examine obstacles and ways of overcoming them, so that the benefits of green taxes and of cutting harmful subsidies, in terms of environmental improvement and economic efficiency, can be more fully realized.
Main conclusions of the ConferenceA range of policy instruments is available to governments to achieve various environmental policy goals. Several OECD countries have successfully introduced ‘green’ taxes. Participants reviewed examples set by Denmark, Germany and the UK. However, the role of such taxes sometimes remains limited, as is illustrated by recent experiences in France, Ireland and Spain. The conference sought to explore why ‘green’ taxes are not more often used to limit emissions and reduce energy consumption.
During the Conference, nobody questioned the theoretical argument that taxes are the most effective instrument to internalise social costs in the form of environmental degradation and excessive energy use. Similarly, nobody disputed that taxes foster dynamic efficiency, in the sense that polluters and energy users have an enduring incentive to limit emissions and reduce further their energy consumption. That said, politicians in most OECD countries share worries of the business community that ‘green’ taxes may have potentially large impacts on the competitive position of certain sectors of industry. These competitiveness concerns have been addressed in the UK by all five measures identified in Section 4.3 of the OECD Report on Environmentally Related Taxes in OECD Countries. Contrary to arguments often put forward, no significant negative impacts on sectoral competitiveness have yet been observed.
From the discussions it emerged that many participants were doubtful that merely voluntary agreements can be a major instrument in environmental policymaking, because the price signal is not used, and given problems of asymmetrical information and enforcement, including ‘free riding’. Environmental taxes are therefore preferable.
Experience from OECD countries suggests that, at the time of their introduction, environmentally related taxes should be part of well-designed policy packages, including measures addressing competitiveness and equity concerns.
The prospects for active international policy co-ordination in this area are not uniformly good. Progress is often slow, as many countries are opposed to what is perceived as restrictions to national sovereignty in tax matters. Within the European Union, the current ‘unanimity rule’ (co-ordination in tax matters requires support from all Member States) often functions as a major obstacle. Possibly, this rule will not survive the coming enlargement of the EU. Participants agreed that, even if steps forward are often at a snail’s pace, countries should keep learning from each other’s experiences.
Lessons for national policymakers
Proponents of green taxes should consider the following strategies:
- Increase public awareness of environmental challenges. Sometimes voters and a majority among policymakers are insufficiently aware of existing problems; see the case of the water charge in Ireland.
- Stress the environmental impacts of the ‘green’ tax.
- Stress the advantage of using the tax instrument in terms of lower overall costs to society. This may mobilise the political will needed for change.
- Include new environmentally related taxes into much broader reform packages, to demonstrate that additional revenues are fully or partly re-cycled through reductions of other taxes (tax shifting), and introduce ‘green’ taxes gradually. Popular acceptance of ‘green’ taxes will increase if they can be presented as a tax “one can avoid” (by changing one’s behaviour).
- The example of the Climate Change Levy in United Kingdom demonstrates that also businesses can be taxed without significant negative impacts on sectoral competitiveness.
- The failure of the French Carbon tax does however underscore how important it is that the taxes are designed with great care.
- Underline favourable experiences with the tax instrument in other OECD Countries. This requires a well-structured international exchange of information.
Also see Jeff Smith on How to Optimize the Environmental Tax Shift
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