Green taxes work when properly targeted

Green taxation needs well-designed policy packages, concluded a conference exploring the successes and failures of recent environmental taxation. European ministers are calling for a rethink in how taxes are structured to ensure maximum environmental impact with minimum costs for those with low salaries.





News service Edie reports that the meeting’s conclusions (which took place in June), published by the Organization for Economic Cooperation and Development (OECD), list current obstacles to European blanket taxation, including a fear of reduced business competitiveness, associated job losses and high costs for low-income earners, along with problems in coordinating policy at European level. Progress can be slow where countries are opposed to what is perceived as restrictions to national sovereignty in tax matters. Within the European Union, the current ‘unanimity rule’ often functions as a major obstacle.





In the meeting’s review of European countries’ taxation schemes, Germany’s Ecological Tax Reform was hailed as a success, generating positive environmental impacts within two years of its introduction. The Danish government had similar success with its 1990 reforms, where environmentally related taxes were levied on both households and businesses. Under the Tax Reform of 1993, existing green taxes for households were increased sharply and new taxes were introduced. They were then offset by a gradual reduction in the tax on personal income. Additional compensation was offered to low-income individuals who could not be sufficiently compensated by the tax reduction.





Some countries felt that compensation was preferable to mitigation, in order to encourage technological innovation and foster behavioural change. Both the UK and Spanish governments opposed taxes on household use of energy. The UK was more concerned with addressing ‘fuel poverty’, while Spain argued the demand for energy was so inelastic to price changes that taxes would not significantly reduce energy use. Spain preferred positive incentives in the form of lower taxes to stimulate investments aimed at protecting the environment.





But France’s Carbon Tax, based on the concept of tax rebates, was less than successful, being scrapped after two years. The French government originally proposed tax reductions for industry, with the reduction varying with the energy input. Tax rebates were linked to an obligation to negotiate voluntary agreements with the administration. In the end, however, the Carbon Tax was pronounced unconstitutional by the Constitutional Council.





Nevertheless, taxation was hailed an effective instrument to tackle environmental degradation and excessive energy use, where polluters and energy users have an enduring incentive to limit emissions and reduce energy consumption. The meeting concluded 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. Public awareness should also be increased to ensure voters understand the need for taxation and how taxes will lower society’s costs. Public acceptance might also be won if green taxes were presented as taxes one could avoid by changing one’s behaviour.





Copies of the report Conference on environmental fiscal reform are available from the OECD’s website at:





http://www.oecd.org/pdf/M00034000/M00034220.pdf


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