Environmental taxes

Climate change is the greatest environmental threat we face as human beings. The global average temperature has already risen by 1.1 °C since pre-industrial times, and if the Paris Agreement target - to keep the increase below 2 °C and try to limit it to 1.5 °C - is not met, the consequences could be catastrophic. We therefore need, to reduce the emission of green house gas globally and international bodies such as the International Monetary Fund (IMF), environmental organisations and many economists agree that a key tool for fighting climate change is environmental taxation.

What are environmental taxes?

According to the statistical framework developed jointly in 1997 by Eurostat, the European Commission, the Organisation for Economic Cooperation and Development (OECD) and the International Energy Agency (IEA), environmental taxes are "those whose tax base consists of a physical unit (or similar) of some material that has a negative, verified and specific impact on the environment".

In an unregulated scenario, a company could manufacture a product in a polluting way without considering its impact on the planet's health or that of the environment. This is what is known in economics as externality. The purpose of green taxes is to make polluters pay in accordance with the 'polluter pays' principle, with the price reflecting the cost of these externalities.

The benefits of environmental taxes 

There is almost total unanimity when it comes to pointing to environmental taxation as a key tool for moving towards a decarbonized economy that favours sustainable development. Among the main benefits that justify the existence of these taxes, the following stand out:

  They internalize the negative externalities.

  They promote energy saving and the use of renewable sources.

  They discourage anti-ecological behaviour.

  They motivate companies to innovate in sustainability.

  They generate revenue for governments, allowing other taxes to be lowered or environmental projects to be carried out.

  They protect the environment.

The IMF has proposed that the countries that emit the most greenhouse gases establish a tax on CO₂ emissions. According to this organization, this rate would have to be USD 75/ 68 Euros per ton in 2030.

he agency maintains that this rate will impact, mainly, in the use of coal to generate electricity. This type of tax seeks to shift more polluting forms of energy in favour of less polluting ones, such as renewables.

The ideal situation for environmental taxation is what is known as the double dividend hypothesis. Contrary to the prejudice that environmental taxes burden the economy, a scenario in which the rise in these taxes would be compensated by a reduction in taxes on labour, capital or consumption would result in a double benefit: an improvement in the environmental quality and efficiency of the economic system.

On what are environmental taxes applied?

Each country has its own design regarding environmental taxes. In spite of this, at the international level the main taxable facts with environmental interest are:

  The emissions of nitrogen monoxide (NO) and nitrogen dioxide (NO₂) which are produced, above all, by combustion vehicles.

  The emissions of sulpher dioxide (SO₂) —the main cause of acid rain—especially produced by the combustion of petroleum products and the burning of coal.

  Waste management (domestic, commercials, industrials, construction, etc).

  The noise made by the take-off and landing of aircraft.

  Energy products (petrol, diesel, natural gas, coal, electricity generation from fuels, etc.) which generate CO₂ emissions when burned.

  Sources of water pollution (pesticides, artificial fertilizers, acids, etc).

  Earth manipulation and the extraction and use of natural resources.

  The emissions of carbon dioxide (CO₂).

  Products that reduce the ozone layer.

Transport (polluting vehicle registration, use, import or sales).

In terms of industries, the one most affected by environmental taxation is energy. According to Eurostat, in 2021 energy taxes in the European Union (EU) accounted for more than three-quarters of total environmental tax revenues (78.4% of the total), well ahead of taxes on transport (18.1%) and on pollution and resources (3.5%). 

The collection of environmental taxes

Last year, the EU raised over 300 billion euros, representing 2.2% of European GDP and 5.4% of total tax revenues.

By type of tax

(Unit in billions of euros)

By country

(% of GDP)

  SEE INFOGRAPHIC: The collection of environmental taxes [PDF]

Principles for proper environmental taxation

According to the OECD, good environmental regulations should follow these principles:

• Environmental taxes should be targeted to the pollutant or polluting behaviour, with few exceptions.
• The scope of an environmental tax should be as broad as the scope of the damage.
• The tax rate should be commensurate with the environmental damage caused.
• The tax must be credible and its rate predictable in order to motivate behaviours that help protect the environment..
• Environmental tax reform revenues can be used as additional revenue or help to reduce other taxes.
• Distributional impacts should be addressed through other policy instruments.
• Competitiveness concerns need to be carefully assessed, not to obstruct taxes but to offer the possibility of coordinating policies and establishing transitional relief periods.
• Clear communication is critical to public acceptance of environmental taxation. 
• Environmental taxes may need to be combined with other environmental policy instruments to address certain issues.

However, the implementation of the various taxes and the way environmental taxation is coordinated often fail to reflect these principles. Some of the most common criticisms include:

• Lack of connection towards the negative externalities that generated the tax.
• Lack of environmental consistency in the design due to not being based on environmental damage.
• Lack of consideration regarding the spatial scope of taxable events, subjecting technologies and premises rather than damage and consumption.
• Rates too low to discourage the agents causing environmental damage.
• Carbon taxes are often zero or almost non-existent in countries such as the United States, while in Sweden or Finland they are the main source of green taxes.
• The complexity and diversity of the taxes to which the most affected sector of all, the energy sector, is subjected.
• The lack of international or regional diversity in respect with environmental taxation leads to disparity in revenue collection.

Environmental taxation is commonly referred to as a key element in slowing climate change and this is why experts in the field, international organisations — such as the OECD or the European Commission — criticise the lack of commitment to environmental taxation in many countries and urge them to make environmental tax reforms.