Why greening taxes makes sense
Does taxation have a colour? If we’re referring to the ones that can help create a more sustainable future, then the answer is yes! The colour is green.
Environmental (or green) taxes include taxes on energy, transport, pollution and resources. These are part of a broader policy mix of green taxation initiatives at the EU and Member State level that can help us reach environmental policy goals.
Since the transition towards climate neutrality requires deep changes, green taxation addresses every aspect of environmental protection and preservation. For instance, it covers climate change, pollution, resource consumption and biodiversity loss, as well as gas emissions and the use of pernicious substances.
Currently, EU Member States implement environmental taxation strategies. However, there are differences across the Member States due to the absence of common EU rules.
Doing things differently
No matter the strategy implemented, the goal is one: to mitigate damage to the environment.
In terms of pollution, which represents a significant cost for our society and is a key concern for EU citizens, there’s the Polluter Pays Principle. Polluters are held responsible for the pollution they cause. The idea behind this policy is for polluters to find environmentally friendly alternatives or to fund clean-up actions. Examples of taxes are listed below.
Air pollution: Nitrogen Oxide (NOx) tax, tax on domestic biomass burning, and tradeable livestock rights for NH3 emissions.
Water pollution: Pesticides tax, nitrogen fertiliser levy, and waste water charge.
Waste: Landfill and incineration tax, pay as you throw, and beverage container tax.
Biodiversity: Market-based offsetting, forest felling charge, intensive livestock charge, and peat tax.
Green taxation also encourages environmentally beneficial activities. The purchase and use of eco-friendly cars, the use of public transport, the use of biofuels and renewable energy, the investment and research in energy efficiency and clean technologies are several activities that are being incentivised through environmental taxation.
Green taxes for a green future
Environmental taxes aim to facilitate the EU’s goal of green transition based on the European Green Deal. The Deal is a comprehensive strategy for the Union to become the first climate neutral continent by 2050 and transform it into a sustainable, fairer and more prosperous society that respects planetary boundaries.
Carbon taxes, for example, will set the price of carbon that will ultimately result in discouraging the consumption of carbon-intensive products and fuels.
The ‘Fit for 55’ package, the EU’s plan against greenhouse gas emissions, puts the focus on reducing reliance on fossil fuels including coal, oil and natural gas, as well as expanding the use of solar, wind and hydropower energy, accelerating the development of electric cars, and spurring clean-energy options for aviation and shipping.
Environmental tax revenue
Based on the latest data available, total environmental tax revenue in the EU in 2020 amounted to EUR 299.9 billion, representing 2.2 % of EU GDP and 5.4 % of total EU government revenue from taxes and social contributions. The latest data also shows that a very large portion of the 2020 EU environmental tax revenue – 77.2 % - comes from energy taxes. Transport taxes account for 19.1 %, and the share of taxes on pollution and resources is still very small (3.7 %) in the EU.
Across the EU, the environmental tax revenue-to-GDP ratios ranged in 2020 from 1.2 % (Ireland) to 4.7 % (Slovenia). The environmental taxes to taxes and social contributions (TSC) ratios also varied across the EU Member States, with Slovenia (12.3 %) reporting the largest shares of environmental taxes in TSC, and Slovakia (4.0 %) and Luxembourg (3.5 %) the lowest.
As regards the tax burden, this varies by environmental tax category and sector. Corporations pay the highest share of energy taxes (51.5 % in 2019) while the share levied on households is at a slightly lower level (44.0 %).
Households are, however, the main payer of transport taxes (66.4 % in 2019), and they pay a larger portion of pollution and resource taxes (55.9 % in 2019).
The fact that the environmental taxation is aiming to reach climate and environmental policy goals and to influence citizens’ behaviour makes it a powerful tool to transform our economy.
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