With the 20-20-20 target in mind, set by the European policy makers for the year 2020, it has never been of such importance for countries to discover ways to reduce pollution while not hurting their economy at the same time. In order to achieve the latter, the European Environment Agency (EEA) came with the idea of reforming the environmental taxation in countries which could consequently achieve a pollution reduction while improving other factors (social, economic,…) at the same time.
So what is an Environmental Tax Reform (ETR)?
An Environmental Tax Reform is by definition ‘a reform of the national taxation system where there is a shift of the burden of taxes from example labour/capital towards environmentally damaging activities such as unsustainable use of natural resources or pollution.’ In sum, with the measure, governments should lower taxes on production capital and raise taxes on activities that are harming the environment. This can be implemented in 3 different ways: First, governments of countries can carry out the ETR in a revenue-neutral way, i.e. leaving total taxes unchanged. Second, it can be carried out in a revenue-positive way, increasing the total tax burden and revenue for the government and third, in a revenue-negative way which is the case when not all taxes have been recycled. Although revenue-positive ETR sounds seductive for governments, it is however advisable to implement the reform in a neutral way, as it would be able to damage a country’s economy when taxes are already high and an additional tax would be levied. Now, how could an ETR ultimately benefit the economy?
A first effect one can describe is the one that the reform is designed to do: reducing environmental pollution. Companies will have an incentive to decrease their waste as to avoid taxes. Additionally, the ETR will have the effect of making various goods and activities (mostly bad for the environment) much more expensive as companies, who face additional taxes, will somehow pass on these cost to the end-consumer. Third, and most importantly, shifting taxes from labor to pollution may increase employment and promote ecological innovation. Why? Companies, after the implementation of ETR, will face less wage-costs and may therefore willing to create extra job opportunities within their organization. For example, a study by the EEA has shown that increasing the price of one tonne carbon dioxide to €68 by 2020 could create 152000 extra jobs in Germany.
A last important effect stems from the extra government funds available by increasing tax on polluting activities. The aforementioned funds could be used to create incentives for companies to commit to innovation such as the development of renewable energy sources and in this way boost eco-innovation.
In sum, environmental taxes have always had the misleading reputation of being an impediment to economic activity while in fact, as I’ve tried to point out in this blog, they can serve as an important and successful tool for boosting employment, innovation and a country’s economy as a whole.