On 6th September 2016 the European Environment Agency, an agency of the European Union tasked to provide “sound, independent information on the environment” published a report on Environmental taxation and EU environmental policies. This report provides a useful and informative commentary on the current position of environment related market based instruments (such as taxes, fees, charges, producer responsibility schemes and tradeable permits) in the EEA member countries being the 28 EU Member States plus Iceland, Liechtenstein, Norway, Switzerland and Turkey. The report references potential forthcoming erosion of tax revenue and opines on a need for a structural review of environment taxes and their design.
There are very many points arising from the report some of which we refer to below.
- Revenue from environment taxes across Europe varies considerably. However, as a whole they grew markedly (in terms of comparison with GDP) since the 2008/9 economic and fiscal crisis, whereas before this they were relatively flat.
- The percentage of environment taxes differs very markedly across sectors. The sectors with the largest environment taxation in Europe are (i) energy (76% of total environment tax receipts), (ii) transport (20 %), and (iii) pollution and resources taxes (including in respect of waste and water)(4%).
- Environment taxes are often more effective at achieving the environment purpose than pure regulation. Increasingly the focus of environment tax design could move away from being purely a policy tool for environment protection towards a policy instrument to simultaneously address environment, socio-economic and fiscal considerations.
- Whilst the revenue potential of environment taxes is well below that of taxes on labour and consumption (they are at the level of levies on income of corporations), the European Environment Agency cites authorities to argue that environment taxes are less distorting towards labour and growth. The European Environment Agency also points to lower evasion levels and lower administration costs than other taxes.
Shifting tax from labour to environment
- Governments appear to be increasingly receptive to revenue neutral tax programmes which shift some of the burden of taxation from labour and capital (good things) onto environment harmful products and activities (bad things).
Potential tax revenue erosion
- The report points to two areas of potential tax revenue erosion which it sees as an important consideration for future tax design. One of these relates to an environment tax itself.
- Purely from a revenue perspective, revenue from environment taxes can be self-defeating over time. For instance where transport taxes are employed to shift users to more efficient or non-carbon road vehicles, tax revenue based on petrol/diesel consumption theoretically will decline. Also the European legal and policy drive to decarbonise the energy sector will theoretically cause current tax revenue based on carbon to erode correspondingly. As noted above, the energy and transport sectors generate almost all of the current environment tax revenues.
- The other significant factor raised in the report is that many European economies (by no means a homogenous trend across Europe) face an era of eroded revenue from labour taxes as the aging population retires. The report points to a potential projected overall decline in the European labour supply from 2023.
- If Governments become more inclined to shift some of the burden of taxation from labour to environment issues, and even though environment issues tend to have a medium or long term horizon the European Environment Agency suggests that it would be prudent to start work on design now as development of new taxes can take a long time.
The report raises many interesting aspects which, if not all new, are accompanied by updated information. It appears to be advocating more attention be given to greater use of environment taxes and that such attention needs to be given sooner rather than later. This is important given that economic measures undoubtedly will need to be adopted to deal with climate change and the objectives of the Paris Agreement on Climate Change along with the ongoing debate in the EU on the proposed circular economy package presently under consideration by the European Parliament which includes the promotion of economic instruments to discourage landfilling generally and economic incentives for producers to put greener products on the market and support recovery and recycling schemes.
We found it interesting that the report (at page 15) describes as “critical” the need for reform and phase out of subsidies for products and services which are harmful to the environment. However, unlike the report’s considerable detail on environment taxes, there is no detail on these subsidies. In terms of balance within the report, it would have been useful to see such detail.