‘Greening’ the tax system Summary An exploration of ways to alleviate environmental pressure by fiscal means ‘Greening’ the tax system An exploration of ways to alleviate environmental pressure by fiscal means Summary Part 1 Introduction1 1 This publication comprises Being the child of famous parents can present special challenges. a translation of the full text Expectations will be high, as was the case for the Second Dutch of the first chapter and the boxes incorporated in the Green Tax Commission charged with exploring ways of ‘greening’ the official report of the Second Netherlands’ tax system, i.e. of finding ways in which environmental Dutch Green Tax impact could be lessened by fiscal means. Following an interval of Commission. over two years, a new commission was appointed in May 2000 as successor to the first, which had been set up in 1995. The first group, known by the name of its chairman Jacob van der Vaart (of the Ministry of Finance) presented its third and final report in November 1997. The reports of this group contained many recommendations by which environmental objectives could be furthered through the tax system. The second working party was formed under the chairman- ship of Jan de Waard and included members of the former group. Its task was to define new possibilities, to evaluate the measures taken thus far, to identify any tax expenditure that may have a detrimental effect on the environment, to define the anticipated effects of new measures and to incorporate all these aspects in an agenda for the next government period. As a full list of options should be available when the political parties compile their manifestos for the 2002 gen- eral election, the Commission was requested to produce its final report by mid-2001. The members As in the first Commission, the members of the second Commission were chosen for their different backgrounds, rendering a wide- ranging dialogue likely. They represent various walks of life: tax experts, representatives of employers’ and employees’ federations, agricultural and environmental organizations, the world of science, research agencies, former parliamentarians and serving officials from the Ministry of Finance, the Ministry of Housing, Spatial Planning and the Environment, the Ministry of Economic Affairs, the Ministry of Transport, Public Works and Water Management and the Ministry of Agriculture, Nature Management and Fisheries. The respective ministers acted as joint ‘commissioning client’ for the Commission’s activities and reports. 3 Approach The Second Dutch Green Tax Commission was given a very broad Europe The countries of Europe now enjoy somewhat less individual free- mandate, based on which it made efforts to take stock of existing dom in devising their own fiscal policy and legislation. Increasingly, ideas and suggestions from all sections of the community, where measures to promote environmental objectives by fiscal means must these had not yet been examined in detail by its predecessor. It also be coordinated with other nations. However, as yet there is no inter- examined environmentally harmful fiscal measures as identified by national legislation which actually prohibits the introduction of any a separate working party. In the early stages of its deliberations, the form of environmentally-related tax. In fact, we can observe an inter- Commission faced a list of over eighty measures to be investigated. national trend whereby individual countries are encouraged to set an economic price on environmental impact by means of their Based on clear criteria enjoying broad support, and with the assis- national taxation system. Domestic users and businesses are thus tance of specialist research agencies, these measures were then encouraged to limit the pollution they produce and companies are closely considered and their advantages and disadvantages weighed encouraged to act in a socially responsible manner, taking general against each other. This evaluation process took over a year and interests into account in their decision-making processes. Because resulted in a refined set of recommendations by which a further the Netherlands is a member of the European Union, its national leg- ‘greening’ of the Dutch taxation system may be brought about. The islation must be assessed against the European rules and guidelines. proposed measures are both practical and practicable, and can be independently implemented by the Netherlands. Some can be imple- The scale and international nature of environmental issues now mented immediately; others call for further study but have clear demands a collective, multilateral approach. This is fully realized potential nonetheless. The various recommendations are presented by the the Second Green Tax Commission. Certain options were in the second part of this summary. rejected because they threatened to exceed the limits faced by national policy-making. Should a third commission ever be appoint- Reservations To carry on where someone else has left off has both advantages and ed to consider the relationship between taxation and the environ- disadvantages. Much of the pioneering groundwork has already been ment, it will be required to conduct its activities on a somewhat dif- done. The path has been cleared, as it were. Yet it is not enough to ferent level. In fact, it may be worthwhile considering the appoint- equal previous achievements: if possible, they must be surpassed. ment of a commission at European level. Aspects which are particu- The process of fiscal ‘greening’ proved to be no exception. The first larly relevant to the pan-European context are examined elsewhere Commission had not only developed practical selection criteria, it in this document. had plucked some of the low-hanging fruit. The most obvious options had already been examined, presented and in some cases, Limitations Since 1995, the Netherlands has been tirelessly and painstakingly implemented. In many instances, the measures left for the second examining opportunities for using fiscal means to strengthen its Commission proved to be, upon closer inspection, of insufficient environmental policy. In the intervening period, many tax-bases scope to allow any effective implementation of a tax-measure. The contributing to further fiscal greening have been developed. The resultant legislation would either lack focus or it would simply be Netherlands is now one of Europe’s frontrunners in this regard. The ineffective. The ‘law of diminishing returns’ applies equally to fiscal current report represents the conclusion of the inventory phase, at instruments, especially when we consider that concerted efforts least for the time being. Most of the more obvious options have now have been made to maximize those returns in recent years. been implemented, or have at least been fully examined and Moreover, several important proposals relating to new forms of taxa- described. Further exploration of the opportunities will call for new tion were already being evaluated in a broader context. They include debate concerning the possibilities and limitations of fiscal policy the ‘kilometre levy’, a direct charge on car usage, and the ‘open space itself. This will no doubt highlight the apparent conflict between the levy’, a charge intended to promote efficient utilization of scarce budgetary function of taxation (i.e. raising funds for the public purse) space. As the report of the Second Green Tax Commission neared and its function in influencing behaviour. One variable can only in a completion, work in these areas was still ongoing. The Commission limited way be used to achieve two objectives. Where levies are therefore confined itself to a number of recommendations addressed imposed as part of the fiscal system, this may be seen to be in the to those persons directly involved in the relevant fields. nature of sanction. As with a rope, one can pull but one cannot push! This is why the original Van der Vaart commission recommended 4 5 maintaining a careful balance between levies to discourage environ- These measures have resulted in a far ‘greener’ tax system. When mentally ‘unfriendly’ behaviour and allowances to encourage envi- taxes on motor vehicles (sales tax and road excise duty) and fuel ronmentally responsible behaviour. In recent years, considerable duty is taken into account, the proportion of green taxes in overall emphasis has been laid on the fiscal instrument as a means of pro- tax revenue has risen from 8.6% in 1990 to 14.1% in 2001. This figure moting environmental awareness. The political climate allowed little refers only to taxes which benefit the national exchequer. Taxes that room for actually increasing expenditure. Several members of the De are used to finance environmental expenditure directly are not Waard Commission believe that it would now be appropriate to look included. Nor are the local taxation measures. beyond fiscal possibilities alone. Giving money in ‘payment’ for envi- ronmentally friendly behaviour may sometimes be more effective In 1996 a Regulatory Energy Tax, also known as ‘ecotax’, was intro- than imposing penalties. A more extensive use of subsidies will offer duced by taxing the small-use of natural gas, heating oil and electric- greater room for positive stimuli. However, as with levies, we must ity and reducing direct income tax at the same time. From that year remain alert to distortion of normal market forces which subsidies to the present the shift towards more ‘green’ taxes continued. It is may entail. certain that the recommendations of the original Van der Vaart com- mission played a role in this shift. The Commission’s approach involved exploring means of contribut- ing to a better environment by means of fiscal incentives. The Revenue from 'green' taxes, 1985 - 2002 (in eur x billion) boundaries of its own mandate were frequently reached. In such 1985 1990 1995 1998 1999 2000 2001 2002 cases, it is useful to seek points of convergence with existing envi- €€ €€ €€ €€ ronmental policy and to take a specific environmental problem as Duty on mineral oils/derivatives 1.8 2.5 4.3 4.9 5.2 5.2 5.6 5.8 the starting point upon which to test a broad range of instruments.