EEA Report No 17/2016 Environmental taxation and EU environmental policies ISSN 1977-8449 EEA Report No 17/2016 Environmental taxation and EU environmental policies Cover design: EEA Cover photo: © AlexSava (www.istockphoto.com) Small photos: © JacobH (www.istockphoto.com) Layout: Pia Schmidt Legal notice The contents of this publication do not necessarily reflect the official opinions of the European Commission or other institutions of the European Union. Neither the European Environment Agency nor any person or company acting on behalf of the Agency is responsible for the use that may be made of the information contained in this report. Copyright notice © European Environment Agency, 2016 Reproduction is authorised provided the source is acknowledged. More information on the European Union is available on the Internet (http://europa.eu). Luxembourg: Publications Office of the European Union, 2016 ISBN 978-92-9213-755-7 ISSN 1977-8449 doi:10.2800/296823 European Environment Agency Kongens Nytorv 6 1050 Copenhagen K Denmark Tel.: +45 33 36 71 00 Web: eea.europa.eu Enquiries: eea.europa.eu/enquiries Contents Contents Authors and acknowledgements .............................................................................................. 4 Executive summary .................................................................................................................... 5 1 Introduction ........................................................................................................................... 6 2 Market-based instruments in EU environmental legislation .......................................... 7 3 Definitions and rationales for environmental taxes ...................................................... 13 3.1 Definitions of environmental taxes .....................................................................................13 3.2 Rationales for environmental taxation ...............................................................................15 4 Implementation of environmental taxes in EEA member countries ............................ 17 4.1 Current status of implemented environmental taxes ������������������������������������������������������19 4.2 Analysis of selected developments in environmental taxation .......................................22 5 Overall findings and reflections ........................................................................................ 34 5.1 Overall findings on environmental taxation ......................................................................34 5.2 Reflections on future challenges .........................................................................................36 References ................................................................................................................................. 41 Annex 1 EU environmental targets and objectives ........................................................... 47 Annex 2 Overview of environmental taxes in EEA member countries............................ 64 Environmental taxation and EU environmental policies 3 Authors and acknowledgements Authors and acknowledgements The European Environment Agency (EEA) and its Authors European Topic Centre on Waste and Materials in the Green Economy (ETC/WMGE) prepared this report. Stefan Speck (EEA) and Susanna Paleari (ETC/WMGE) The EEA gratefully acknowledges contributions from European Environmental Information and Observation Editorial support Network (Eionet) members in Germany, Latvia, Poland, Slovakia and Turkey, from the European Commission, Bart Ullstein and Peter Saunders (ETC/WMGE) Directorate-General Environment and Eurostat and from EEA colleagues. ETC/WMGE task manager The authors would also like to express thanks to Margit Schratzenstaller-Altzinger, Olinka Gjigas, Roberto Zoboli Viire Viss, Xavier Labandeira, Roberto Zoboli and Anil Markandya (member of EEA's Scientific Committee), who provided valuable suggestions and EEA project manager comments during the work on this report. Stefan Speck 4 Environmental taxation and EU environmental policies Executive summary Executive summary EU environmental policies address a range of Environmental taxes, eco-innovations and their environmental and resource use challenges, including diffusion are key enabling factors in the transition to a air pollution and transport, climate change and energy green economy alongside investment instruments. use, freshwaters, marine waters, chemicals, biodiversity and land use, waste, and sustainable consumption and A further benefit of environmental taxes is their fiscal production. function. Well-designed taxation systems should be efficient as well as enhance economic growth and help Overall, there are currently 82 binding targets and achieve important social objectives e.g. better health. 84 non‑binding objectives established in response to Environmental taxes can achieve non-environmental these challenges for the period 2013–2050, with several goals and thereby contribute to a holistic, all-inclusive of them addressing environmental and socio-economic policy approach. Studies show that environmental considerations together. Achieving them cost-effectively taxes are less distorting towards economic behaviour often requires the use of market-based instruments than labour and corporate taxes. Evasion is also much (MBIs) in tandem with regulations. The main MBIs in lower than for other taxes, while administrative costs use include tradable permits and quotas, producer are lower than for income and value-added taxes (VAT). responsibility schemes, tariffs and environmental taxes. Currently 18 binding and 24 non-binding MBIs are in The fiscal outlook in Europe has heightened political place based on current EU environmental legislation in interest in the potential of revenue-neutral tax-shifting force. policies whereby the revenues resulting from environmental taxes are used to reduce labour taxes. Environmental taxation and in particular tax-shifting Such environmental tax reforms have been beneficial programmes, also known as environmental tax reform and can continue to be in the short- to medium-term (ETR), are high on the political agenda, as illustrated in as shown by several EEA member countries. the Europe 2020 strategy and several other EU policy Environmental taxes have a role to play in the overall documents. The current application of environmental fiscal system. Although their revenue potential is well taxes in European Environment Agency (EEA) countries below those of labour and consumption taxes, such as shows that energy, carbon and transport (vehicle) value added tax, they are of the same order as those taxes are by far the most commonly used, while levied on the income of corporations. waste-related instruments exist in the majority of these countries. The use of taxes for addressing air and water Longer-term developments including demographic pollution and resource use is rather less widespread. changes and technological breakthroughs on energy and transport in the transition to a low-carbon, green The primary objectives and benefits of environmental economy will contribute to the erosion of the current taxes are to reduce pollution and resource use. They tax bases in European countries. These expected are also several secondary benefits: for example, such trends challenge the overall basis of current thinking taxes contribute to a healthier society and hence lower on tax-shifts. Some countries have already developed health-related costs, they trigger eco-innovations that new environmental tax instruments but much more generate wealth and jobs, while the broad diffusion needs to be done on the design of resilient, long-term of environmentally friendly technologies support tax systems in Europe in the face of such systemic sustainable systems of production and consumption. challenges. Environmental taxation and EU environmental policies 5 Introduction 1 Introduction This report does three things. It provides an overview The analysis focuses on the design and application of of market-based instruments (MBIs) established by carbon/energy taxes and transport taxation schemes. EU environmental legislation. Then it explains the established definitions and rationales for the application The report closes with overall findings and a more of environmental taxes and discusses their current reflective analysis that addresses wider considerations design and application in EEA member countries (1). It around the application of environmental taxes. It concludes with overall findings and some reflections considers the prospects for ETR in the long-term on the potential for long-term tax-shifting programmes (2030–2050) in the context of technological innovation, in the context of policy targets as well as technological changing demographics, climate change, and energy innovation and demographic changes. reduction targets. The overview of MBIs and the assessment of Two annexes contain further information relevant to the environmental taxation schemes follows previous discussion of MBIs. Annex 1 provides an overview of the reports by EEA over the past 20 years. These include: targets and objectives agreed since autumn 2012 under Environmental taxes — Implementation and environmental EU environmental policy and legislation across nine effectiveness (1996); Environmental agreements — areas. This applies the same methodology and criteria in Environmental effectiveness (1997); Environmental taxes the 2013 EEA report Towards a green economy in Europe — — Recent developments