Environmental tax reform: increasing individual incomes and boosting innovation - 14 January, 2012.
European governments could simultaneously reduce income tax, increase innovation and cut pollution by introducing well-targeted environmental taxes and recycling the revenues back into the economy. This was one of the findings from a pair of reports on environmental tax reform (ETR) published today by the European Environment Agency (EEA).
Environmental tax reform is defined as 'reform of the national tax
system where there is a shift of the burden of taxes, for example from
labour to environmentally damaging activities, such as unsustainable resource
use or pollution'.
There are at least four possible types of effects of
ETR. The first effect is to make various goods or activities more expensive,
while the second effect comes from the direct or indirect distribution of this
extra revenue. Thirdly, job creation and eco-innovation may be another
result of this process. And lastly, effective ETR will also result in
environmental benefits, for example by reducing pollution.
Environmental taxation also has an important role to play in spurring
innovation, according to a broad range of studies. By increasing tax on
pollution and other environmentally-damaging activities, governments can use
the extra funds to provide incentives for innovation, such as developing
renewable energy. For advanced economies like the EU, such schemes also create
new technologies which can be exported globally, the reports say.
The reports also look at ETR in practice across Europe. Analysis of
policies in Germany and the Netherlands showed that ETR and other environmental
policy instruments have broadly positive effects in increasing innovation. The
wider economic effects of ETR have also been analysed in Germany, where
environmental taxation cut pension contributions and created an estimated 250
000 jobs.
One of the challenges of ETR is ensuring the costs and benefits are
appropriately distributed across society, and do not negatively impact the
poorest people. Instruments also need to balance the right mix of environmental
and economic incentives. Ultimately, ETR mechanisms can only
be implemented if they are acceptable to the public and policy-makers.
Modelling
the impact of environmental tax reform
- The EEA calculated the impact of a tax on
energy and other resources, with the revenues used to cut social security
payments and income taxes. The model indicated
that this fiscal reform would result in financial benefits for almost all
socio-economic groups. However, in a few countries the poorest people
could see negative effects, as these people spend a higher proportion of
their income on energy.
- Increasing the cost of emitting carbon
could also have a negative effect on the poorest groups, according to a
Germany-based modelling study. However, the scenario shows that the
worst-hit parts of society could lose just 1 % of their disposable income
in 2020, so it would be relatively simple and affordable to compensate the
affected groups via targeted benefit transfers.
- Furthermore, the reduction in social
security payments means labour costs decrease, boosting employment – the
model suggests that increasing the price of emitting one tonne of carbon
dioxide to €68 by 2020 could create 152 000 additional jobs in
Germany.
- The modelling
exercise also analysed the effects of applying ETR to meet the EU
target of reducing greenhouse gases by 20 % by 2020. This scenario looked
at the effect of taxing emissions, with the revenues used to support
innovation and reduce income tax and social security costs. The model
showed that the policies would increase employment by more than 1 million jobs,
with only a small (0.04 %) cost to GDP to achieve the 20% GHG reduction
target at EU level.
Source: www.eea.europa.eu
January 14, 2012.