FEATURE
Environmental Taxes Gaining Ground in Europe National "green taxes" are environmentally effective and catching on, says the European Environment Agency. MARIA BURKE
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nvironmental taxes have been debated in Europe for years. An effort to establish a European Union-wide carbon-energy tax faced strenuous opposition and finally was defeated last year. But "green taxes" adopted by individual European countries over the past decade have been effective and are gaining acceptance, according to a new report from the European Environment Agency (EEA) in Copenhagen (1). The report states that these taxes have achieved their objectives at reasonable cost, and there is considerable scope for expanding their use on the national and European Union (EU) level. Europe-wide taxes still rare however. Within the EU, environmental taxation is likely to remain a lively issue. The green tax lobby may be gaining strength, but it faces formidable opposition from industries directly affected by particular taxes. The EEA report was requested in early 1996 by the European Parliament's Committee on Environment, Public Health, and Consumer Protection to further the public policy debate with the best available information. The agency commissioned three environmental economists to collect and analyze data from around the EU. Released in October, the report examined the environmental effectiveness of 16 taxes from six countries. On a national level, the EEA reports that taxes have spread widely over the past six years, particularly in Scandinavia, the Netherlands, Belgium, and Luxembourg, and to a lesser extent in larger countries such as the United Kingdom France Italy Austria, and Germany. Eastern European countries, such as Poland Hungary, and Estonia are also now introducing a few environmental charges and taxes The report highlights as examples of particularly successful taxes those on air pollution, nitrogen oxides, and vehicle fuels in Sweden and water pollution in the Netherlands. The most successful approach to introducing environmental taxes, according
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to the report, is "green tax reform," in which green taxes are part of a package of tax reforms designed to address market failures, competitiveness, and employment through a tax shift from labor to pollution. Several countries, including Denmark, Sweden, the Netherlands, and Norway, are trying to move away from taxes on labor or capital to those on energy and the environment. "The general perception is that current policies are weighted too heavily in favor of regulations, and now there is a need for more taxes," said report coauthor Paul Ekins, an economist with Forum for the Future, a U.K. sustainable-development organization. He points out that the best results come from the gradual introduction of a variety of economic environmental instruments, including taxes. A test bed for "green taxes" European countries appear to be at the leading edge of green taxes. Newly industrialized countries, such as Korea, Taiwan, and Singapore, are beginning to follow Europe's lead with energy and waste taxes. Federal environmental taxes generally are not popular in the United States, but the EEA report noted the apparent success of the 1990 U.S. tax on ozonedepleting chemicals, based on ozone-depleting potential, which encouraged chemical companies to develop alternatives. The first green taxes introduced in Europe during the 1970s were "cost-covering charges" aimed at making the polluter pay for the cost of regulating emissions. Such fees included the water pollution charges introduced by the Dutch government in 1970 and the Dutch household waste charge levied by municipal authorities on inhabitants for waste collection. In the 1980s, "incentive" taxes emerged, intended to change environmental attitudes by persuading industry to invest in waste treatment. In the early 1980s, France and Germany enacted water pollution charges aimed at subsidizing wastewater treat0013-936X/97/0931-84AS14.00/0 © 1997 American Chemical Society
ment plants. In France, polluters pay this tax if they discharge to open water and are given financial subsidies if they undertake treatment measures. In Germany, charges decrease when emitters invest in abatement technologies. Another incentive tax is Sweden's charge on nitrogen and phosphorus content of fertilizers, introduced in 1984, which raised funds for manure treatment plants. Revenue-producing fiscal taxes were introduced in Europe in the late 1980s and 1990s. These include the carbon dioxide taxes in Sweden and Norway, both introduced in 1991, and charges for dumping and incinerating waste in Denmark begun in 1986. U.S. green tax prospects unlikely "U.S. observers watch the European experiences with interest," said Robert Repetto of the World Resources Institute in Washington, D.C. We want to see how far they will go, what the analyses of economic
and environmental impacts show, how European countries cope with competitive effects." But it will always be harder to introduce environmental taxes in the United States, he believes. "In many European governments, one party is in control and can relatively easily introduce legislation. Here, laws must pass through two houses of Congress, which may be controlled by different parties, and finally the president." Early in President Clinton's first term, the Democratic administration proposed a tax on energy use as part of a larger financial package, but that proposal was dropped, and a $.043 per gallon tax on liquid fuels was passed. That tax, earmarked for the U.S. Treasury, went into effect in 1993. "Prospects during the next few years are unlikely to be much better than in the past four years, although now the election is over, people are more free to talk about them," Repetto said. He believes VOL.31, NO. 2, 1997 / ENVIRONMENTAL SCIENCE & TECHNOLOGY/ NEWS • 8 5
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Effectiveness of 16 European "green taxes" To further the public policy debate on environmental taxes within the European Union, the European Environment Agency commissioned economists to collect and analyze data on taxes currently in use. Types of taxes included revenue-producing fiscal taxes, incentive taxes designed to change environmental attitudes, and "cost-covering charges" intended to charge polluters for the cost of regulating emissions (/). Instrument
Environmental function
Effects
Fiscal environmental taxes Sulfur tax (Sweden)
Increase penetration of low-sulfur Environmental: Reduction of 6000 tons of sulfur; reduction of sulfur content of oil by an average of 40%. Incentive: Average fuels and adoption of sulfurabatement costs were 25% of the tax rate. abatement measures
C0 2 tax (Sweden)
Reduce C0 2 emissions
Environmentall Possible shift tn fuels and increased competitiveness of combined heat and power plants. Incentive: Unknown.
C0 2 tax (Norway)
Reduce C0 2 emissions
Environmental: C0 2 emissions dropped by 3-4% (1991-93) from a rising trend. Incentive: Price of heating oil increased 15%; gasoline increased 10%.
Tax on domestic flights (Sweden)
Reduce emissions by nationally operated airlines
Environmental: Unknown, likely very small. Incentive: Unknown.
Waste charge (Denmark)
Reduce waste generation and increase recycling and reuse
Environmental: Reused fraction of demolition waste increased from 12 to 82%; contributed to an increase in reuse/recycllng rate of 20-30% (1985-93). Incentive: Tax rate doubles average cost of waste dumping and increases cost of incineration by 70% on average.
Incentive charges Tax differentiation on Increase penetration of unleaded leaded petrol petrol (Sweden)
Environmental: Emissions of lead dropped by 80% (1988-93). Incentive: Tax differential exceeds additional production costs.
Tax differentiation for Increase penetration of diesel (Sweden) low-pollution diesel fuels
Environmental: 75% reduction of sulfur emissions by diesel cars, 95% in cities; reduced emissions of particles, smoke, NOy Incentive: Tax differential higher than additional production costs.
Toxic waste charge (Germany)
Reduce the amount of toxic waste
Environmental: Reduction of toxic waste production of 20-45% (1991-93). Incentive:Tax rate increased average dumping and incineration costs by 5-15%; rate doubled in 1993, increasing this cost by 10-30%.
NOycharge (Sweden)
Speed reduction of NOx Environmental: Main cause of reduction by 9000 tons in 1992. emissions from large combustion Incentive: Charge rate four times higher than average abatement costs. plants
Fertilizer charge (Sweden)
Reduce the demand for fertilizer
Environmental: Nitrogen down by 25%; phosphorus down by 65% (1980-92); charge was one of the factors. Incentive: Unknown.
Water pollution charge (France)
Stimulate adoption of in-plant wastewater treatment measures, building of treatment plants
Environmental: Modest. Incentive: Charge rate considerably lower than average pollution abatement costs.
Water pollution charge (Germany)
Support adoption of water pollution abatement in permit application process
Environmental: Early announcement contributed to stepping up construction of wastewater treatment capacity. Incentive: Original relation between charge rate and marginal abatement damage costs not implemented.
Cost-covering charges: User charges Water pollution charge (Netherlands; nonstate)
Finance wastewater treatment plants
Environmental: Water pollution (biological oxygen demand) down to 5% of households, 79% decrease from industry (1975-91). Incentive: Average charge slightly lower than average pollution abatement costs.
Household waste charge (Netherlands)
Promote a fair distribution of waste management costs over users
Environmental: 10-20% less household waste in "pay-per-bag" villages. Incentive: Unknown.
Cost-covering charges: Earmarked charges Battery charges (Sweden)
Cover costs of collection, disposal, and information
Environmental: Collection rate of lead batteries 95%; decreasing share of small mercury and nickel-cadmium batteries. Incentive: Charge renders recycling of lead batteries feasible.
Aircraft noise charge (Netherlands)
Finance insulation and redevelop- Environmental: Insulation of buildings around airport areas. ment programs around airports Incentive: Very low.
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that attention will focus on broader tax reform, such as introducing consumption taxes to replace income taxes. Repetto reports that there is a "mosaic of activity" at the state level, however. For example, in 1991 Louisiana, which has a high concentration of petrochemical companies, introduced an "environmental scorecard" for investors. This scorecard keeps a tally of companies' compliance with environmental laws, amounts of toxic discharges, and waste volumes. Good scores are rewarded with graded exemptions from property taxes. Proponents of environmental taxes point out that taxes can achieve much more than legislation can by changing economies, markets, and attitudes as well as raising revenues. Taxes incorporate the costs of pollution and use of the environment directly into the price of goods and services, confront polluters with the full extent of their polluting activity, and create incentives to use or generate less of the taxed substance. Impact on economic competitiveness Significant political barriers include the perceived impacts on the competitiveness of on a country, region, or industrial sector; potential pressures on lowincome groups; possible conflicts between national, world, and EU trade rules; and perceptions that taxes have to be high to work. The most common argument against taxes, especially from industry groups, is the effect on competitiveness. "European industry is deeply concerned about its competitiveness compared with the United States, Japan, and the newly industrialized countries in Asia," said Nigel Haigh of the Institute for European Environmental Policy in London. "Green taxes are worsening and systematically weakening European industrial competitiveness without strengthening environmental protection," said Bernard Teissier of the European Chemical Industry Council in Brussels. "There is always a risk of distortion of competition, which should be looked at very carefully." But if these taxes were introduced worldwide, particularly in the United States, they would not affect competitiveness, he added. The EEA is not convinced that taxes damage the overall competitive position of a country. The report notes that Denmark, the Netherlands, and Norway—significant users of environmental taxes—are the three most competitive countries in the EU, according to the Institute for Management Development. However, the report does acknowledge that particular sectors and regions can suffer and suggests ways to protect against damage in the market, Slich 3.S ensuring that imports and domestic products taxed similarly. Taxes become contentious when taxpayers find a government using these taxes to increase its revenues, comments Ekins. They are more accepted when me revenue is used to reduce other taxes or to help die environment. Revenue-neutral taxes should not harm overall competitiveness, Ekins believes. A classic example is the U.K. landfill tax in which industry pays more for waste disposal but less for national insurance. Green tax reforms appear to work well, according to the EEA report. It cited the example of Den-
A water pollution charge system in the Netherlands, introduced in 1970, was "quite successful" (2\ in financing the creation of collective wastewater treatment plants. The charge was the main reason that industry pursued pollution abatement measures, according to a survey of industry representatives. (Photo courtesy Lorette Dorreboom, Environmental Images, London.)
mark, which agreed to redistribute taxes from labor to natural resources and pollution in 1993. It lowered income taxes by 8-10% from 1994 to 1998 and phased in increased gasoline, energy, and waste taxes, and a new water supply tax. But the tax shift is intended to be revenue neutral. For example, the government plans to return to industry the money raised from a higher carbon dioxide tax applied in 1996 in the form of lower social security contributions or funding for energy-saving improvements. Measuring effectiveness of taxes The report used two criteria to assess green taxes. The first is what environmental effect die tax has on pollution or the use of scarce resources. It attempts to directly trace the contribution of the tax to monitored pollution reduction. The second is how the tax rate compares with the marginal pollution abatement costs, or as a proxy, with average abatement costs of measures taken by taxpayers. The EEA notes tiiat evaluation is sometimes difficult because countries do not set pollution reduction goals or explicit price incentives. This also means that any assessment tends to be qualitative rather than quantitative. One of the most effective taxes, according to the EEA, is the Swedish tax on sulfur. Introduced in 1991, the tax set out to decrease sulfur emissions by promoting the use of low-sulfur fuels and the cleaning of flue gases. The tax rate—40 Swedish Kroner ($6) per kilogram (kg) of sulfur—applies to fuels such as coal, oil, and peat that contain >0.1% by weight of sulfur. For light oils, a tax differentiation scheme compensates through tax rebates for the cost of producing oils of higher purity (0.001% and 0.005% sulfur content). The report cites a 1994 report from the Swedish Ministry of the Environment that claimed that the tax had a considerable impact. The average sulfur content of fuel oil decreased from about 0.65% in 1990 to 0.4% in 1994. About 25% of taxpayers have VOL.31, NO. 2, 1997 /ENVIRONMENTAL SCIENCE S TECHNOLOGY / NEWS • 8 7 A
taken measures to clean flue gases and are receivThe main difficulty is the sheer complexity of the ing tax refunds. On average, the cost of abatement subject. An evaluation has to separate the effects of measures has been 10 Kroner/kg, one-fourth of the green taxes from other elements, assess what would tax rate. have happened without the tax, and calculate the reAnother Swedish tax on NO^. emissions, intro- inforcing or counteracting effects of other reguladuced in 1990, applies to 185 large electric utilities. tions. Data are often difficult to retrieve and may not Total NOx emissions from these plants were re- be old enough or sufficiently detailed. Another imduced from 24,000 tons in 1990 to 15,300 tons in 1993. portant consideration is time: It may take up to a decRevenues are refunded to the taxpayers on the ba- ade for a tax or regulation to be effective. sis of a proportional share of the total energy proIt is very difficult and sometimes impossible to duced by the plants. Sweden also levied a tax on evaluate green taxes, agrees Stephen Smith, deputy leaded fuel in 1986, which resulted in nearly zero use director of the Institute of Fiscal Studies in London. by 1993. The EEA report made a good attempt but is probaThe Dutch water pollution charge system, intro- bly much less thorough and detailed than the OECD duced in 1970, sought to help finance collective report, he said. wastewater treatment plants that handle residential and industrial effluents. Regional water board Prospects for EU-wide taxes rates are calculated on the basis of funds required The European Commission has declared its strong for investing in and running plants. The charge sys- interest in green taxes in its Fifth Environmental Actem accompanies a permit licensing system. A re- tion Plan (5). And an EC White Paper on growth, comcent Organization for Economic Cooperation and De- petitiveness, and employment (6) envisages reducvelopment (OECD) study (2) called the policy "quite ing labor costs through increased pollution charges. successful." In terms of households connected to a But the EEA has found that since these reports came public sewage treatment plant, treatment capacity out in the early 1990s there has been limited progress increased from 52% in 1975 to 95% in 1992. Of all dis- in establishing taxes at a European-wide level. Encharges, 74% were treated in 1991 compared wiih 51% vironmental taxes excluding energy taxes acin 1980. Discharges from large emitters in the mancounted for only 1.5% of total EU taxes in 1993, acufacturing industry decreased by 80% between 1975 cording to EEA calculations. and 1991. Harmonizing tax policy in the EU is tricky, reTwo Dutch studies (3, 4) attempted to disentan- quiring unanimity among its 15 member states. The gle the effects of the taxes from overall Dutch water most infamous failure is the EU carbon-energy tax, policy. One found a strong relationship between vari- first proposed in 1992 but strenuously opposed by ations in charge rates of water boards and the rate the United Kingdom. However, according to sources of reductions of discharges within their jurisdic- in Brussels, a carbon tax is edging nearer as the Eution. The other reported that 54% of interviewed in- ropean Commission is planning to announce a draft dustry representatives claimed that the charge was directive on energy taxation. The directive will probthe main factor in undertaking water pollution abate- ably increase the number of taxed energy sources to ment measures, whereas only 20% pointed to the per- include C03.1 cinclfifcis,a.s well 3.S gasoline and heatmit policy. ing oil. At present, efforts in the EU are targeted toward improving the conditions for states that wish to use EEA assessment questioned Teissier argues that the EEAs modest review does economic instruments. Many policy watchers benot find any taxes that fulfilled their environmental lieve that at the moment it is more important to coobjectives. "Environmental taxes may be useful, but ordinate taxes in member states than to push for EUthey need to fulfill basic conditions which most of wide taxes. the present ones don't. It will need a cultural change in many countries for taxes to be regarded not just References as fund-raising instruments with no environmental (1) Environmental Taxes: Implementation and Environmentargets," he stated. Teissier asserted that taxes should tal Effectiveness; Environmental Issue Series No. 1; European Environment Agency: Copenhagen, 1996. be assessed for defined purposes, for example, to cut (2) Environmental Taxes in OECD Countries; Organization for pollution by a certain percentage. Economic Cooperation and Development: Paris, 1995. The EEA report acknowledged that systemati- (3) de Savorin Lohma, A. The Effectiveness and Efficiency of cally evaluating green taxes is difficult. "Judgments Water Effluent Charge Systems: Case Study on the Netherlands; Organization for Economic Cooperation and Deabout the performance of green taxes remain at the Paris, 1995. level of best guesses. While the theoretical evalua- (4) velopment: Towards Sustainability: A European Community Protion of environmental taxation is a well-developed gramme of Policy and Activity in Relation to toe Environment and Sustainable Development; European nommisfield, adequate evaluation of practical experience with sion: Brussels, 1992. such taxes is still comparatively rare." (5) Growth, Competitivenesssad Employment: The ehalThe agency notes that this finding is supported lenges and Wayysorward into the Twenty-First Century, European Commission: Brussels, 1992. by an OECD report on economic instruments that is expected later this year. This more extensive re- (6) Bulletin of the European Communities (supplement); European Commission: Brussels, June 1993. port has a section on implementing environmental taxes. The EEA reports that preliminary results of the OECD document find that Europe suffers from "lit- Maria Burke is a science journalist based in London and tle tradition in policy evaluation." news editor of Chemistry & Industry magazine.
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