Taxing polluters: what’s going wrong?

Environmental taxes are on the rise. But a closer look at the newly released data reveals a worrying trend which risks locking EU citizens in a vicious circle of inequality.

By Mauro Anastasio and Patrick ten Brink (European Environmental Bureau – EEB)

Environmental taxes across the EU have increased from €264 billion in 2002 to €369 billion in 2017, according to new Eurostat data.

Taxes on energy accounted for more than three-quarters of the total, followed by taxes on transport with 20 percent and those on pollution and resources with three percent.

From plastic pollution to air quality and climate change, green taxes can discourage behaviour that is damaging for people and the environment.

But this only tells half the story. When taxing polluters is not accompanied by a decrease in other taxes such as labour or by a more equitable redistribution of revenues, policy-makers are missing a critical element of policy design.

Like the gilets jaunes movement in France has shown, there can’t be a green transition without social equality. Born as a reactionary movement to oppose increasing taxes on diesel, the movement soon morphed into a broader protest against detrimental economic policies.

This proves that the problem is not green taxes, but inequality.


There is no green transition without social equity

A closer look at the latest Eurostat data shows that there is no evidence of a significant shift towards revenue sources that are less detrimental to the planet.

In fact, despite an increase in monetary terms, the share of environmental taxes in the total revenues collected has decreased from 6.8 percent in 2002 to 6.1 percent in 2017.

This is in part because, all this time, many other taxes have increased, reducing green taxes’ share. Furthermore, there is little use of either earmarking revenues for environmental causes or redistributing taxes by lowering employment or social security contributions. Hence too little money flows either to the environment or back to the people.

This comes as no surprise in the age of austerity. For example, labour taxes, which weigh heavily on citizens, continue to account for 50 percent or more of the total tax revenue in many EU countries. That’s approximately eight times the share of revenues from green taxes.

Source: Eurostat 2019

The share of environmental taxes in total revenues from taxes and social contributions is an indicator of the flagship initiative for a resource efficient Europe under the Europe 2020 strategy. The objective is at least a 10 percent share for the EU by 2020, which seems unlikely to be reached considering the recent trends.


Towards an environmental tax reform

Far from being just another fringe economic theory, international institutions and economists have long called on governments to shift the tax burden from labour on to polluters.

This is known as environmental tax reform, and it’s already been successfully tested in some countries – albeit it has not reached a systemic level of implementation.

Between 1999 and 2003, Germany increased taxes for engine fuels, electricity, light fuel oil and gas in five stages. 88 percent of the revenue was used to reduce pension contributions.

Over this period, the tax revenue from energy rose from €34 billion in 1998 to €53 billion in 2003. Use of public transport experienced annual increases by 3-5 percent. Sales of transport fuel for private vehicles declined, dropping by around 17% over the ten years after 1998.

But reducing taxation on labour or other areas can also bring about wider societal benefits and, through targeted investment, can encourage the creation of jobs in sectors such as recycling and energy efficiency.

And so, in 2002, Germany’s Federal Environmental Bureau concluded that the reform accounted for 60,000 new jobs and contributed to cut emissions by 7 million tonnes between 1999 and 2003.

While this iconic tax reform shows the multiple benefits of good policy, still far too few countries have embraced this approach.

There are of course also instances in which similar reforms failed to meet the expectations of economists. If not properly implemented and periodically reviewed, the tax shift may not generate enough revenues, or it may not reduce the environmental impact of polluters.

But given the increasing threat posed by environmental degradation, climate change, and the rising inequalities, a just and sustainable tax reform can become an instrument to give power back to people. We should heed the message of the gilets jaunes – that social equity, affordability and fairness are essential – and thus design progressive policies needed to protect the planet.