Why there is no need to fear green taxes

The common arguments against environmental taxation can all be easily dismissed, according to Jacqueline McGlade, executive director of the European Environment Agency (EEA), an EU agency charged with providing information to policymakers.

The Commission yesterday (28 March) published a green paper asking national governments to think about using taxation to reform their climate change and energy policies. Most member states already impose some form of ‘green’ taxation, most commonly in the form of fuel and circulation taxes.

But governments have until now been wary of seeing taxes as a front-line method of reducing greenhouse gas emissions.

McGlade says it is time to discount the perceived obstacles to environmental taxation.

First among them is the idea that taxes would discriminate unfairly against the poor. People on a low-income spend a larger percentage of their earnings on basics such as water, energy and housing, and so are hardest hit when taxes drive up these prices.

But McGlade says a combination of income thresholds and tax exemptions could stop the poor getting poorer.

Fears that green taxes would scare industry out of Europe could also be quelled by a bit of careful planning, she adds.

"There is no evidence at all that environmental taxes scare industry away," says McGlade. "If anything they create opportunities and speed up technological developments." A 2001 study by the Organisation for Economic Co-operation and Development (OECD) found that a combination of long introductory periods and short-term compensation for affected sectors would protect competitiveness.

Nor, says McGlade, does the argument that tax revenues would shrink if green taxation was successful stand up to scrutiny. As long as the tax per unit of pollution rises in line with eco-efficiency improvements, she says, the tax base will remain stable.

But McGlade does concede that, for carbon dioxide (CO2) emissions, taxation is not automatically the appropriate mechanism to force an environmental shift in behaviour. "Taxation provides an uncertain outcome at a known price," says McGlade. "Trade mechanisms on the other hand lead to a known outcome at an uncertain price."

Both systems have their place in the fight against climate change, according to the EEA director. For large-scale pollution, as with industry CO2 emissions, she says that Europe has shown that emission trading can make a difference to company planning overnight (see above).

Congestion charges and fuel price increases are examples of areas where emission trading would be hard to manage and taxation is the best way to bring down emissions, she says.

But taxes remain "a blunt instrument leading to an uncertain result," says McGlade.

The common arguments against environmental taxation can all be easily dismissed, according to Jacqueline McGlade, executive director of the European Environment Agency (EEA), an EU agency charged with providing information to policymakers.