Is tax the tool to tackle global warming?

László Kovács, the European commissioner for taxation, is hoping that Europe’s tax offices can help save the environment.

"Taxation should in the first place discourage what is undesirable, rewarding at the same time all sorts of positive behaviour," Kovács said earlier this year, as he launched a consultation on ‘market-based instruments for the environment’.

The most high-profile market mechanism so far is probably the pan-European Emissions Trading Scheme (ETS) which was launched in January 2005. Under the ETS, which is intended to combat climate change, energy-intensive industries are allocated the right to emit carbon dioxide (CO2) and can buy and sell those rights.

Stavros Dimas, the European commissioner for the environment, shares responsibility with Kovács for managing the consultation. He calls trading, environmental taxes and targeted subsidies a "flexible and cost-effective approach" that should be used more.

The consultation green paper asked EU interest groups for their thoughts. It will be followed later this year with a report on the contributions received and by proposals for action in 2008.

BusinessEurope, the European federation of employers’ organisations, says that taxation is not necessarily the best way forward, because of "the high tax levels that are often required to achieve environmental goals". "In addition, taxes pose significant risks to the global competitiveness of European companies if their application is restricted to the EU," according to a BusinessEurope statement. The organisation also says that member states should be free to spend revenue from market mechanisms as they prefer, with no EU-level restrictions.

The trade group EuroCommerce is also asking the Commission to avoid pushing up prices with new taxes and regulations.

But some specific sectors say that environmental taxation could help. European social housing group CECODHAS has argued that tax reform would encourage a shift towards renewable energies and energy efficiency for households, while keeping down the end cost of household heating, cooling and lighting. Buildings today account for more than 40% of EU CO2 emissions.

A conference on environmental taxation last week (18-20 October), hosted by Green Budget Germany, a pressure group, heard Commission officials say that a ‘market based instruments’ forum was one of the things most likely to be proposed next year. This forum would bring together the differing interest groups to spend more time discussing the options.

John Hontelez, secretary-general of the European Environmental Bureau (EEB), said that his group hoped to see a broad range of interests represented at any future forum. He said that he could not support the forum if it simply extended the discussion started with the green paper, instead of developing EU-level action.

"A lot depends on the mandate this forum is given," said Hontelez. "Will it be about making proposals, or just sharing best practice?"

He suggested renewable energy, water manage-ment and waste management as sectors likely to benefit from environmental tax reform.

He added that the forum could help the Commission to support action currently being taken at national level. Hontelez singled out Germany, Sweden and the Netherlands as countries that did most to promote a ‘green tax shift’ in favour of environmental products in the late 1990s, and which proved the economic benefits of using the market to protect the environment. "All three countries now have governments who have not further developed green taxation," he said, "but they have also not undone it. "Because environmental market incentives bring in revenue - countries would miss that if they abolished the incentives."

He said that the UK, Finland and Denmark had also taken steps to promote environmental market reform. "If we had some EU co-ordination on environmental incentives," said Hontelez, "perhaps these six countries could form one big northern European economic bloc."

For now, says the EEB, member states have their environmental action limited by competition and single market rules. Only EU-level legislation could make more possible, said Hontelez.

László Kovács, the European commissioner for taxation, is hoping that Europe’s tax offices can help save the environment.