During the past decade, European countries have continued to increase and refine their use of environmental tax instruments. Although taxes on motor fuels and motor vehicles generate about 90% of the revenue from environmentally related taxes in the European Union, European countries have designed taxes that target a broader array of tax bases, including plastic bags, landfill waste, aggregates, batteries, pesticides, fertilizer, sulfur dioxide, and greenhouse gas emissions not related to energy. In addition, their experience with taxes that have been in force for a number of years has allowed them to fine-tune the measures to increase their effectiveness, for example by increasing tax rates and eliminating exemptions. The longer track record is starting to generate ex- post evaluations that show numerous instances where the taxes have reduced pollution and the consumption of natural resources.
New taxes generate new revenues, giving governments the choice about how to use the new funding. A significant number of new environmental taxes in Europe—often CO2/energy taxes—have adopted a revenue-neutral tax approach, often referred to as environmental tax reform, green tax shifting, or the double dividend. Instead of sending the revenues to the general fund or dedicating them to the environmental problem, the government simultaneously enacts a similar degree of fiscal relief from other existing tax burdens that may dampen economic activity, such as income and social security taxes on labor. Austria, Denmark, Finland, Germany, the Netherlands, Sweden and the United Kingdom have formally adopted environmental tax reforms.
The United States has followed a different path. The Clinton Administration’s proposed broad-based energy tax on the Btu content of fuels failed to pass the Congress in 1993, and motor fuel taxes remain substantially below the European levels. In the United States, revenues from federal environmentally related taxes constituted 3.5% of total tax revenues in 2003, compared to an average of 7% for the OECD countries and highs of 10% in Denmark and 16% in Turkey.
In recent years, federal environmental tax policies in the United States have tended to focus on creating tax credits and tax deductions for targeted activities that have an environmentally positive effect, rather than sending negative price signals for environmentally damaging activities. The Energy Policy Act of 2005, the first major piece of energy legislation since the early 1990s, relied heavily on tax incentives to execute federal policy. It created short-term benefits for energy conservation investments, such as an income tax deduction for energy efficient lighting, heating and cooling systems installed in commercial buildings and an income tax credit for alternative-fuel vehicles linked to fuel economy. In the electricity-generating sector, it created incentives for alternatives to traditional coal-burning plants, including a tax credit for utilities that produce electricity from coal using technology that will lower emissions, and an extension of tax credit for electricity produced from wind power for wind farms placed in service by the end of 2007
- European Environment Agency, 2006. Market-based Instruments for Environmental Policy in Europe, 41-49.
— European Environment Agency, 2006. Using the Market for Cost-effective Environmental Policy, 7, 24-33.
— National Environmental Research Institute, 2006. The Use of Economic Instruments in Nordic and Baltic Environmental Policy 2001-2005, at 9-12, 225-26.
- OECD, 2006. Database on Instruments Used for Environmental Policy and Natural Resources Management, (Oct. 2006).