Higher Environmental Taxes as Solution to the Economic and Financial Crisis

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A tax on CO2 emissions presents an easy way to combat climate change. On 13 April 2011, the EU Commission proposed just such a tax
The EU countries affected by the crisis find themselves in a dilemma. They have to ensure economic growth and employment while, at the same time, they need to reduce costs and save money through higher taxes. A new survey indicates: environmental taxes are the most effective tool in this context – and simultaneously conserve resources.

Some EU countries are in the middle of a deep economic and financial crisis. On the one hand, they do have to promote growth in order to protect and create jobs; on the other, they urgently need more money, something they are trying to achieve through budget cuts and tax hikes. Some countries have already cut back on expenditure, often by slashing welfare spending, and this, in turn, has understandably created fierce protest and is still the cause of disturbances. However, far too rarely have subsidies been cut that are detrimental to the environment, and only very occasionally, if at all, have subsidies been cut according to ecological considerations – yet this is exactly what has to be undertaken today.

Thus far, most governments have come to the conclusion that cuts do not suffice to cover the gaps in their budgets, making tax hikes inevitable. However, if the revenue thus created is used exclusively as stop-gap money and not to reduce other taxes or give back to society through targeted investments, then the resulting social consequences will be overwhelmingly negative.
Necessary tax hikes

What types of tax hikes have the least negative consequences for economic growth and job security? As shown by a new study, there is a clear answer: Raising taxes on energy consumption and CO2 emissions comes with few side effects – especially if compared to other indirect taxes, such as VAT, or direct taxes such as income tax. On top of that, energy and CO2 taxes result in lower carbon emissions and greater energy efficiency, thus not only cutting expenditure but also stimulating competition. It comes as no surprise that former German Finance Minster Hans Eichel backs such an approach.

As a matter of fact, a number of countries have already gone ahead. Greece, for example, has considerably raised taxes on fuel, while Ireland has introduced a charge on airline tickets and a CO2 tax. In 2013, Spain is planning to implement higher energy taxation. Change is afoot, with more and more countries realising the advantages higher energy taxes have over other forms of tax hikes.
A plethora of possibilities: environmental taxes

Regarding environmental taxes, the range of options available is vast. Binding European legislation would make it easier to implement such measures and regulate spending, however this would be difficult to achieve, as such measures require unanimity within the EU. Nevertheless, current plans for a fiscal union and possible changes to the Treaty present a good opportunity to change this or, at least, relax EU rules regarding such proceedings.

The following options would make fiscal as well as environmental sense:
  • A CO2 tax

    A tax on CO2 emissions presents an easy way to combat climate change, provided such emissions caused by respective taxpayers are not already covered by the EU’s emission trading scheme. On 13 April 2011, the EU Commission proposed just such a tax, a tax that would be calculated according to actual energy consumption and CO2 emissions and not, as it is currently the case, litres and cubic metres. It would thus suggest itself, to support this proposal and encode it in national law – as has already been done in some of the Nordic countries and, most recently, Ireland. All in all, the member states could thus increase their revenue by about 40 billion euros – a third of the EU’s budget, for which, alternatively, such revenue could also be earmarked.

    • A charge on airline tickets / a tax on aviation fuel

    A charge levied on airline tickets would tax outgoing flights from EU countries. The UK, France, Germany, Austria, and Ireland have already introduced such a charge. An alternative would be to tax aviation fuel or levy a toll on airways. Among European countries, thus far, only the Netherlands and Norway tax aviation fuel on domestic flight routes. Until now, similar initiatives have not succeeded on the EU level, as all fiscal measures require unanimity. It is therefore no surprise that some countries have decided to unilaterally introduce a charge on airline tickets – and this has hardly, if ever, resulted in unfair competitive advantages.

    • A tax on nuclear fuel

    A tax on nuclear fuel could be a further source of revenue – and such funds may, at least to a very small part, offset the risks and cost that come with nuclear energy. Thus far, such a tax has only been introduced in Germany, the Netherlands, and Sweden, and, outside Europe, in Japan.

    • Extending the emission trading scheme

    Revenue generated through a more forceful move towards the auctioning of emissions allowances could also profit government budgets. A further possibility suggested by the EU Commission on 14 November 2012 is to cut the number of emission certificates on the market, thus hiking up the prices. The initial auctions of emission certificates, which are being held on a regular basis, could then generate more revenue.

    • A financial transaction tax

    A financial transaction tax should be levied on such transactions whose speculative nature has contributed to the banking, economic, and financial crisis. Here, some countries have already taken a first step and introduced a banking charge and, recently, eleven EU countries decided to jointly introduce such a charge.

    • Finally, a tax on natural resources

    In the long run, all extracted or imported finite resources have to be taxed and, at a later point, the same has to happen with renewables – as this will improve efficient usage and recycling. A first obvious step on the way is the extension of energy taxes to non-energy-related usage, which means, to all plastics produced from oil. A next step should include construction materials, and after that, step by step, further mineral resources.

    As shown, environmental taxes can be implemented in numerous ways – ways that will help governments to balance their budgets without compromising the economy and triggering job losses at the same time. Above all, they present fewer dangers to growth than other tax hikes – and this is, at present, the most decisive and relevant reason. Today, we can no longer afford to go on with tax policies that ignore such insights.


    Translated from German by Bernd Herrmann (German version).

    Kai Schlegelmilch is vice-chairman of the FÖS (Forums Ökologisch-Soziale Marktwirtschaft) and vice-president of  the Green Budget Europe (GBE).



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