E C O N O M Y

• by Kai Schlegelmilch

  Public policies have a great influence on the economy and the environment as on average 50 percent of total expenditures and income goes through the budget - via taxes and expenditures. In recent years many Western countries are beginning to use this influence in an environmentally rational way. To investigate the environmental impacts of their budgets they are looking at existing taxes and charges, tax allowances and exemptions, relevant regulations and expenditures. Furthermore they have started to implement new environmental taxes and abolish environmentally damaging subsidies. This process is now broadly defined as Ecological Tax Reform (ETR). The introduction and/or increase of energy taxes and the simultaneous reduction of social security contributions is often considered as the core of an ETR. The term "reform" indicates that the overall tax burden should decrease, or at the very least not increase. Hence, the revenue raised should be used to lower other, more distortionary taxes like those on labor, investment and capital.

Advantages of environmental taxes

• Internalize externalities into prices (these are costs that are not paid by the polluter so far)
• Set incentives to change the behavior of producers and consumers
• Raise revenues, e.g. for a comprehensive ETR
• Spur cost-effective and innovative responses, thus strengthen competitiveness and employment
• Cope well with diffuse pollution sources
• Help to reinforce other instruments, particularly regulations.

  These effects are especially supported when the revenues as part of an ETR are used to reduce other more distortionary taxes which often disturb economic and social welfare. Thus a "double" or "multiple" dividend may occur.

Which countries use environmental taxes?

  However, only limited progress in the introduction of taxes on the EU-level can be noticed. In 1992, a combined CO2/energy tax was proposed by the European Commission, but failed to gain approval by all Member States. Generally, the perceived potential loss of competitiveness (of only a few sectors) appears to be a main obstacle - although these sectors should have been exempted! But critics argued that exemptions would soon be considered as "subsidies" and therefore abolished. In May 1995, a modified proposal for such a tax was presented, leaving more room for national action. But still there is no support for this from all countries. In autumn 1995, Germany refused to accept a CO2/energy tax that would not be mandatory for all Member States. For the turn of the year 1996/97, the EU-Commission is expected to come up with a new proposal.

  In the meantime, the general trend of taxation promotes less employment through increasingly higher taxes on labor and social security contributions, and contributes to increasing environmental pollution through stable, and in real terms often falling, taxes on the use of the environment. Only energy taxes were increased between 1980 and 1993. The share of taxes on labor reached over 50% in the EU in 1993 as against total taxes, which decreased to only 18%. While taxes on energy rose to 5.2%, taxes on the use of the environment were increased by a mere 1.5%.

Environmental effectiveness

Implementation: Main Barriers and Solutions

• the removal of environmentally perverse subsidies and regulations;
• careful design of the taxes and of mitigation measures;
• the use of environmental taxes and their revenues as part of policy packages and ecological tax reforms;
• gradual implementation;
• extensive consultation;
• information.

  The overall competitiveness of countries may be improved by well-designed taxes which can spur innovation and possibly encourage structural change towards sustainable development. But still, these perceived barriers are not always easy to overcome.

Green Budget Reform in CEE

For information on the conference (9-11 April 1997) contact:
Vida Ogorelec Wagner at Umanotera, The Slovenian Foundation for Sustainable Development,
P.O. Box 4440,
Resljeva 20, 1000 Ljubljana, Slovenia,
Tel: (386-61) 132-2354,
Fax: (386-61) 132-2354, x7029,
E-mail: in10217@sparc.eunet.si.