OECD calls for more and better green taxes

Friday, 07 July 2006

Source: WBCSD

There is a "high potential" for governments to introduce more environmental taxes, according to a new report from the Paris-based OECD. The report recommends reducing exemptions and other approaches to ensure taxes are environmentally effective, economically efficient, and politically acceptable.

Environmental taxes and charges are widely used in OECD countries, but in the last few years have lost some of their allure. In the EU, for example, latest data show they are declining as a share of GDP and of overall taxation (EED 23/05/06). The OECD report discusses how key "obstacles" to their use could be overcome.

One is the widespread fear that green taxes will hit industrial competitiveness. The approximately 375 environmental taxes recorded by the OECD include more than 1,150 exemptions or refunds designed to protect certain sectors, the report notes.

Many of these are total or partial exemptions from energy taxes for energy-intensive industries. As a result the overall burden of environmental taxes falls "almost exclusively" on households and transport. This reduces’ taxes environmental effectiveness and contradicts the principle that polluters should pay, it goes on.

One way industrial impacts can be limited and environmental effectiveness preserved is by introducing taxes across many countries, the report says. It demonstrates the point through modelling of possible OECD-wide taxes on CO2 emissions in the steel and cement industries.

Though there would be some "carbon leakage" due to transfer of manufacturing outside the OECD, in both cases the models predict that global as well as OECD CO2 emissions will fall. Recycling CO2 tax revenues to the affected companies would cut these global emission reductions, it adds.

The report draws further lessons from a series of examples of actual environmental taxes ranging from Switzerland’s lorry road user fee, Ireland’s plastic carrier bag tax and Britain’s climate change levy.

Among these, it urges policy makers to analyse costs and benefits before implementation, including an assessment of competitiveness effects, it concludes. Where measures are introduced to reduce competitiveness impacts, it is important that they do not reduce incentives to reduce pollution.

A second key obstacle to environmental taxes is related to their potential to hit poorer households harder. The report concludes that this regressive impact can be compensated through other measures, for example through social security or general tax systems.

The report also emphasises the importance of minimising administrative costs, and of ensuring that environmental taxes gain political acceptance. Finally, it explores how green taxes can be used in combination with other instruments.

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