The European Green Deal acknowledges the crucial role of taxation in Europe’s sustainability transition. A new European Environment Agency (EEA) briefing, published this week, shows that revenues from environmental taxes can support transition investments but future revenue streams from these taxes will erode as European Union (EU) environmental and climate policy objectives are achieved. The relative share of environmental taxes to total tax revenues has also declined in the past two decades.
Europe’s environmental taxes in decline, despite potentially crucial role
The EEA briefing ‘The role of environmental taxation in supporting sustainability transitions’ looks at recent trends in taxes related to pollution, resource use and greenhouse gas emissions. It also considers the potential of these taxes in raising revenues and supporting Europe’s sustainability ambitions.
Shifting from labour taxes to taxing activities that harm the environment or climate has for long received support from economists and politicians alike. However, as with phasing out environmentally harmful subsidies, substantial increases in environmental tax revenues have largely not been realised, the EEA briefing notes.
In the EU, revenues from environmental taxes were 330 billion EUR in 2019. The share of environmental taxes of total tax revenues declined from 6.6%, in 2002, to 5.9%, in 2019. The trend varies across Europe but, critically, the share declined in frontrunner countries implementing environmental taxes, such as Denmark, Norway, and Sweden, the EEA briefing notes.
The observed trends highlight the problem that effective environmental taxes end up eroding the tax base in the long term. Thus, the primary focus of environmental taxes needs to shift from revenue generation to support achieving environment and climate objectives, the EEA briefing concludes.
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