Environmental taxes and green growth

25-04-2013 | Publication

Providing the right price incentives is key to stimulating green growth. This report discusses how to assess tax options in the context of energy and climate policy and offers some important lessons about environmental taxes. Solutions that may be cost efficient in the short term do not always contribute to achieving long-term goals. It is challenging to introduce smart environmental taxes that both help to achieve environmental goals and are simple to implement.

Green tax reforms: Principles and prospects

Green growth is currently of global interest. It aims to foster economic growth and development, while ensuring that natural assets continue to provide the resources and environmental services on which our well-being relies. Applying taxation in this context is not new. In the Netherlands, green fiscal reform has been on the agenda for a very long time. The choices made in this area form an inextricable part of the institutional frameworks within which citizens, organisations and businesses make decisions that bring about sustainable economic change.

Analytical framework with multiple criteria

At present, there are various (and sometimes incompatible) ideas on environmental tax reform. This report offers an analytical framework to weigh these different and sometimes incompatible views in order to make better choices. The report provides a step-by-step analysis of the issues related to the use of tax instruments as part of the policy on sustainable economic growth. The approach is similar to the Mirrlees Review in the United Kingdom, in its the discussion on standard criteria, such as allocative effectiveness, static efficiency, distributive justice and feasibility, but also explicitly takes criteria such as dynamic efficiency into account.

Environmental taxes aimed at long-term objectives

When designing environmental tax instruments, the context in which these taxes are used (the ‘implementation context’) should explicitly be taken into account. This requires a coherent view of both the policy objectives and the use of tax instruments. The analysis in this report shows that environmental taxes are a useful instrument in the government’s toolbox. However, to prevent unnecessary welfare losses, it should be carefully and properly integrated with other instruments used. Achieving this ambition requires a thorough analysis of the options for actual implementation of environmental tax instruments. This is illustrated in the report about taxes on energy use and associated atmospheric emissions.