The role of (environmental) taxation in supporting sustainability transitions.
Date: 2022-02-07
Institutions: European Environment Agency
Subjects: EU environmental policy, carbon neutrality, climate change policy, environmental tax, pollution control measures

Publications

The role of environmental taxation in support of
sustainability transitions
The role of (environmental)
taxation in supporting
sustainability transitions

This briefing looks at the role of environmental taxes through two lenses. First, it analyses past and
current trends in taxes in their ability to raise revenues, and their use as a basis for reform
programmes that aim to shift taxes from labour and capital to resource use and environmental
pollution. Second, it considers the potential for generating revenue from energy taxes and carbon
pricing in the coming decade and their role in achieving the EUs aim of being climate neutral by
2050, and the implications of this for tax shifting programmes.

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Key messages


Revenues from environmental taxes could support the transition to a climate-neutral

economy by 2050 and achieving the objectives of the European Green Deal reaching a net

reduction of greenhouse gas emissions by 55% by 2030. Given Europe's ageing population

and the implications of this for labour tax revenues and welfare system costs, the arguments

in favour of environmental taxes have never been stronger.


Despite calls for more environmental taxes at the national, European and global levels,

implementation has been very slow. In the EU, environmental taxes account for 5.9% of total

taxes, less than the 6.6% almost 20 years ago. This varies considerably by country however.


The European Green Deal acknowledges the crucial role of taxation in the transition to a

greener and more sustainable economy, and this may drive the implementation of

environmental taxes in coming years.


Carbon pricing measures are essential components of the European Green Deal and also

the European Commission's Fit for 55 package, supporting the transition to a climate-

neutral economy.


The amendment and revision of current EU energy taxation and carbon pricing schemes,

including of the EU Emission Trading System, will also lead to higher revenues in the coming

decade.


However, decarbonising the European economy will inevitably erode the tax base, as current

energy taxation and carbon pricing schemes rely heavily on non-renewable energy products.

It will be essential to strike the right balance between achieving transition objectives and

maintaining revenue stability, and to future proof tax systems with new revenue sources.


The long-standing idea of shifting taxes from labour to environment in support to

sustainability objectives has largely not been realised. With the EU facing multiple fiscal

pressures in coming decades, the idea could be reformulated as sustainable fiscal reform,

embracing taxes from other revenue sources e.g. financial transactions, land, wealth.

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There is a growing understanding across the world that current tax systems need to be overhauled

and modernised to deal with prevalent environmental, social and economic challenges. These

challenges include the technological transition, demographic changes, rising inequality and the triple

environmental crises: climate change, biodiversity loss and the overconsumption of natural resources

(EEA, 2020; OECD, 2020a).

Furthermore, the economic and financial crisis of 2008/2009 and the fiscal implications of the COVID-

19 pandemic have made it clear that fiscal sustainability  understood as the solvency of the public

sector  is critical for addressing multiple aspects of transition. It influences the ability of the EU and

its neighbours to finance investments in transitions and maintain prosperity and social justice, while

also maintaining the resilience of the economic system (EEA, 2020; OECD, 2020a). Therefore,

studying the revenue aspect of overall taxation schemes with a particular focus on past trends and

the future outlook of environmental taxes and emissions trading schemes seems worthwhile and

appropriate. If governments are not able to allocate financial resources to public investments, which

are unconditionally required for the transition process, and social spending for the well-being of their

citizens, they will fail in their primary policy objectives.

Outlines of how a future-proof fiscal system may look are also discussed in the context of the growth

dependency of the economy, in particular if and how the current welfare state can be financed in a

post-growth environment (EEA, 2020; Walker et al., 2021).

A tax system is required that supports social welfare systems and also contributes to financing the

objectives of the European Green Deal (EC, 2019). The EU has ambitious environmental and climate

objectives and economic instruments, such as environmental taxes and trading schemes, which can

support the transition process. Carbon pricing, for example, is a crucial part of the current

decarbonisation debate in Europe, as stressed in the Fit for 55 package presented by the European

Commission in July 2021.

From a revenue perspective, exploring environmental taxation alongside environmental subsidies is

essential, as the latter can also be useful for the transition process. However, many subsidies are

environmentally harmful and have been identified as economically inefficient and trade-distorting,

hindering the effectiveness of environmental taxes and emissions trading schemes. In addition,

environmentally harmful subsidies come with a fiscal burden: they affect the public budget because

tax reductions for specific economic activities or products, which are numerous in the field of energy

taxation, lead to a lower overall tax take. The provision of subsidies is also of relevance in terms of

expenditure, as subsidies may result in less funds being available for spending on other public

services and may also thwart policy measures that aim to reduce environmental pollution or lead to

an increase in resource use.

It is therefore no surprise that numerous attempts have been made at the global, EU and national

levels to phase out environmentally harmful subsidies. The success of these attempts has been

rather modest, as a recurrent challenge is agreeing on a common criterion for defining an

environmentally harmful subsidy 

[1]

. Phasing out environmentally harmful subsidies is also included in

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the proposal for an Eighth Environment Action Programme (EC, 2020a) and in the European Green

Deal (EC, 2019) and highlighted in the EC State of the Energy Union 2021 report 

[2]

, although the

need to consider a socially fair transition is also emphasised.

Revenues from environmental taxes also provide the foundation for tax shifting policies, commonly

known as environmental fiscal reform. This relates to changes in national tax systems, where the

source of revenue raised by taxes shifts from economic functions, sometimes called goods, such as

labour (personal income tax), to activities that lead to environmental pollution and climate change,

sometimes called bads, often in a revenue-neutral way (EEA, 2005). Such tax shifting policies

continue to be promoted by policymakers, most recently by the European Commission in the

European Green Deal: [A]t national level, the European Green Deal will create the context for broad-

based tax reforms, removing subsidies for fossil fuels, shifting the tax burden from labour to pollution,

and taking into account social considerations (EC, 2019).

Although the overall composition of tax revenue in the EU has remained relatively stable over the last

two decades, megatrends such as climate change and the digital transformation of the labour market

are likely to have an impact on the future tax mix in EU Member States (EEA, 2020; OECD, 2020b,

2021).

Trends in environmental tax revenues

When studying the trends in generating environmental tax revenues during the last two decades, a

diverse picture is observed in Europe. At level of the 27 EU Member States (EU-27), environmental

tax revenues increased by 18%, from EUR 253 billion in 2002 to EUR 298 billion in 2019 

[3]

. However,

this growth was less than the increase in GDP (26%) and total tax revenues (31%). Revenues

increased in most EU Member States. For example, they more than doubled in Bulgaria, Estonia,

Latvia, Poland and Slovakia between 2002 and 2019. By contrast, revenues declined in Denmark,

Germany, Norway and Portugal by about 5-15%.

A more insightful presentation of trends in environmental tax revenues is provided in Figure 1. Here,

revenues from environmental taxes are expressed as a share of total tax revenues including social

contributions. At EU-27 level, the share slightly declined overall, from 6.6% in 2002 to 5.9% in 2019,

with trends varying among countries.

Figure 1: The trend of environmental tax revenues in EU-27, EU Member States and Norway

(2002-2019) (as expressed as percentages of total tax revenues including social

contributions)

Between 2002 and 2019, some countries have increased their share of environmental tax revenues,

while others have seen a decline.

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Source: Eurostat (https://appsso.eurostat.ec.europa.eu/nui/show.do?

dataset=env_ac_tax&lang=en)

More info here...

The contributions of environmental taxes to financing countries budgets also show large disparities,

ranging from 4.5% in Germany and Luxembourg to around 10% in Greece and Bulgaria.

Figure 2 illustrates the annual average growth rates of two indicators (environmental and labour tax

revenues) for the 27 EU Member States and Norway between 2002 and 2019. This geographical

presentation illustrates that, in 12 Member States, the tax burden shifted from labour to environment

pollution and resource use taxes, as environmental tax revenues increased more than labour tax

revenues in these Member States (those depicted above the blue line). This may be seen to indicate

a tax shifting policy. The opposite is true in the remaining 15 EU Member States plus Norway, with

environmental tax revenues declining (in four countries; yellow area) or increasing less than labour

tax revenues 

[4]
.

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Figure 2. Annual average change in environmental tax revenues and labour tax revenues

between 2002 and 2019

Source: Author compilation from Eurostat data: Environmental tax revenues [env_ac_tax];

European Commission: Taxation trends in the European Union different

years https://ec.europa.eu/taxation_customs/taxation-1/economic-analysis-taxation/taxation-

trends-european-union_en; and Eurostat: GDP and main components (output, expenditure and

income) [nama_10_gdp]).

More info here...

It is also notable that the forerunner countries in environmental taxation, Denmark, Norway and

Sweden, have all seen a decline in the share of environmental tax revenues in total tax revenues

since the early 2000s. Since the 1990s, these countries have implemented the largest number of

environmental taxes - including CO  taxes - and significantly, have been indexing their tax rates in

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line with inflation (EEA, 2016). These past trends should be taken into account when analysing policy

options for tax shifting programmes until 2050, in particular for the second half of this 30-year period,

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as discussed below.

. The intention of altering human behaviour has not always been an important aspect during the initial

design of many energy taxes. This aspect has, however, now been mentioned by the European

Commission: While the ETD [Energy Taxation Directive] is historically an instrument for Member

States to collect tax revenues, the environmental objective of taxation has gained relevance in the

present context (EC, 2021b).

Whether or not energy taxation will continue as a revenue-generating economic instrument needs to

be critically questioned in the context of assessing the decarbonisation of the transport sector,

essential for achieving a climate-neutral Europe. Data show that revenues from taxes on petrol in

Norway and Denmark dropped massively, by 65% (constant 2010 NOK prices) and 44% (constant

2010 DKK prices), respectively, between 2002 and 2019 (Statistics Norway, 2021a; Statistics

Denmark, 2021). Therefore, it is not surprising that CO  emissions from passenger cars fuelled by

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petrol and kerosene declined by 61% in Norway but overall CO  emissions from passenger cars

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dropped by only 14% during this period (Statistics Norway, 2021b). Reasons for these developments

are numerous and can be attributed to the switch between petrol- and diesel-powered private

passenger cars, as well as the massive increase in purchases of electric vehicles in recent years. It

may therefore be time to think about and assess the future role of environmental tax revenues in

public budgets, as the latter trend of an increase in electric vehicles can be expected to accelerate.

Scanning the trend in carbon tax revenues in Sweden might also be useful, as Sweden is often

referred to as a role model in terms of carbon pricing, as it has the highest CO  tax rate globally. The

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revenues from CO  tax (in constant 2010 SEK prices) dropped by about 17% between 2002 and

2

2019 (Statistics Sweden, 2021). When revenues from the EU Emissions Trading System (ETS) are

included, aggregated revenues fall by about 12%. Approximately 95% of all Swedish fossil carbon

emissions are covered by the two carbon pricing schemes (CO  taxation and the EU ETS)

2

(Government Offices of Sweden, 2021). The trade-off between environmental taxes being effective

and generating revenues is emphasised in the context of Swedish carbon taxation by Criqui et al.

(2019). They explain that Swedens low share of environmental tax in total tax revenues (as shown in

Figure 1) is not the result of taxation not being efficient: [T]he truth is the opposite. The [carbon] tax

has been effective over a long time so the tax base has already eroded (Criqui et al., 2019).

What is the role of environmental tax revenues in the
decarbonisation transition?

As previously discussed, multiple transition processes have fiscal implications for taxpayers and for

the public budget (EEA, 2020). However, not transitioning towards sustainability would also have

fiscal implications, i.e. there would also be costs of inaction (see for example Sanderson and ONeill

(2020) and Swiss Re Institute (2021)). Moreover, the widespread implementation of carbon pricing 

in the form of either carbon taxes or emissions trading schemes  is one of the policy measures

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playing a central role in decarbonisation efforts, including in the Commissions Fit for 55 package 

[5]
.

The introduction of any new economic instrument is deemed likely to generate additional revenues

over time, especially any ambitious carbon pricing policy (OECD, 2021). For example, the

International Monetary Fund (IMF) estimates that the introduction of a carbon price of USD50 per

tonne of CO  on top of existing energy/carbon pricing schemes could generate approximately 1% of

2

GDP in 2030 for emission-intensive countries and about 0.5% in EU Member States such as France,

Germany and Italy (IMF, 2021; IMF and OECD, 2021; Black et al., 2021) 

[6]
.

These findings are similar to those described in the European Commissions impact assessments of

the fiscal implications of implementing a more extensive carbon pricing policy to achieve policy

objective of a 55% greenhouse gas (GHG) reduction at EU level by 2030 (EC, 2020b). The European

Commission concluded that:



While in the baseline energy taxes and carbon prices in 2030 raise revenue
equivalent to 1.8% of GDP, in CPRICE [a carbon pricing scenario] this increases
to 2.25%. The extension of carbon pricing to a wider range of sectors of the
economy should therefore not be seen as a game-changer in terms of the
[7]
structure of public finance .

EC, 2020b, p.68 

To understand these results in context, it is critical to note that energy tax and carbon pricing

revenues amounted to 1.8% of GDP in the EU-27 in 2019, illustrating a potential increase of about

0.4 percentage points by 2030.

As part of the Fit for 55 package, the European Commission proposed a revision of the Energy Tax

Directive (ETD) (EC, 2021c). Several options for revisions to the current ETD are assessed in the

accompanying impact assessment, demonstrating that revenues can increase in the short to medium

term (EC, 2021b). However, by 2035, the last year of the evaluation process, the revenues under all

options are expected to be between 3% and 33% lower than revenues in 2020 at the EU-27 level

(see Figure 23 in EC, 2021b).

The primary objective of any carbon pricing policy is to reduce carbon emissions, implying that, if

effective, the consumption of fossil fuels will reduce over time. But this also means that revenues

from existing or newly introduced energy taxes and carbon pricing policies will decrease because of

the erosion of the tax base as the policies work effectively. It is therefore the overall net effect that is

relevant for any meaningful analysis. One of the most relevant and comprehensive analyses of the

overall fiscal repercussions of stringent climate and energy policies was undertaken by the United

Kingdoms Office for Budget Responsibility (OBR) in its 2021 fiscal risk report (OBR, 2021). The

report assesses the costs of decarbonising the UK economy until the fiscal year 2050/51, including

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the wider fiscal implications of the transition to net zero emissions. The OBRs analysis projects how

the receipts from environmental taxes will develop during the transition process. This analysis is

based on scenarios developed by the UK Committee on Climate Change (CCC, 2020) and the Bank

of England (2021). The key insights from analysing the implications of stricter UK energy and climate

policies for budgetary revenues are as follows:

Revenue will be lost from energy taxes (fuel duties), vehicle excise duties, air passenger duty,

and landfill and plastics taxes because of the decarbonisation of the economy. It is estimated

that these environmental taxes will generate about 1.6% of GDP in the fiscal year 2025/26 but

will decline over time and will be completely gone by 2050 (Figure 3) 

[8]
.

A carbon price will be introduced in all sectors of the economy that currently do not pay a

carbon price 

[9]

. The carbon price will enter into force in all sectors from 2026/27 with a starting

price of about GBP 100 per tonne CO  and thereafter increasing by an average annual rate of

2

2.6%, reaching GBP 187 per tonne CO  in 2050/51 (all figures in 2019 prices). Additional carbon

2

tax revenues will be generated from 2026/27, amounting to 1.8% of GDP. These revenues are

then projected to decline, reaching 0.5% of GDP, as the reduction in emissions can no longer be

offset by the rather steep increase in carbon tax rates.

Overall, a massive increase in the environmental tax revenues is projected, caused by the

introduction of the carbon pricing policy offsetting the loss of revenues from existing environmental

taxes. Over time, it will not be possible to balance the loss of these with revenues from the carbon tax

because of the stringent climate policy measures, resulting in a net negative effect. A small amount of

revenues would still be generated from environmental taxes at the end of the period. It should also

be highlighted that this analysis is based on the existing environmental taxation scheme, except for

the introduction of the carbon tax in 2026/2027.

Figure 3 Total direct impact on receipts of the transition to net zero emissions

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Source: OBR (2021) (http://nationalarchives.gov.uk/doc/open-government-licence/version/3/).

More info here...

One of the crucial differences between the studies cited is the time horizon. The OBR study projects

the fiscal implications until 2050 (transition to net zero emissions in the United Kingdom) and the

European Commission report has a time horizon until 2030 (55% GHG reduction).

All of these findings demonstrate that fiscal challenges result from the conscious policy objective of

decarbonising the economy, and these challenges are triggered by the erosion of the associated tax

base. A reduction in GHG emissions must be aligned with a sharp reduction in the use of energy

fuels, which are currently the largest revenue generator in the context of environmental taxation

(EEA, 2016) 

[10]

. This challenge is also addressed by the European Commissions report on the 2020

survey on tax policies in the EU (EC, 2020c). This report focuses on the design and principles of fair

and efficient tax systems in a changing world. It defines the term sustainable tax revenues  which

is closely linked to the notion of fiscal sustainability  as revenues that come from tax bases that do

not erode and secure sufficient funding for current spending and probably increased spending in the

future (EC, 2020c). The report also clarifies what is meant by eroding tax bases: changes in the way

people travel or heat their homes could lead to drastic revenue losses from energy taxation (EC,

2020c).

Assessing the potential of tax shifting programmes must not focus on short-term prospects alone but

rather should focus on the ability to deliver medium- to long-term policy objectives. In other words,

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can these programmes meet the essential condition of guaranteeing the sustainable tax revenues

required in the long run to sustain current and future public spending programmes in a world of

multiple transitions, ranging from the need to decarbonise the economy to dealing with the fiscal

challenges of an ageing and in some EU Member States shrinking population and technological

transitions (EEA, 2020). For example, the current energy taxation scheme is largely based on the use

of fossil fuels, which must decline as decarbonisation of the economy is realised. Furthermore, the

current scheme of transport taxation is oriented to support the uptake of electric vehicles (EVs) via a

reduction in annual vehicle tax and sales tax rates, or even the complete exemption of EVs from any

form of transport tax 

[11]

. It can be expected that the design of these taxes will change over time,

particularly when the ban of the sale of fossil fuel -powered vehicles takes effect 

[12]
.

Such trends can be expected to have disproportionate implications for the public budgets of EU

Member States that rely heavily on energy tax revenues from transport fuels under existing national

energy taxation regimes. Such Member States include Luxembourg, where 90% of all environmental

tax revenues were generated from transport fuels in 2019, Lithuania (89%), Czechia and Poland

(73%), and Estonia (72%). This gives rise to the question  based on current energy taxation

schemes  of if and how these countries can compensate for this shortfall in their public budget

given the relatively high shares of transport fuel tax revenues in total tax take. For example, this

amounts to 7% in Estonia and 6.5% in Bulgaria, compared with the EU-27 average of 3% in 2019

figures 

[13]
.

It is unlikely that energy tax revenues will decrease substantially over the next 10-20 years, but it is

clear that this will happen eventually, as already evident in Norway. The trajectory will depend on how

seriously governments implement stringent fiscal policy instruments alongside regulatory measures

aiming to decarbonise the economy including the transport sector. A finely nuanced approach is

probably required to assess options for environmental taxes in the context of the European Green

Deal and its aims to decouple economic growth from resource use and to reach climate neutrality by

2050.

Tax shifting programmes may no longer be relevant

Regarding the future potential of tax shifting programmes, it appears that the momentum has stalled,

as summarised by Pisany-Ferry (2021):

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

This approach [tax shifting programme] has increasingly been questioned for
overlooking the fact that decarbonization entails significant distributional
consequences. Carbon taxation/pricing is regressive and often affects residents of
some areas disproportionally. 
This reality (and the corresponding discontent, vividly illustrated by the French
Yellow Vests movement) has led governments to reconsider plans for carbon
taxation. Whereas it was viewed a few years ago as a potential source of revenue
or an opportunity to substitute for other taxes (according to the double dividend
hypothesis), there is growing recognition that revenue from carbon taxation or the
auctioning of tradable permits must largely be redistributed in order to neutralize
their income effects, at least for the bottom half of the income distribution.

Pisany-Ferry, 2021, p.11 

The proposals included in the Fit for 55 package of July 2021 follow these lines of argument,

including a proposal for the introduction of a social climate fund (EC, 2021d). The objective of this

fund is twofold: (1) to finance temporary direct income support for vulnerable households and (2) to

support measures and investments that reduce emissions in road transport and buildings sectors

and as a result reduce costs for vulnerable households, micro-enterprises and transport users (EC,

2021e), pledging a socially fair transition (EEA and Eurofound, 2021). The financial resources to be

allocated to the social climate fund are projected to amount to 25% of the expected revenues from

the auctioning of emission allowances under the EU Emissions Trading System covering buildings

and road transport 

[14]

. The majority of revenues from emission trading is proposed to be spent in its

entirety on climate- and energy-related projects, thus being a critical policy instrument for financing

the energy transition. The proposal is going further than the current policy which specifies as an

objective that Member States spend at least half of the revenues from the ETS auctioning in actions

for climate and energy purpose.

The Fit-for-55 package makes it less likely that tax shifting programmes will be implemented in the

short term. Other environmental taxes do not generate enough revenues, limiting the scope for tax

shifts that are revenue neutral. For example, in 2019, EU-27 revenues from pollution and resource

taxes amounted to 3% of total environmental tax revenues (EUR 9.5 billion), compared with 78%

from energy taxes (including carbon pricing measures) (EUR 232 billion) and 19% from transport

taxes (EUR 56 billion). A study commissioned by the European Commission modelled a tax shifting

programme that raised revenues from pollution and resource taxes while reducing labour costs,

revealing positive but nearly negligible macroeconomic impacts in terms of increases in GDP and

employment (EC, 2021f).

It is undoubtedly time for environmental taxes and carbon pricing policies to take centre stage, and

their importance and significance can be expected to gain greater prominence during the transition to

a climate-neutral economy. However, these economic instruments must be designed to support the

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sustainability transition by fulfilling the principle of getting the prices right in line with the polluter pays

principle. The revenue-generating aspect of environmental taxes, including carbon pricing policies,

should no longer be at the forefront of policy discussion.

Offsetting, or at least compensating for, expected revenue shortfalls in the coming decades will

require revising the current taxation schemes to fit transition objectives, as well as accelerating the

phasing out of environmentally harmful subsidies as an additional source of budgetary revenues.

Concepts and proposals for redesigning transport taxes, including distance-based road charges, can

be found (Gago et al., 2019; OECD and ITF, 2019; Blank et al., 2021). One of the challenges is

making sure that new taxation schemes are implemented at the right time. Running existing and new

schemes in parallel may lead to unwanted outcomes. Such outcomes would be expected if for

example distance-based charges were introduced alongside current road fuel taxation schemes, as

owners of passenger vehicles powered by fossil fuels would be negatively affected, leading to further

disruptions in society

Last but not least, it may be a good time to revise the concept of environmental fiscal/tax reform 

shifting the tax burden from labour to environmental pollution and resource use  to achieve

sustainable fiscal reform. It is anticipated that fiscal challenges will continue in the multiple transition

setting (EEA, 2020), since fiscal sustainability, when understood as the solvency of the public sector,

will be crucial in the sustainability transition.

The Organisation for Economic Co-operation and Development summed it up nicely, saying that

[E]nsuring long-term fiscal sustainability requires that governments engage in continual strategic

forecasting of future revenues and liabilities, environmental factors and socio-economic trends to

adapt financial planning accordingly (OECD, 2013). When assessing the macroeconomic policy

environment, which needs to balance public budgets, fiscal sustainability emerges as a constraint on

all public policies. The climate and energy transition, as well as the demographic transition, must

reflect the effects in terms of both the revenue and spending of public budgets. The ageing

population will have macroeconomic and fiscal impacts, as it will increase the need for spending on

social protection and health, while also eroding the tax base through a reduced labour force. This is

highly relevant in those EU Member States whose populations are projected to shrink (EEA, 2020).

Thus, sustainable fiscal reform seems to be a worthwhile approach to further developing the

environmental fiscal reform concept and making more broadly relevant that at present. Reforming the

fiscal system and making it fit for the future will be demanding. The increasing demand for public

spending for climate and energy investments, as well as in relation to the ageing population, is well

documented (EC, 2018, 2021g; Rouzet et al., 2019). The bigger political challenge is how to revise

current taxation schemes  in addition to phasing out subsidies  and find additional revenue to

future proof the tax system. Different proposals are discussed in the literature including robot,

financial transaction and digital service taxation schemes 

[15]

, as well as revising property taxation

schemes and wealth taxes, especially to raise the revenues needed to recover from the COVID-19

pandemic (see, for example, Kapeller et al. (2021) and IMF (2021)). 

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Notes

[1] For further information, see Parry et al. (2021a), for the latest estimate of energy subsidies, and

OECD (2005), for more on the challenges of reforming and phasing out environmentally harmful

subsidies.

[2] See the annex of the state of the energy union report (EC, 2021a).  

[3] All monetary values are expressed in 2010 constant EUR prices or in 2010 national currencies.

[4] It must be noted that the findings may have differed slightly if a different time horizon had been

selected; for example, Denmark, Germany and Sweden introduced environmental tax reforms during

the 1990s and early 2000s via policies to reduce taxes levied on labour and introducing new or

increasing existing environmental taxes (Speck and Jilkova, 2009). However, the finding does not

change in the case of Norway, as environmental tax revenues dropped by 5% between 1995 and

2019.

[5] See https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3541

[6] See also WEF (2021), which projects the additional revenues generated from setting an

international carbon price floor for greenhouse gases (GHGs) that by 2030 would reach USD75 per

tonne for high-income countries, USD50 per tonne for middle-income countries and USD25 per tonne

for low-income countries, and is based on a proposal made by the IMF (Parry et al., 2021b).

[7] The CPRICE scenario is a carbon-pricing based scenario that achieves around 55% GHG

reductions. It assumes strengthening and further expanding of carbon pricing, be it via EU ETS or

other carbon pricing instruments, to the transport and buildings sectors, combined with low

intensification of transport policies while not intensifying energy efficiency, renewables policies (EC,

2020b). The carbon price of the CPRICE scenario amounts to EUR60 per tonne CO2 (2015 prices) in

2030.

[8] The United Kingdoms share of environmental tax revenues in its total tax revenues and GDP

amounted to 6.9% and 2.3%, respectively, in 2019.

[9] The carbon price is aligned with the price trajectory of the early action scenario constructed by

the Bank of England, which was undertaken to explore the implications of early action for the financial

system and was aligned with the Central Banks and Supervisors Network for Greening the Financial

System scenario (NGFS, 2021).

[10] See also Eurostat (2021).

[11] An interesting example of tax exemption for EVs can be found in Germany: EVs are exempt from

annual vehicle taxation and the loss in tax revenues is projected to be about EUR295 million for the

years 2021-2025. The shortfall in revenues will be offset by funds from the EUs Recovery and

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Resilience Facility (RFF) under the approved German Recovery and Resilience Plan (RRP).

[12] See Wappelhorst (2021) for an overview of national and sub-national governments committed to

phasing out the sale of newly registered internal combustion engine passenger vehicles (status as of

June 2021).

[13] The significance of revenues generated from transport fuel taxes is more visible when these

revenues are assessed as a share of the tax take excluding revenues from social contributions, as

the latter are set aside to finance social benefits. In 2019, these shares totalled 10.6% in Estonia and

more than 9% in Bulgaria, Romania and Slovenia, compared with the EU-27 average of 4.5%.

[14] See Defard (2021) for a discussion, including of the challenges that establishing a social climate

fund may face. The economic and social consequences of the current sharp increase in end user

energy prices are strong indications that political actions will be needed to reduce the adverse effects

of higher energy costs for households and industries triggered by higher carbon prices, which

foreseen as necessary for reaching climate neutrality in 2050.

[15] For more information, see EEA (2020). Digital service taxes (DSTs) are implemented in several

EU Member States.  But it is expected that DSTs will be repealed as part of the agreement to

overhaul international tax rules imposing a minimum tax rate on business profits of 15%. For further

information on the OECD/G20 Inclusive Framework on Base Erosion and Profit Sharing (BEPS),

see https://www.oecd.org/tax/beps/ (accessed 21 December 2021).

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Identifiers

Briefing no. 22/2021 
Title: The role of (environmental) taxation in supporting sustainability transitions

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Published on 07 Feb 2022

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