Abstract
The paper provides a political economy analysis of the potential of environmental tax reforms, focusing on the interaction of economics and political realities by considering climate and energy policies and demographic changes. It examines the future potential for environmental tax reform in view of the need to integrate the economic and environmental demands while taking into account social inclusiveness. Demographic change will have significant budgetary implications for some EU Member States, creating pressures for increased expenditure (e.g. on pensions and health care) while undermining revenues due to a reduction in the labour force. Environmental tax reform potentially offers a response to this challenge. However, there are uncertainties over whether environmental tax revenues, in particular those linked to carbon emissions, will be sufficient to meet the growing expenditures linked to population ageing. Successfully reducing greenhouse gas emissions by 80–95% by 2050 compared to 1990 will shrink the tax base for energy taxes and carbon pricing. It is therefore questionable whether increases in energy tax rates and a high carbon price would enable governments to sustain environmental tax revenues as a share of GDP, let alone increase them as proponents of environmental tax reform envisage.
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Source: author based on Eurostat data (it should be kept in mind that this analysis is a snapshot of past developments meaning that the trend may differ when based on different and/or shorter time periods)
Source: author based on Eurostat data
Source: author based on Eurostat data
Source: EC 2011
Source: EC 2013
Source: EEA (2014a)
Source: author’s calculation based on EC and Eurostat
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Notes
See for more information and reports discussing decarbonisation pathways for other countries at http://deepdecarbonization.org/countries/.
Labour taxation comprises all taxes paid by employers and employees which are linked to wages, such as payroll taxes and personal income taxes as well as social security contributions (SSCs).
Employment data show the number of employed persons aged between 15 and 64 years—Eurostat classification [lfsa_pganws].
All monetary data are expressed in constant 2005 prices.
Achieving the 40% reduction target, EU emission trading scheme (EU ETS) sectors would have to reduce their emissions by 43% compared to 2005 and non EU ETS sectors including transport would need to reduce emissions by 30% compared to 2005.
See for more information: http://ec.europa.eu/clima/policies/ets/credits/index_en.htm.
The EC published in summer 2016 the updated EU reference scenario concluding that total GHG emissions are projected to be reduced by 35% in 2030 and 48% in 2050 (European Commission (EC) 2016).
The UK Government introduced the fuel price escalator in 1993 setting at an annual increase of 3% in constant prices later rising to 5% and finally to 6%, i.e. ahead of inflation. The latest rise due to the escalator was implemented in the budget of 1999.
Own calculation based on tax rates published by DG TAXUD and deflated by the GDP deflator (Eurostat).
Estimates based on the German energy tax scheme show that the tax take for petrol- and diesel-driven vehicles is on average eight and five times higher respectively than the tax revenues generated from electric-driven vehicles (Teufel et al. 2015)
Tax revenues data are in constant 2005 prices deflated by GDP deflator.
It must be stated that the projections published in the EC report do not take into account the current developments with regard to the increase in refugees and asylum seekers as well as recent changes in the pension and retirement policies in EU Member States. Therefore, it is rather obvious that all these projections do have an inherent degree of uncertainty and can only provide an indication of future developments based on the current status of policies and knowledge.
This projection implies that Germany would move from a ratio of about three working-age persons for every elderly person in 2013 to less than two working-age persons in 2050.
All monetary data in European Commission (EC) 2015d are in constant prices (base year 2013).
This finding can be derived by applying the IPAT framework; i.e. impact of human activity on the environment (I) is equal to the product of population (P), affluence (A) and technology (T).
The share of labour taxation as % of total tax revenue (including social security contribution) differ between EU member states. The EU-28 average (arithmetic) amounted to 50.5% with the lowest share in Malta 34.3% and the highest in Sweden of 58.5% in 2014.
The reduction of the pension level is regulated by law and cannot be lower than 43% in 2030.
The increase in SCC rate is also regulated by law and cannot be higher than 22% in 2030.
An interesting study assessing the implications of the transition to low-carbon vehicles was undertaken by CE and Ricardo-AEA (2013). The fiscal implications of this transition is noteworthy to be mentioned as the macro-modelling results are revealing that the transition modelled in the project will lead to a shortfall in the public budget as the fall in excise taxes levied on transport fuels are not offset by the increase in revenues of all other taxes ‘from the net improvement to the economy’ (CE and Ricardo-AEA 2013).
See for a discussion of the concept of fiscal sustainability and the links between this concept and climate change: Ekins and Speck 2014.
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Speck, S. Environmental tax reform and the potential implications of tax base erosions in the context of emission reduction targets and demographic change. Econ Polit 34, 407–423 (2017). https://doi.org/10.1007/s40888-017-0060-8
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DOI: https://doi.org/10.1007/s40888-017-0060-8