Taxes can provide a clear incentive to reduce environmental damage. Businesses need to be convinced that innovation and investment to reduce environmental damage brings rewards. Similarly, clear and sustained price signals can provide an important incentive for households, for example to reduce their energy consumption or to increase the extent to which they recycle waste. They underpin other policy instruments such as information campaigns (e.g. on the fuel efficiency of new cars or white goods) or the wider use of ‘smart’ meters for water, gas and electricity.
The use of environmentally-related taxes, charges and emission trading schemes is spreading across OECD and emerging economies. Across OECD countries, revenues from environmentally-related taxes amount to about 1.7% of GDP, ranging from about 0.7% on average in North America to 2.5% in Europe. Over 90% of these revenues come from taxes on fuels and motor vehicles.