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Revenues from green taxes have dropped despite increased use (data update – 01/07/2011)

27 May 2010

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.

Revenues from these taxes have been on a slight downward trend in relation to GDP (our chart), although the number of environmentally related taxes has been increasing in recent years. The decline in revenue partly reflects the drop in demand for fuel in response to recent high oil prices and other factors, which in turn has led to a reduction in total revenues from taxes on energy products.

CO2 taxes have existed for a number of years in a few countries, such as Sweden. More recently, countries like Iceland and Ireland have decided to introduce CO2 taxes as part of their fiscal consolidation measures, and CO2 taxes are also under consideration in France and Japan, for example, as well as several emerging economies. Still, the scope for expanding the use of green taxes in OECD countries remains considerable. Ensuring that these taxes help achieve environmental goals is a policy challenge, as this OECD study suggests (pdf).

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