Green growth will require large scale changes in the behaviour of households, business and governments. Taxes and other market-based instruments are key policy instruments for providing clear and sustained incentives to reduce environmental damage. Businesses need a reasonable degree of certainty that innovation and investment to reduce the scale of environmental damage will be worthwhile. Similarly, consistent 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. This can be supported by 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.
Environmentally related taxes are increasingly being used in OECD economies and can provide significant incentives for innovation, as firms and consumers seek new, cleaner solutions in response to the price put on pollution. These incentives also make it commercially attractive to invest in R&D activities to develop technologies and consumer products with a lighter environmental footprint.
Expanding the use of environmentally related taxes can play an important part in growth-oriented tax reform, shifting the burden from corporate and personal income taxes and social contributions towards taxes that have less of a negative effect on investment and labour supply.
Fossil fuel subsidies
The IEA has estimated that subsidies to fossil fuel consumption in emerging and developing countries amounted to some USD 409 billion in 2010. These subsidies result in fuel prices below world market prices whether delivered through price controls or through public expenditures. Reforming or eliminating inefficient support for the consumption or production of fossil fuels can contribute to achieving economic and fiscal objectives, while also helping to tackle environmental problems like climate change. At the global level, reforming fossil-fuel subsidies would contribute to curbing emissions of greenhouse gases such as CO2 by removing major incentives to produce or use such fuels. At the country level, reforming fossil-fuel support would also help reduce public spending and increase tax revenues, thereby improving fiscal balances. It could free up scarce government resources for other priorities, such as protecting vulnerable households, stimulating employment creation, or helping to address climate change at home or in developing countries.
Current OECD work
For many years, the OECD has been collecting information on, and analysing the environmental effectiveness and economic efficiency of, various instruments used for environmental policy – including looking at how different instruments interact when they are used in combination.
Fossil fuel subsidies
The OECD has contributed to the work of the G20 by identifying examples of tax expenditures relating to the production and consumption of fossil fuels in OECD countries (see www.oecd.org/g20/fossilfuelsubsidies).
Other current work includes: A methodology to identify and estimate producer and consumer energy subsidies; modelling-based analysis of the economic, trade, and GHG emission impacts of phasing-out fossil fuel subsidies; advice and recommendations on the phase-out of fossil fuel subsidies, especially on how to address social or competiveness impacts, drawing lessons learned from experiences with country subsidy reforms.
In addition, some of the Economic Surveys and Environmental Performance Reviews that OECD regularly produces of OECD and emerging economies include sections on fossil fuel subsidy reform to assess country progress and provide targeted advice for reforms.
The structure of tax systems
Building on the study Taxes and Growth, and Economic Surveys, a supplementary report for the Green Growth Strategy could be developed examining country experiences with tax reform at both national and local levels, and considering reform strategies to achieve greener growth, as well as political economy issues.
Tax treatment of tradable permit regimes
Getting the tax treatment of tradable permits “right” is important not only for achieving environmental objectives, but also for the integrity of tax systems. Work is underway to identify the domestic and international tax issues that arise in connection with the tax treatment of tradable permit regimes (see flyer).
Taxation, innovation, and the environment
Recent analysis has looked at the impacts of environmentally related taxes and similar instruments on innovation activity in firms and households. The report Taxation, Innovation and the Environment used case studies to highlight the ability of environmentally related taxes to induce innovation. By imposing a direct cost on the polluter, taxes, in addition to providing incentives for pollution abatement, also encourage innovation to seek out new products and processes that can reduce the polluters’ tax burden. This innovation both reduces emission levels for a lower economic cost, as well as lowering the tax burden on the polluter (or provides a revenue stream to a third-party inventor).
Environmental policy tools and evaluation: www.oecd.org/env/taxes
OECD’s work on fossil fuel subsidies : www.oecd.org/g20/fossilfuelsubsidies
OECD/EEA instruments database: www2.oecd.org/ecoinst/queries/index.htm
OECD-IEA Fossil Fuel Subsidies and Other Support webpage: www.oecd.org/iea-oecd-ffss.
A database on environmentally related taxes in OECD and partner countries: www.oecd.org/env/policies/database.
- Taxing Energy Use: A Graphical Analysis (2013)
- "An update of the G20 Pittsburgh and Toronto Commitments", joint report by IEA, OPEC, OECD and World Bank on fossil-fuel and other energy subsidies (2011)
- Ensuring Environmental Compliance: Trends and Good Practices (2009)
- Environmental Outlook to 2050 (2012)
- Environmentally Related Taxes in OECD Countries: Issues and Strategies (2001)
- “Interactions Between Emission Trading Systems and Other Overlapping Policy Instruments”, General Distribution Document, Environment Directorate (2011)
- Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels (2011) (pictured)
- Mitigation Potential of Removing Fossil Fuel Subsidies: A General Equilibrium Assessment, OECD Economics Department Working Paper No. 853 (2011)
- OECD Economic Surveys: Mexico 2011, includes a focus on energy subsidies
- OECD Economic Surveys: India 2011, chapter on phasing out energy subsidies
- OECD Economic Surveys: Indonesia 2010, includes a chapter on phasing out energy subsidies
- The Political Economy of Environmentally Related Taxes (2006)
- Taxation, Innovation and the Environment (2010) (pictured)
- Taxation, Innovation and the Environment: Policy brief (2011)
- The tax treatment of tradable permits for greenhouse gas emissions (flyer)