Environment in emerging and transition economies

EaP GREEN: Taxation of environmentally harmful products



The project covers product-related economic instruments – those that regulate the sale and use of products: product taxes, tax differentiation based on environmental factors, deposit-refund schemes, and extended producer responsibility (EPR).

Well-designed taxes can be a powerful incentive for reducing the environmental impacts of products, for fostering the use of less environmentally harmful alternatives, and for generating revenue for the public budget. For example, fuel taxes have been applied in many countries to reduce the consumption of fossil fuels, and differentiated taxes applied to vehicles, detergents, and batteries have stimulated the market for cleaner alternatives. Deposit-refund systems are widely used in managing waste flows where re-use and recycling create significant savings in raw materials or production costs, whereas EPR is best suited for products which are dangerous to mix in, and/or costly to recover from, the general household waste.

All EaP countries (Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine) impose taxes on environmentally harmful products (such as motor fuels and imported vehicles), but only some of them (e.g. Armenia and Moldova) have product taxes mandated by environmental legislation. A few countries differentiate the tax rates for motor fuels based on their quality. Only a few deposit-refund schemes (e.g. for glass bottles) remain in place from the Soviet era, and an EPR system has recently been introduced in Belarus. Several EaP countries are interested in expanding the use of product-related economic instruments. One of the principal problems with the performance of these instruments in the partner countries is their exclusive revenue-raising focus, without much concern about their environmental effectiveness, enhancing which is a key challenge.

Objectives and activities

  • Preparation of a Policy Manual on the design of product-related economic instruments that would provide incentives for both reducing pollution and introducing greener products. It will draw on related experience in EU and OECD countries and examples  from the countries of Eastern Europe, Caucasus and Central Asia (EECCA) where product-related economic instruments already form part of the policy mix;
  • Pilot projects will be implemented in several EaP countries to design or reform economic instruments for environmental management of products, in consultation with governmental and non-governmental stakeholders. The pilot projects will result in specific recommendations on how the policy, legal and, possibly, institutional frameworks should be reformed and will accompany the countries in their implementation;
  • National-level capacity building workshops will be organised in all EaP countries. Their objective will be to disseminate policy recommendations and lessons learned from the pilot countries, as well as guidance for designing product-related economic instruments.

DID YOU KNOW? In 2010, 70% of all the revenues from environmentally related taxes in OECD countries came from taxes on various energy products, especially on motor vehicle fuels, and another 27% were raised via taxes on motor vehicles and various transport activities.