The polluter pays principle is a simple idea at the core of EU environmental policy: those responsible for environmental damage should pay to cover the costs.
This toolkit presents economic instruments used in the EU Member States to make polluters pay.
It was developed by a project led by Institute for European Environmental Policy (IEEP) for DG Environment.
Environmental taxes, charges or fees add extra costs to the use of products or services that reflect the environmental harm they cause.
Trade permit schemes set a cap or quota for pollution in a given area, and only allow actors in that area to pollute according to the quantity of permits they hold.
Deposit refund schemes charge users an extra fee when they buy a product, which is refunded if the product packaging is returned for recycling or reuse.
In these schemes actors must compensate for environmental damage in one place by paying for equal or greater environmental restoration somewhere else.
Myth-busting about polluter pays instruments
While there are many examples of economic instruments designed to make polluters pay in place across the EU, they still only contribute a minor share – less than 10% - of total government revenues in all the Member States.
This section provides evidence to dispel some common myths about green taxes and other forms of environmental economic instruments, that may be standing in the way of their wider adoption.
In general, higher income households consume more goods and services that cause environmental damage than lower income households, and so will pay more in green taxes in absolute terms. But because green taxes tend to represent a higher proportion of the income of lower income households, they are generally considered to be socially regressive.
This can easily undermine the social acceptability of such measures, especially if alternative options are not available for people to change their consumption behaviour. An example is the ‘gilets jaunes’ protests in France in response to fuel tax increases that were seen to hit car-dependent working class and rural communities hardest.
However, with careful design green taxation can be fair, particularly if the revenues are recycled to the benefit of lower income and marginalised communities. For example, the revenues from taxes on highly polluting biomass or coal for domestic heating in countries like Bulgaria or Poland could either be returned as lumpsum payments to lower income households (similar to a scheme in British Colombia, Canada), or used to subsidise the installation of electric heat pumps and energy efficiency renovations in low income housing.
Another option to make green taxes fairer is to use the revenues to reduce taxes in other areas, such as progressive cuts to labour taxes for lower income earners. The IEEP et al. study for DG Environment modelled the distributional impacts of a broad range of green taxes across EU Member States with revenues used to cut income taxes. This package of measures was found on average across the EU to increase GDP and jobs, while increasing incomes most for the lowest income groups.
Taxation and other pricing instruments can lead to higher production costs that put companies at a disadvantage compared to their competitors who are not subjected to such a tax. Such impacts are, however, highly context-specific, and can be addressed through careful policy design.
The IEEP et al. study for DG Environment estimated the impacts of several green taxes on competitiveness, finding mixed results. In the case of a tax on NOx emissions from industries like energy or steel production, for example, only very small net effects on competitiveness were found due to the structure of international demand in those sectors.
In the case of taxes on pesticides and fertilisers, however, more substantial competitiveness impacts were found as a result of higher export food prices. But by using a part of the tax revenues to invest back into the agriculture sector, it may be possible to offset the negative economic impacts from a pesticide tax through economic stimulus and efficiency gains from the investment.
A good example of careful policy design to address competitiveness concerns is the pesticide tax in Denmark, which has helped to decrease pesticide loads and protect water quality. Many farmers feared that the tax would hit production of specialty and high value crops in Denmark. However, the Danish Ministry of Environment conducted an evaluation of the effects of the tax and concluded that this was not the case. Pesticide costs measured as a share of gross dividend remained constant and decreases in certain crops were found to be due to other factors. Where there were justified concerns, as in the case of potatoes, the government reduced another tax in compensation and redirected part of the revenue from the pesticide tax into a dedicated fund.
Green taxes can have two objectives: both to cover the costs to society of environmental harm caused by a product or service, and to incentivise households or business to change behaviour to avoid causing such harms. There are lots of examples where careful design of green taxes or other economic instruments have served not merely to raise revenues, but have resulted in substantial environmental benefits.
- Taxation of emission of air pollutants by industry in Sweden is widely seen to have driven a significant reduction of emissions since the early 1990s. More recently, a reduction of air pollution in Czechia can at least partly be attributed to a fee on the emission of air pollutants by industry.
- In France, residents must pay the household waste collection fee to finance waste collection. In many cities, incentive pricing is used and helps to raise awareness about waste reduction, increase the separation of waste, and reduce the quantity of waste sent to landfill or incineration. Where incentive pricing has been introduced, it has led to a reduction of 30% of waste going for final disposal.
- Ireland was the first Member State to introduce a plastic bag levy in 2002, to change consumer behaviour from using disposable shopping bags to using more durable, reusable bags. The measure has since been widely adopted across the EU, leading to significant reductions in plastic bag use.
The design of pricing instruments is key to their environmental effectiveness. For instance, the rate of a tax is important to influence behaviour. If the difference in price between more and less environmentally-friendly behaviour is too small, the instrument will not have any impact, as can be seen in the case of water abstraction charges in France and Spain and waste charges in Croatia, Greece and Lithuania, for example.
Pricing instruments will also always be more effective where they are implemented in the context of broader supportive policy measures. A good example is the combination of the landfill tax and ban on landfilling of recyclable/biodegradable waste which operates in Austria and the Netherlands.
The introduction of environmental pricing instruments – like many forms of highly visible taxation – can easily attract opposition. Protests from stakeholders, whether business groups or citizens, can often lead to watering-down of measures.
This was the case, for example, with freezing the rate of the waste disposal tax in Estonia, greatly limiting its efficacy, and with the introduction of the Forest Public Benefit Function Fee in Croatia, which attracted much opposition due to the lack of public awareness of the objective of the fee, or clarity about what the revenue was being used for.
But one way to address public concerns is through meaningful stakeholder consultation and engagement in the design and implementation of green pricing measures.
- For example, a scheme that works much better to protect forests is the Sèlvans scheme in Catalonia, Spain. Stakeholder involvement has been promoted actively and supported with scientific evidence. Sèlvans has been successful both in attracting public administration and private donors’ attention to the instrument and its mission, and in engaging with landowners and establishing a varied and flexible range of effective instruments and agreements.
- In Finland, significant consultation processes helped the DRS and packaging tax to achieve widespread support among stakeholders, albeit requiring an initial reduction in the recycling target from 90% to 80%.
- In Romania, a careful stakeholder consultation process, including conferences involving business and civil society actors, was critical to building understanding and support for the introduction of a deposit-refund scheme.
Certain types of green pricing instruments are relatively simple to design and administer – which is part of their attraction – while it is true that some others are more challenging, and require careful design processes, including meaningful stakeholder consultations.
Relatively simple systems include waste disposal taxes, taxes on air pollution from stationary (industrial) sources, and pay-as-you-go systems.
- Waste disposal taxes (either on landfilling or incineration) are relatively easy to administer because the tax is usually paid by the operator of the facility receiving the waste. It is then transferred through the gate fee to the companies delivering the waste to the facility. Waste disposal taxes exist in several Member States, including Austria, Belgium, Croatia, Estonia, France, Italy, the Netherlands, Portugal, Slovakia and Spain, and are currently being implemented in Greece.
- A tax on point emissions (like air pollution from industry) is also relatively simple to administer. Industrial facilities that emit air-polluting substances like nitrogen and sulphur oxides and particulate matter are regulated and controlled. These taxes have been deployed in Czechia, Slovakia and Sweden, for example.
- The system for control of vehicular access (CVA) in Malta is another good example of system that is easy to administer and works well to achieve its objectives. The CVA system allows any vehicle to enter the city of Valletta under a time-based ‘pay-as-you-go’ billing system enabled through cameras and automated technology. It encourages people to drive less in the centre and discourages parking for long periods of time, and was established after a transparent consultation process with many different experts and stakeholders.
Systems that are harder to administer involve diffuse sources, many stakeholders, and/or many different, widely distributed products, including measures to increase packaging recycling or to reduce environmentally-harmful agricultural inputs. Careful policy design and stakeholder engagement is vital to overcome these challenges.
- Instruments directed at increased recycling and less disposal of packaging include deposit-refund schemes that work mainly for beverage containers, and extended producer responsibility systems, where the collection is funded through dedicated sectoral funds set up for this purpose. Deposit-refund schemes exist, for example, in Finland, Latvia and the Netherlands, and have recently been introduced in Romania. They have been deployed after lengthy, transparent and broad consultancy processes, which have served to increase their efficacy and support.
Several countries have attempted to deal with agricultural sources of water pollution through taxation, like Denmark where taxes on pesticides and fertilisers were introduced, and the Netherlands which established a system of tradable charges on phosphate. These tend to be harder to administer, because in the case of pesticides, for example, there are many different pesticides with differing harmful characteristics that also vary according to their application. In the case of phosphates, the emissions have to be correctly attributed to correctly distribute the rights to emit. By engaging the farmers, Denmark has managed to create a system that is both reasonably effective from an environmental point of view and has built farmer support.
Given that one of the objectives of green taxes and other types of green pricing instruments is to encourage consumer or business behaviour change, the revenues from such schemes can be expected to decline over time (assuming it is cheaper to change behaviour than to pay the tax). This leads some stakeholders to conclude that such measures are not a long-term, sustainable source of government revenues.
While this trend can certainly be observed in some cases, such as the declining revenues raised from the plastic bag levy in Ireland, there are two ways in which such concerns may be addressed. Firstly, governments may choose to increase tax rates over time – as was the case with the NOx tax in Sweden, the municipal waste and incineration charge in Catalonia, Spain, the waste tax in the Netherlands, the landfill tax in Greece, the waste disposal charge in Estonia or the air pollution fee in Czechia, for example.
Alternatively, governments may choose to expand the environmental tax base by introducing new polluter pays instruments. The IEEP et al. study for DG Environment includes modelling of the introduction of an expanded basket of green taxes introduced across the EU with equivalent income tax cuts, finding that such measures would on average support employment creation and GDP growth.
You can read more about polluter pays instruments across the EU in the study “Green taxation and other economic instruments – Internalising environmental costs to make the polluter pay” by IEEP et al.