To a very large extent, EU polluters do not pay for the environmental damage that they cause, imposing health and clean-up costs on the whole society instead. These were the findings of a new Commission study on ‘Green taxation and other economic instruments’. The study shows that the costs of pollution and environmental damage greatly exceed the revenues generated from taxes and other economic instruments to tackle polluting activities. This is the case across the board: for all pollutants, in all EU Member States and across all sectors of the economy. The study also calls for wider use of environmental taxation and other economic instruments to send a strong signal to polluters to reduce their emissions, and to avoid charges falling disproportionately on poorer households.
The Commission will support national rollouts of green taxes and economic instruments, in particular through the European Semester process where it can recommend the identified good practices as part of its dialogue with Member States. Building on the results of the study, the Commission launched the ‘Greening taxes – applying polluter pays principle in practice’ flagship initiative as one of the support projects under the Technical Support Instrument, the EU programme that provides tailor-made technical expertise to EU Member States to design and implement reforms.
Virginijus Sinkevičius, Commissioner for the Environment, Fisheries and Oceans, said:
The costs of pollution and environmental degradation are real. They come from unsustainable production and consumption that affects our health and the environment, but the polluters are not held accountable for them. It is the society and nature that pay the bill. Shifting taxation to environmental pollution and getting the prices right is a way to reduce costs on citizens and promote innovation and investment in a cleaner economy. With the interactive toolkit on economic instruments the Commission takes yet another step to support Member States on the journey of sustainable fiscal reforms and make the polluter pays principle a reality in the EU.
The study finds that evidence is strongest for air pollution, greenhouse gases (GHGs) and water pollution as good data on both costs and emissions is available across the EU. The costs of air pollution, GHGs and water pollution alone amount to at least EUR 750 billion per year across the EU. However, polluters are charged only 44% of the cost of air pollution and GHGs, whilst water polluters pay almost nothing. More localised evidence about other forms of environmental damage tells the same story.
The study also finds that at national level, taxation of waste management is uncommon and local waste management charges tend to reflect only the cost of providing the service rather than a share of the identified EUR 420 billion external cost.
Macroeconomic modelling of an EU-wide scenario shows that higher environmental taxes, with revenues used to reduce labour taxes, would have positive impacts on growth, jobs and real incomes. The EU scenario capturing a conservative portfolio of 10 economic instruments applied across the EU raises EUR 30 billion per year by 2030, and boosts GDP growth by 0.2% and employment by 0.1%. The study also presents plenty of good examples in European countries that other countries could use as inspiration for their own green taxation policies.
There is a clear scope to apply the polluter pays principle more rigorously through an expansion of environmental taxation and other economic instruments in the EU. To support this process, an interactive toolkit building on the findings of the study is now online, presenting economic instruments used in EU Member States for all stakeholders who want to engage in discussions encouraging application of the polluter pays principle. It showcases examples, and provides suggestions of which economic instruments could be implemented in Member States and the effects of these instruments. It also contains a myth-busting section to address directly the criticism of a broader implementation of economic instruments.
The Polluter Pays principle is one of the key principles underlying EU’s environmental policy – that those responsible for environmental damage should pay to cover the costs. Applying the principle means that polluters are incentivised to avoid environmental damage and are held responsible for the pollution that they cause. Assigning the right price to pollution, as required by the polluter pays principle, is a key driver for cleaner production and consumption.
The study estimates the external environmental costs associated with different sectors of the economy in five areas: air pollution and greenhouse gas emissions, water pollution, waste treatment, water scarcity and biodiversity loss. These costs are compared with the revenues generated from those economic sectors through taxes and other economic instruments, to show their apparent degree of internalisation.
The study was commissioned by the European Commission and developed by the Institute for European Environmental Policy. Its conclusions support the findings of the European Court of Auditors that the Polluter Pays Principle is inconsistently applied across EU environmental policies and actions.
A complementary work is ongoing on phasing out of environmentally harmful subsidies, with a workshop planned for 15 November. You can register here. The results of these two projects together will support Member States wishing to embark on greening their budgets.
For more information
Study on Green taxation and other economic instruments and Annexes
- Publication date
- 12 November 2021
- Directorate-General for Environment