What are Green Taxes?

Green taxes are also known as environmental taxes. It is a new type of taxation introduced to help achieve the objectives set regarding the reduction of greenhouse gas emissions and pollution in general.

It is known that emissions and other types of pollution have been affecting our environment significantly in recent years. It has been proven that if the rise of the global average temperature is not controlled, the resulting climate change could be catastrophic. This is why the Paris Agreement exists, which set a target to keep temperature increase below two °C with a special goal of limiting it to 1.5°C.

Climate change has been a topic of discussion and concern worldwide, with governments in different countries trying to step up and take some actions focused on addressing pollution issues.

One of those actions is this new type of tax, which will focus on discouraging behavior that may cause any form of environmental damage. In other words, if you are increasing pollution, you pay tax. And almost everyone agrees on the fact that green taxation is going to play an essential role in the fight to protect our environment against climate change, including the International Monetary Fund (IMF), environmental organizations, and many economists.

Definition of environmental taxes

There is a clear definition of what precisely environmental taxes are, provided by the statistical framework developed jointly in 1997 by Eurostat, the European Commission, the Organisation for Economic Cooperation and Development (OECD), and the International Energy Agency (IEA). This definition says that environmental taxes are “those whose tax base consists of a physical unit (or similar) of some material that has a negative, verified and specific impact on the environment”.

Environmental tax: where is applied?

Based on the definition above, it is clear that the European Union is one of the most prominent bodies applying environmental taxes. The member countries have put in place the European Green Deal with very ambitious objectives, such as a 55% reduction in greenhouse gas emissions by 2030 and becoming a climate-neutral continent by 2050.

The EU considers that environmental taxes can have a huge positive impact. They integrate green taxation with other climate and energy policies, such as the EU Emission Trading System.

Fortunately for the planet, climate change is not only a concern for the EU. Outside of it, there are many countries with similar environmental policy instruments in place. The United Kingdom, which is now out of the EU since the Brexit, Australia, and India have been successfully applying green taxation to improve the environmental situation.

Other countries where environmental taxes are an important part of the taxation policy include Israel, Turkey, and Iceland.

Does the US have green taxes?

Considering the size of the country and the economic power it has with so many industries that can generate pollution, this question is definitely a good one.

While the US does have environmental taxes, many believe they are too low, especially compared to other developed countries in terms of tax revenue and GDP. According to stats provided by Metcalf, the average environmental tax rate in other Organization for Economic Co-operation and Development (OECD) countries is 2.23 percent of GDP. In comparison, in the U.S., it is only 0.9 percent of GDP.

The truth is that, as it happens with other taxes, the most important thing is not how much is charged but the positive impact taxation can have and how the tax revenue is used to obtain the desired outcomes.

What are the types of environmental taxes?

There are different types of classifications for environmental taxes. For example, one classification considers the way they are applied. This way, the types of environmental taxes can be:

Industrial pollution taxes

This type refers to the taxes charged to industrial companies for producing the biggest amounts of harmful emissions. These taxes usually apply to things like fossil fuels, electricity, and the generation of water contamination.

Individual taxes

Not only big factories and other businesses harm the environment. Some people have certain behaviors that are harmful to the environment, and these revenue-based taxes aim to curb those practices. They usually apply to things like vehicles and gasoline, which directly affect personal income due to the amount of money people spend.

Incentive taxes

Taxation does not necessarily mean punishment. It has been a trend to use subsidies and tax cuts to encourage industrial and individual investment in clean energy and sustainable alternatives that could help reduce emissions.

What are examples of green taxes?

Each of the groups described above can include different examples. According to the EU guidelines, these taxes are energy, transport, resources, and pollution taxes. Let’s take a closer look at these four.

Energy

As the name suggests, these are the ones applied to energy products, including fuel for transport. This means that fuel taxes are a form of energy taxes. Products that are covered include:

Energy products for transport purposes:

• Unleaded petrol.
• Leaded petrol.
• Diesel.
• Other energy products for transport purposes (e.g. LPG, natural gas, kerosene, or fuel oil).

Energy products for stationary purposes:

• Light fuel oil.
• Heavy fuel oil.
• Natural gas.
• Coal.
• Coke.
• Biofuels.
• Electricity consumption and production.
• District heat consumption and production.
• Other energy products for stationary use.

Greenhouse gases:

• The carbon content of fuels.
• Emissions of greenhouse gases (including proceeds from emission permits recorded as taxes in the national accounts).

Transport

This green tax applies to all things related to transport except the fuel part of the energy type. Transport taxation involves the following:

• Motor vehicles import or sale (one-off taxes).
• Registration or use of motor vehicles, recurrent (e.g. yearly taxes).
• Road use (e.g. motorway taxes).
• Congestion charges and city tolls (if taxes in national accounts).
• Other means of transport (ships, airplanes, railways, etc.).
• Flights and flight tickets.
• Vehicle insurance (excludes general insurance taxes).

Resources

A type of green taxation that covers both non-renewable and renewable sources, including:

• Water abstraction.
• Biological harvesting (e.g. timber, hunted, and fished species).
• Extraction of raw materials (e.g. minerals, oil, and gas).
• Landscape changes and cutting of trees.

Pollution

While all of the previous are addresses pollution, this type is specific for the resulting impact. The following categories are covered here.

Measured or estimated emissions to air:

• Measured or estimated NOx emissions.
• Measured or estimated SOx emissions.
• Other measured or estimated emissions to air (excluding CO2).

Ozone-depleting substances:

• CFCs or halons.

Measured or estimated effluents to water:

• Measured or estimated effluents of oxidizable matter (BOD, COD).
• Other measured or estimated effluents to water.
• Effluent collection and treatment, fixed annually.

Non-point sources of water pollution:

• Pesticides (based on e.g. chemical content, price, or volume).
• Artificial fertilizers (based on e.g. phosphorus or nitrogen content or price).
• Manure.

Waste management:

• Collection, treatment, or disposal.
• Individual products (e.g. packaging, beverage containers, batteries, tires, lubricants).

Noise:

• Aircraft take-off and landings.

Energy taxes or carbon taxes

When it comes to taxation definitions, these two types are commonly confused, but they are closely related. As we saw above, an energy tax can be charged on the carbon content of fuels, so this could also be considered a carbon tax. In general, a carbon tax could be the one considering the effect of carbon emissions. Therefore, most of them also fall in the energy category.

Final thoughts

The green tax shift can bring a lot of benefits. From internalizing negative externalities to motivating innovation for a more sustainable future, they can help reduce greenhouse gas caused by fossil fuels. Let’s hope the revenues are appropriately used, and we can see a better future for the environmental situation.