Environmental Taxes are key for a cost-effective fiscal consolidation. European states generate most of their revenues by levying taxes on labour and income. At the same time, activities causing environmental degradation and depletion of scarce natural resources (such as consumption of electricity, fuels and water as well as production of waste) account for a small fraction of government finances. This endangers economic growth and employment while rewarding over-exploitation of natural resources. Environmental fiscal reform can correct this disparity by shifting the focus of government taxes from labour/income to environmentally harmful and resource-depleting activities.
Market-based policy instruments that can be used for this purpose are carbon taxes, emissions trade, water abstraction charges, levies on the production of waste, traffic congestion charges etc. Another instrument is phasing out of environmentally harmful subsidies to fossil fuels.
Several European countries have already introduced such policy instruments. Apart from saving energy and improving the environment, environmental taxes can produce better economic results than conventional taxes: Many studies and best practices show that, depending on whether and how the additional public revenues generated from environmental taxation are recycled in the economy, an environmental fiscal reform may also be beneficial for economic growth.