Europe Shows Carbon Taxes Can Boost Economies

Cutting taxes on renewable energy is part of the success of Environmental Tax Reform, which is spreading in Europe without harm to economies.

WASHINGTON, DC, US, 2001-08-21 [] Cutting taxes on renewable energy is part of the success of Environmental Tax Reform, which is spreading in Europe without harm to economies. Eight European countries have various forms of ETR, and others have started to adopt measures which mean that the revenue from taxes on pollution or natural resource depletion are used to lower taxes on valuable economic activities, such as employment or investment. A detailed study, ‘Environmental Rax Reform: The European Experience,’ has been released the Center for a Sustainable Economy in Washington, which shows that a re-direction of revenue, or ETR, shows that it is possible to use a market-based approach to reduce greenhouse gas emissions without harming the economy. “When the revenues of environmental taxes are used to reduce other distorting taxes, the economic outcome is better … in terms of impacts on both employment and gross domestic product,” conclude the authors, including World Bank economist Benoit Bosquet. The analysis examines 44 studies, including 104 separate models of environmental tax reform. Financing renewable energies out of the new environmental taxes could result in even more jobs and increased GDP than even the ETR measures which European countries have taken so far, according to the report. “Our survey suggests that policy packages that include the use of a portion of the environmental tax revenues to finance energy efficiency or renewable energy improvements are more likely to result in positive employment and GDP impacts,” but it warns that poorly designed environmental tax reform can impose substantial costs on an economy. “On the other hand, a well designed reform can increase employment and GDP and (have) distributional effects that are negligible or positive,” it explains. “The weight of economic evidence (from Europe so far) suggests that in most economies, elements of good design include a labor tax reduction … policies to protect the competitiveness of energy-intensive industries; measures to prevent a wage-price inflationary spiral; policies to promote the development and spread of new cost-effective clean technologies and policies to compensate low-income households outside of the workforce.” Most of these factors are included in current Environmental Tax Reforms in Europe, but the report says “ETR should be regarded as fundamental tax reform, not just environmental protection: the intention is to alter the system of incentives through cuts in taxes on economic goods such as work and investment, financed by increased taxes on ‘bads’ such as pollution and natural resource consumption.” It creates a kind of “double dividend” of environmental improvements, plus economic benefits which would be even greater if the economic value of environmental improvements were included. “While many U.S. policymakers fear that any reforms aimed at reducing greenhouse emissions will have a negative effect on the domestic economy, (the report) suggests just the opposite,” concludes the CSE in releasing the report. “By taking leadership in demonstrating that economic instruments are workable, effective and economically beneficial and in developing clean technologies, (western nations) may be able to blaze the trail for the poorer and more fragile economies of the world to follow.”