Why are green fiscal policies such a small part of green economic policies? Evidence from three European countries

One of the fundamental causes of environmental and resource use problems are unpriced scarcity and perverse subsidies. The logical solution seems to be to correct perverse subsidies and to price goods that were unpriced through taxes or otherwise. These measures would also improve the government budget that may be used to reduce distorting taxes and invest in the green economy or for social purposes. In practice the adjustment process of taxes and subsidies is very slow, while at the same time a large number of policies for greening the economy would have been much cheaper and more effective if prices were right. Why is there so much resistance to do what seems to be logical from an economic point of view? This chapter attempts to answer these questions by analysing green taxation policies and discussions in the Netherlands, Germany and the UK as well as by comparing the dynamics in these countries. One conclusion is that we have to be very careful with indicators like the share of environmental taxes in the GDP, because classification is not consistent and because the taxes may not give incentives for greening the economy. In all three countries, the tax on energy has many exemptions that are sometimes used as a reward for making green agreements with governments. Third, coal in electricity production kept its privileges in Germany and the Netherlands in exchange for an agreement, while the UK introduced carbon taxes for coal, in practice forcing companies to close down coal-based electricity production. International competiveness, distributional issues and fear for stranded assets seem to be the main drivers against the consistent use of green taxation. Other issues are the administrative burden, enforcement problems and perception on the effectiveness of taxes. In cases where environmental taxes are explicitly related to labour tax reductions, people are generally not aware of this. In many cases the environmental taxes are relatively complex, such as for example in the UK where it is almost impossible to calculate the final tax people pay on energy use. Designing a lucid and consistent tax system is therefore crucial. A large number of exemptions does not fit into this. The European Emission trading scheme (ETS) creates an extra problem for green taxation, because a reduction in pollution in one country will be offset by more pollution in another country, except when the excess quota is taken out of the market.