Green Taxation and Other Economic Instruments

26th November 2021

by Tanzir Chowdhury, Hara Xirou

This report, which was commissioned by the European Commission and funded by the European Parliament, explores the external costs associated with a range of areas of environmental concern in the EU, and the extent to which these costs are internalised in taxation and other economic instruments in the EU.

The study was co-authored by our policy experts with the Institute for European Environmental Policy (IEEP), Trinomics, Aarhus University, CE Delft and Cambridge Econometrics.

The areas of environmental concern fell under 5 thematic areas:

  • Air quality
  • Water quality
  • Water scarcity
  • Waste, resources and circular economy
  • Biodiversity and land use management

The report estimated the current levels of external environmental costs associated with these thematic areas across different areas of the EU economy and compared them with revenues generated from those economic sectors through taxation and economic instruments to show the degree to which these costs are internalised. The findings showed are significant proportion of costs are not internalised – for example, only around 44% of environmental costs associated with air pollution and greenhouse gases (GHGs) are internalised.

Building on a previous project in 2019 which looked at the state of environmental taxation and budgetary reform across all then 28 EU Member States through a suite of 40 case studies, we then designed 54 economic instruments for the 27 EU Member States based on which areas instruments would be needed in the most and where there was a problem of externalities not being correctly priced. Modelling as part of the study demonstrated that the wider application of appropriate economic instruments could generate positive macroeconomic benefits on growth and jobs, while advancing the polluter pays principle across Europe.

A toolkit was developed for stakeholders to accompany the report, presenting the economic instruments to make polluters pay in the EU. The toolkit can be found here.

This report is available free of charge. Press the orange button and provide a few details about yourself to access the download.