1. Topic

2. Introduction

Air pollution is increasing rapidly, however various measures can be applied in order to combat it. Among these ways, we find the economical means such as CO₂ tax, NO_X tax and Energy tax appear to be the most frequent ones. These should comply with the purpose of a tax in principle, but, are the air quality taxes an efficient economic instrument to combat air pollution and improve the demand in the transport sector?

3. Discussion

In addition to framework measures harmonised at EU level, the implementation of an environmental policy also requires the provision of a number of economic, technical or fiscal instruments. According to the Organisation for Economic Cooperation and Development (OECD), we can define economic instruments as “instruments that affect costs and benefits of alternative actions open to economic agents, with the effect of influencing behaviour in a way which is favourable to the environment affecting the cost in a way to promote the use of processes and products which are less damaging to the environment”.

The fifth Environmental Action Programme includes the broadening of the range of environmental policy instruments as one of its key priorities. Environmentally related taxes are defined as any compulsory, unrequited payment to general government levied on tax-bases deemed to be of particular environmental relevance. Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments. Environmental taxes and charges can be a way of implementing the "polluter pays" principle by inducing consumers and producers to adopt more environmentally compatible behaviour. “The polluter pays principle” applies in the EU and, in principle, taxes (which are a type of instrument - together with charges, subsidies, permits and deposit/refund systems-) should contribute to obtain environmental benefits and this would have, as a consequence, an improvement in the transport demand.

One way of applying the “polluter pays principle” to transport is to adjust fuel taxes to reflect environmental externalities. But in setting tax rates on fuels, many factors other than reducing environmental externalities need to be considered such as the efficient use of resources, the need to finance road maintenance, the impacts of road congestion etc. Most governments complement fuel taxation with other policy instruments, as fuel taxes are not always very efficient in reducing externalities from emissions (except for the greenhouse gas carbon dioxide which is directly linked to fuel consumption). Indeed, emissions and their environmental externalities not only depend on fuel choice but also on vehicle driving pattern and the location and time of emissions. Moreover, fuel taxes are generally considered as road user fee intended to fund roadway projects and services but these are often not sufficient to cover this purpose. As some complementary incentives to fuel taxes that will help reaching an efficient and equitable situation to pay to roadway costs and encourage efficient transportation, we can list:

· Commuter Financial Incentives (free parking space)

· Congestion or Road Pricing

· Vehicle Use Fee, Distance-based pricing: traveller pay for the distance and the used type of infrastructures rather than independently upon the travelled distance (e.g. at national level in the Netherlands)

· Annual vehicle tax: vehicle excise duty (e.g. in Sweden)

· Pay-as-you-drive insurance

· Annual tax road depending on energy consumption (Energy taxes)

· Pay-lane (e.g. at local level in the Netherlands

· Fiscal instruments to stimulate the introduction of 3-ways catalyst (e.g. at national level in the Netherlands)

A common vision is that environmental externalities should be corrected by taxing polluting goods instead of subsidizing non-polluting alternatives. However, incentives to use alternative modes and reduce driving such as the creation of cycling paths, the organisation of training programs for bicyclists, the reimbursement of employee cycling mileage expenses are always good to be considered and implemented.

The formulation of incentives should be such of a dissuading element to leave your cars aside and benefit from public transport. There is a continuous flow of ideas to encourage a broader change in taxation policy to increase taxation on “bad aspects” (i.e. air pollution) and to reduce it on “good aspects” (i.e. employment). In some cases the use of revenues can play an important role to support action programmes and invest on measures to improve the air quality and improve the transport system.

Different Member States have different problems and ways of solving the problem and in some cases the regions are autonomous with respect to fiscal policy and each region makes its decision (e.g. in the Netherlands). The debate has been going on for years due to the unanimity voting debate required in the tax and fiscal measures regime.

At European level the more relevant need is the tax harmonisation: in general higher taxes on vehicles and fuels hamper the introduction of new technology as there will be little room for R&D budgets on a market where margins are small (e.g. Denmark has an around 200% tax on new cars, meaning that new technology is expensive).

Overcoming the cost barrier from taxes is not an easy task on a European level: single nations are not the driving force to tax harmonisation due to the importance of government revenue from private car sales and use.

In the meantime many foreign markets, such as Korea, where free trade is not granted, slow down investments in new technology by not adhering to established standards.

The Commission has expressed the desire to make greater use of the economic instruments, for which there is currently a proposal for a Directive on Taxation of energy products as well as a Communication on Taxation of CO₂ emission from cars. The future Directive imposes minimum tax rates on all energy products (and it could lower the tax provided that business make investments in energy efficiency measures equivalent to the amount which they would have to pay under higher rate of tax). The Communication aims at stopping distortions of the internal market through differences in passenger car taxation. It would verify which are the options for taxing passenger cars in proportion to the CO₂ emitted and would help to reduce its emissions to 8% below the 1990 level to comply with the Kyoto Protocol. The Council and EP had set a target of reducing this emission from 120 g CO₂/km by 2005 or 2010 at the latest. In 1998 the European car industry (ACEA) made a voluntary commitment to reduce it to 140 g CO₂/km (in new cars). As there is a difference of 20 g, the Commission estimates that there is scope to induce market changes to cover this gap by means of fiscal measures to motivate people to buy less polluting cars and increase the use of the public transport.

4. Recommendation / Conclusion

CO₂ taxes seem to be an effective way to improve travel demand. However, this economic instrument seems not to be enough to achieve the objective to improve the transport demand. CO₂ taxes could be increased to combat air pollution, but an effective transport system has to be well implemented otherwise people cannot really see a benefit on them. The use of voluntary agreements is also a good and effective instrument to improve the transport demand. Fiscal instruments of environmental policy use the tax system to influence the behaviour of economic agent. But there is also a need to change the behaviour of the citizens to substitute the use of their cars by the public transport. Not only CO₂ taxes will reduce the pollution and improve the transport system. Combating the original pollution source is the best instrument. Very often, related taxes can be very usefully implemented in combination with various policy instruments: voluntary agreements, command and control regulations or tradable permits. This seems to be an effective means to reduce air emissions. While legislation might take a long time to be effectively implemented, voluntary agreements, for instance, seem to be an effective and quicker way to combine with legislation, obtain positive results and they are even a more flexible instrument than the CO₂ tax.

5. Examples / Further Reading

The Netherlands

(National level)

Cleaning up conventional vehicles and making them more energy efficient: Dutch government tries to speed up these processes by making the annual road tax more dependent upon energy consumption and stimulate the role of alternative fuels; this is especially the case of HDVs as it is not foreseeable that the emissions of diesel vehicles will come down to the level of CNG and LPG vehicles; the fuel tax for LPG for buses has been lowered and no vehicle sale tax is required for these buses anymore, nevertheless this measure was not very effective, that appears to be quite a reluctance to move to LPG.

Dutch government is going to use pricing mechanism to influence people’s choice; they try to internalise external costs into the trip-price for the traveller moving towards the “Variabilisation” (the traveller pays for the travelled distance and the used type of infrastructure); in this process the annual tax may disappear altogether and people will pay more for actual use of roads and space.

The primary instruments for the national authorities are fiscal (vehicle purchase tax, annual road tax, fuel taxes, subsidies, etc.) but they have to work within limits settled by EU: they cannot develop an independent emissions policy but are only allowed to stimulate technologies specifically in anticipation of European policies (e.g. emission standards) without leading to unfair competition (stimulating specific technologies is easily seen as such).

Fiscal instruments to stimulate the 3-ways catalyst have been used in the late 1980s long before it became mandatory by the EU: within half a year over 50% of all new vehicles were equipped with it and fiscal means were also effective to stimulate the use of unleaded gasoline.

(Local level)

Pay lane and road-pricing were heavily debated and the issue became very political: it is virtually impossible to implement it on a large scale but we may be able to set up pilot local applications and then use the results of that to make the discussion more open. The recent application of road pricing in London has significantly added value to the discussion within main European cities on this category of taxation.

Sweden

Fuel taxes: the tax on gasoline is divided in energy tax (about 60%), carbon dioxide tax (about 15%) and VAT (about 25%), whereas bio-gas and ethanol are only charged with VAT.

Annual vehicle tax: it would stimulate the use of lighter vehicles since it is related to weight.

Road pricing and Vignette/Cordon charge: it is a very sensitive political subject and there are not yet national roads where this policy is applied, though the required technology exist and was exported to other countries. Fuel tax exemption: biogas and electricity driven vehicles are exempt of fuel tax in order to decrease the operational costs.

France

Promotion of Electric Vehicles: the best way to promote EVs is evaluated to be the internalisation of external costs for users that means introducing restricting measures for non environment-friendly vehicles.

Belgium

A specific example on initiatives for the wider use of LPG in Belgium is reported as LPG promotion in Belgium (2000-2001)

Further Examples:

6. Additional Documents / Web Links

· Communication on Taxation of CO₂ emission from cars, COM (02) 431.

· Communication on Voluntary Agreements, COM (02) 412.

· Proposal for a Directive on Taxation of energy products, COM(97)30, OJ C 139/97.

· “Study on the Economic and Environmental implications of the Use of Environmental Taxes and Charges in the EU and its Member States”. Final Report. Chapter 5, Nitrogen Oxides. ECOTEC in association with CESAM, CLM, University of Gothenburg, UCD and IEEP. April 2001.

· Final Report on “Economic Evaluation of a Directive on National Emission Ceilings for Certain Atmospheric Pollutants: Part A: Cost-effectiveness Analysis”. European Commission. International Institute for Applied Systems Analysis. Luxemburg and AEA Technology. November 1999.

· European Automobile Manufactures Association –ACEA. COM (98)495 final, July 29, 1998, p.33.

· OECD Website: Database on economic instruments in environmental policy.

· UTOPIA Project – Deliverable 10: Evaluation of policy aspects – November 1999.

Last Updated

25th January 2005