To what extent do existing tax institutions and procedures internalize negative and positive externalities?
The tax system is fully aligned with the goal of internalizing externalities.
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9
Norway
Norway has a long tradition of using taxes and subsidies to influence the consumption of certain harmful commodities. Taxes on alcohol and tobacco are high, while a historical system of taxing luxury goods has been dismantled. As a policy instrument in the green transition, carbon taxes are being introduced for more product groups – particularly in sectors not covered by the EU ETS, such as waste incineration – and the government has signaled a gradual increase to NOK 2,000/tCO2e by 2030. A compensation system for industries at risk of carbon leakage continues to coexist. Incentivization of specific activities (for example, research and development) is generally done through direct support rather than through the tax system. However, the tax system has been actively used in combination with other economic incentives to introduce zero-emission vehicles, yielding effective impacts.
The tax system is largely aligned with the goal of internalizing externalities.
8
Czechia
The concept of externalities has influenced Czech tax policy, though it has not been the principal driver. The policy has evolved partly in response to pressures from particular interests and input from the EU, which has contributed to the introduction of environmental taxes. While the resulting share of environmental taxes appears high by international standards, this reflects the continued high use of environmentally harmful heating and transport fuels rather than a genuine concern for environmental issues. Vehicles are taxed according to EU emission standards, with the worst offenders incurring significant tax supplements while the best face no extra tax. Environmental taxation, as defined by EU carbon trading rules, has also influenced transport policy, as indicated in the section on Resilient Critical Infrastructure.
Tax deductions are available for firms engaged in research and development (R&D), but these have proven difficult to claim. The number of firms interested fell from 1,306 in 2015 to 835 in 2021, the latest year for which information is available. The problem lies in the stringent conditions for defining R&D imposed by the tax administration and upheld in court judgments. These conditions require systematic activity that leads to something demonstrably new, not merely the adaptation of an existing product. There is no specific targeting to focus on particular areas and their usefulness, although this can be addressed in accompanying policies for research support through subsidies.
Tax deductions are available for firms engaged in research and development (R&D), but these have proven difficult to claim. The number of firms interested fell from 1,306 in 2015 to 835 in 2021, the latest year for which information is available. The problem lies in the stringent conditions for defining R&D imposed by the tax administration and upheld in court judgments. These conditions require systematic activity that leads to something demonstrably new, not merely the adaptation of an existing product. There is no specific targeting to focus on particular areas and their usefulness, although this can be addressed in accompanying policies for research support through subsidies.
Citations:
https://www.czso.cz/csu/czso/danova-podpora-vyzkumu-a-vyvoje-v-roce-2021-dosahla-24-miliardy
https://www.czso.cz/csu/czso/danova-podpora-vyzkumu-a-vyvoje-v-roce-2021-dosahla-24-miliardy
Germany
Since the ecological tax reforms of the late 1990s, the German tax system has included “green” taxes designed to internalize the ecological damage produced by certain polluting activities. German industry is subject to the European emissions-trading system, which features market-based pricing of CO2 emissions. In 2021, Germany took another significant step toward comprehensive CO2 pricing by introducing a national price on CO2 for fossil fuels used for heating and cars. This CO2 levy is increasing from its starting price of €25 in 2021 to €45 in 2024 and €55 in 2025. In 2027, a European emission trading system is planned to cover emissions from traffic and buildings. With this system, the CO2 price will then be determined as the market price in this trading system (Bundesregierung, 2024).
Critics argue that the government could do more with price incentives. The current administration seeks to steer the green transition through regulations that mandate specific technologies. A recent example is the new Building Energy Act (Gebäudeenergiegesetz). This act prescribes in detail which technology must be used under certain circumstances. The concept of a price mechanism is to leave these decisions to the voluntary actions of agents, potentially leading to higher efficiency.
Subsidies and tax incentives are largely focused on measures with ecological or research-related justifications. Among the largest federal subsidies are support for energy efficiency in buildings, support for microelectronics, hydrogen infrastructure, charging and fueling infrastructure, measures for natural climate protection, and climate protection contracts with industry (BMF, 2023). The financial capacity of the government to fund these incentives has been curtailed by the Federal Constitutional Court’s ruling on the German Debt Brake, forcing the government to reprioritize these subsidies. However, the government remains committed to using substantial financial incentives to support the green transition.
Critics argue that the government could do more with price incentives. The current administration seeks to steer the green transition through regulations that mandate specific technologies. A recent example is the new Building Energy Act (Gebäudeenergiegesetz). This act prescribes in detail which technology must be used under certain circumstances. The concept of a price mechanism is to leave these decisions to the voluntary actions of agents, potentially leading to higher efficiency.
Subsidies and tax incentives are largely focused on measures with ecological or research-related justifications. Among the largest federal subsidies are support for energy efficiency in buildings, support for microelectronics, hydrogen infrastructure, charging and fueling infrastructure, measures for natural climate protection, and climate protection contracts with industry (BMF, 2023). The financial capacity of the government to fund these incentives has been curtailed by the Federal Constitutional Court’s ruling on the German Debt Brake, forcing the government to reprioritize these subsidies. However, the government remains committed to using substantial financial incentives to support the green transition.
Citations:
BMF. 2023. Subventionsbericht des Bundes 2021-2024. Berlin: Bundesministerium der Finanzen.
Bundesregierung. 2024. “CO2-Preis steigt auf 45 Euro pro Tonne.” Pressemitteilung 1. Januar. www.bundesregierung.de/breg-de/aktuelles/co2-preis-kohle-abfallbrennstoffe-2061622
BMF. 2023. Subventionsbericht des Bundes 2021-2024. Berlin: Bundesministerium der Finanzen.
Bundesregierung. 2024. “CO2-Preis steigt auf 45 Euro pro Tonne.” Pressemitteilung 1. Januar. www.bundesregierung.de/breg-de/aktuelles/co2-preis-kohle-abfallbrennstoffe-2061622
Sweden
Tax policy has been used to absorb negative externalities and promote positive ones. In 2022, environmental tax revenue amounted to SEK 97 billion, a decrease of SEK 6.5 billion from 2021. The new government reduced the tax on fuel, while the center-right government decreased revenue from electricity.
Having said that, tax revenue from emissions rights has increased threefold from 2021 to 2022. Energy taxes contribute the most to environmental tax revenue and include energy tax on fuels, carbon dioxide tax, and energy tax on electricity (SCB, 2023).
Having said that, tax revenue from emissions rights has increased threefold from 2021 to 2022. Energy taxes contribute the most to environmental tax revenue and include energy tax on fuels, carbon dioxide tax, and energy tax on electricity (SCB, 2023).
Citations:
SCB (Statistikmyndigheten). 2023. “Environmental tax revenue decreases in 2022.” https://www.scb.se/en/finding-statistics/statistics-by-subject-area/environment/environmental-accounts-and-sustainable-development/system-of-environmental-and-economic-accounts/pong/statistical-news/environmental-accounts – environmental-taxes-2022-and-industry-allocated-environmental-taxes-2021
SCB (Statistikmyndigheten). 2023. “Environmental tax revenue decreases in 2022.” https://www.scb.se/en/finding-statistics/statistics-by-subject-area/environment/environmental-accounts-and-sustainable-development/system-of-environmental-and-economic-accounts/pong/statistical-news/environmental-accounts – environmental-taxes-2022-and-industry-allocated-environmental-taxes-2021
7
Austria
The steering function of the Austrian tax regime – its ability to incentivize changes in economic behavior to preserve the sustainability of natural resources and environmental quality – has long been notably weak. However, the ecological-social tax reform passed by the government in October 2021 marked the start of a new era, including the pricing of CO2. The newly established CO2 pricing regime has been criticized for being too lenient to make a significant impact on shaping citizens’ behavior, and many issues remained unaddressed by the reform, such as lower taxation of diesel. Additionally, the scheduled incremental increase in fees has been delayed to mitigate the hardships of high inflation.
Ecologically harmful subsidies include subsidized commuting (Pendlerpauschale) and diesel for agriculture.
More recently, the government has significantly expanded subsidies introduced to internalize positive externalities. This has been particularly evident with incentives to replace older heating systems with new non-fossil options. In 2023, the government tripled the federal-level subsidies available, allowing up to 75% of costs to be refunded and, in cases of social hardship, even up to 100%.
Austria has an established regime for providing subsidies for basic research (“Grundlagenforschung”), but the resources have not been sufficient to fund all submitted applications deemed “excellent” by external and international peer reviews.
Ecologically harmful subsidies include subsidized commuting (Pendlerpauschale) and diesel for agriculture.
More recently, the government has significantly expanded subsidies introduced to internalize positive externalities. This has been particularly evident with incentives to replace older heating systems with new non-fossil options. In 2023, the government tripled the federal-level subsidies available, allowing up to 75% of costs to be refunded and, in cases of social hardship, even up to 100%.
Austria has an established regime for providing subsidies for basic research (“Grundlagenforschung”), but the resources have not been sufficient to fund all submitted applications deemed “excellent” by external and international peer reviews.
Citations:
https://www.bmk.gv.at/service/presse/gewessler/20231129_heizungstausch.html
https://www.derstandard.de/story/2000145801814/1-1-milliarden-fuer-grundlagenforschung-in-oesterreich
https://www.bmk.gv.at/service/presse/gewessler/20231129_heizungstausch.html
https://www.derstandard.de/story/2000145801814/1-1-milliarden-fuer-grundlagenforschung-in-oesterreich
Denmark
Subsidies and deductibles are used to internalize both positive and negative externalities. One example of the former is the large deductible offered to firms innovating technologies to become more energy efficient. An example of the latter is the deductible offered for transportation to and from work. This transportation deductible aims to maintain population levels in low-density areas, but works against the sustainability targets set in the 2020 Climate Law.
Regarding environmental and climate issues, there is room for improvement with regard to internalizing externalities. The CO2 tax is a step in that direction, but it has not been fully implemented yet.
The Danish tax system has been criticized for being too complex and for offering too many deductions. This complexity can result in offsetting deductions, which means that policy goals are not met.
Regarding environmental and climate issues, there is room for improvement with regard to internalizing externalities. The CO2 tax is a step in that direction, but it has not been fully implemented yet.
The Danish tax system has been criticized for being too complex and for offering too many deductions. This complexity can result in offsetting deductions, which means that policy goals are not met.
Estonia
Environmental taxes have been on the political agenda for many years, and both tax rates and total revenue from these taxes have increased. However, environmental taxes as a share of overall tax revenues remained stable or slightly decreased in 2021 compared to 2019 (6.8% and 9.6%, respectively) (Eurostat 2023). Compared to the European Union average, Estonia has higher excise duties on fuel, pollution and raw resources such as oil shale mining. Excise duties from fuel alone comprise more than 6% of all tax revenues (ASK 2021). The government program for 2023 – 2027 includes a planned increase in fuel excise duties in May 2024.
Pollution and mining levies are most substantial in northeastern Estonia, and since these funds go to municipal budgets, they can represent significant revenue for local governments. In Alutaguse municipality, such levies have composed about one-third of the budget. However, experts warn that relying on environmental taxes is not sustainable in the long run. As the economy becomes greener, the income from these taxes will diminish (ASK 2021). The electricity excise duty is applied equally to both fossil and green energy. Additionally, the tax rate is substantially lower – nine times lower – for big enterprises as a means of making Estonia more attractive to large businesses.
Taxes on transport, such as those on heavy vehicles and road tolls, are very marginal. Estonia has been the only EU country without a car tax; however, the introduction of such a levy has been specified in the coalition agreement for 2023 – 2027. The principles of the car tax were intensively debated throughout 2023. The right-wing Isamaa, which publicly opposed the introduction of the car tax, became the most popular political party largely because of this anti-tax campaign. At the moment, it is not clear when the car tax will be introduced, and with which calculation formula. However, one of the clear principles is to encourage people to opt for newer and greener vehicles.
The government already supports purchases of electric vehicles and electric bikes with grants of $1,700 and $700, respectively. According to Bank of Estonia expert Kaspar Oja, this measure lacks social equity because it supports better-off urban people and enterprises that do not need the support (ERR 27.02.2003).
In 2022 – 2023, VAT for printed and digital media outlets was reduced from 9% to 5%. Starting in 2024, this rate will return to the former level. According to the government, Estonian media houses are strong enough, and media consumption will not suffer because of this change. However, increases in VAT, coupled with higher prices for home delivery of newspapers, impair access to media for low-income and rural households.
Pollution and mining levies are most substantial in northeastern Estonia, and since these funds go to municipal budgets, they can represent significant revenue for local governments. In Alutaguse municipality, such levies have composed about one-third of the budget. However, experts warn that relying on environmental taxes is not sustainable in the long run. As the economy becomes greener, the income from these taxes will diminish (ASK 2021). The electricity excise duty is applied equally to both fossil and green energy. Additionally, the tax rate is substantially lower – nine times lower – for big enterprises as a means of making Estonia more attractive to large businesses.
Taxes on transport, such as those on heavy vehicles and road tolls, are very marginal. Estonia has been the only EU country without a car tax; however, the introduction of such a levy has been specified in the coalition agreement for 2023 – 2027. The principles of the car tax were intensively debated throughout 2023. The right-wing Isamaa, which publicly opposed the introduction of the car tax, became the most popular political party largely because of this anti-tax campaign. At the moment, it is not clear when the car tax will be introduced, and with which calculation formula. However, one of the clear principles is to encourage people to opt for newer and greener vehicles.
The government already supports purchases of electric vehicles and electric bikes with grants of $1,700 and $700, respectively. According to Bank of Estonia expert Kaspar Oja, this measure lacks social equity because it supports better-off urban people and enterprises that do not need the support (ERR 27.02.2003).
In 2022 – 2023, VAT for printed and digital media outlets was reduced from 9% to 5%. Starting in 2024, this rate will return to the former level. According to the government, Estonian media houses are strong enough, and media consumption will not suffer because of this change. However, increases in VAT, coupled with higher prices for home delivery of newspapers, impair access to media for low-income and rural households.
Citations:
Arenguseire Keskus. 2021. Keskkonnahoidu mõjutavad maksud Eestis 2021. https://arenguseire.ee/wp-content/uploads/2021/09/2021_maksustruktuur_keskkond_luhiraport.pdf
ERR. 2023. “Elektriautode ostu toetamine tekitab vastakaid arvamusi.” February 27. https://www.err.ee/1608898838/elektriautode-ostu-toetamine-tekitab-vastakaid-arvamusi
Arenguseire Keskus. 2021. Keskkonnahoidu mõjutavad maksud Eestis 2021. https://arenguseire.ee/wp-content/uploads/2021/09/2021_maksustruktuur_keskkond_luhiraport.pdf
ERR. 2023. “Elektriautode ostu toetamine tekitab vastakaid arvamusi.” February 27. https://www.err.ee/1608898838/elektriautode-ostu-toetamine-tekitab-vastakaid-arvamusi
France
The internalization of negative externalities is sometimes achieved by taxation even if this goal was not intended. The example of the high gasoline tax rates in France illustrates such a case. In recent years, the attempt to impose a duty on carbon emissions from transport has largely failed due to fierce resistance from the “red hat” (2013) and “yellow vest” (2018 – 2019) social movements. However, the principle that polluters should pay for their pollution is firmly stated in Article 110-1 of the Environmental Code. Its effective application is generally restricted to situations in which the pollution has a direct, immediate and visible impact even if various contributions have been put in place – for instance, to fund recycling industries for disposable products.
The internalization of positive externalities has mostly been applied to agriculture, with specific programs for contributions to landscapes or biodiversity. This is also the case for the energy-saving domains, as companies and individuals can receive direct reimbursements or subsidies for insulating buildings or buying appliances used to generate renewable energy. Furthermore, the government has subsidized electric vehicle leases for low-income households. Research by companies is also largely subsidized.
The internalization of positive externalities has mostly been applied to agriculture, with specific programs for contributions to landscapes or biodiversity. This is also the case for the energy-saving domains, as companies and individuals can receive direct reimbursements or subsidies for insulating buildings or buying appliances used to generate renewable energy. Furthermore, the government has subsidized electric vehicle leases for low-income households. Research by companies is also largely subsidized.
New Zealand
Existing tax institutions and procedures aim to internalize both negative and positive externalities – at least to some extent.
Environmental taxes, such as levies for agricultural emissions, as well as tobacco and alcohol taxes, aim to internalize negative externalities by discouraging excessive consumption. Conversely, other tax policies provide subsidies or tax credits to incentivize behaviors that generate positive externalities. An example of this is the Clean Car Discount for low-emissions vehicles.
Tax policies aimed at internalizing negative and positive externalities were a key focus of the 2023 election campaign. The new National-ACT-NZ First coalition announced it will scrap the “future generations” smoking ban, instead directing revenue from tobacco taxes to fund the coalition’s tax cuts (Corlett 2023). Additionally, the coalition axed Auckland’s Regional Fuel Tax, which was introduced for 10 years to pay for the city’s new rail infrastructure projects, and removed the Clean Car Discount. They argued that the latter scheme – which taxes high-emission vehicles to subsidize low-emission vehicles – was fiscally unfair (Trevett 2023).
Environmental taxes, such as levies for agricultural emissions, as well as tobacco and alcohol taxes, aim to internalize negative externalities by discouraging excessive consumption. Conversely, other tax policies provide subsidies or tax credits to incentivize behaviors that generate positive externalities. An example of this is the Clean Car Discount for low-emissions vehicles.
Tax policies aimed at internalizing negative and positive externalities were a key focus of the 2023 election campaign. The new National-ACT-NZ First coalition announced it will scrap the “future generations” smoking ban, instead directing revenue from tobacco taxes to fund the coalition’s tax cuts (Corlett 2023). Additionally, the coalition axed Auckland’s Regional Fuel Tax, which was introduced for 10 years to pay for the city’s new rail infrastructure projects, and removed the Clean Car Discount. They argued that the latter scheme – which taxes high-emission vehicles to subsidize low-emission vehicles – was fiscally unfair (Trevett 2023).
Citations:
Corlett, E. 2023. “New Zealand scraps world-first smoking ‘generation ban’ to fund tax cuts.” The Guardian, November 27. https://theguardian.com/world/2023/nov/27/new-zealand-scraps-world-first-smoking-generation-ban-to-fund-tax-cuts#:~:text=The%20laws%20were%20due%20to,outlets%20and%20the%20generation%20ban%E2%80%9D
Trevett, C. 2023. “Election 2023: National Vows to Scrap Discounts on EVs and ‘Ute Tax’ in 100 Days if Elected.” New Zealand Herald, September 30. https://www.nzherald.co.nz/nz/politics/election-2023-national-leader-christopher-luxon-sets-out-new-policy-as-concerns-about-campaign-safety-rise/INHI4QQZYFAV5MV7OZBNLQHPIM
Corlett, E. 2023. “New Zealand scraps world-first smoking ‘generation ban’ to fund tax cuts.” The Guardian, November 27. https://theguardian.com/world/2023/nov/27/new-zealand-scraps-world-first-smoking-generation-ban-to-fund-tax-cuts#:~:text=The%20laws%20were%20due%20to,outlets%20and%20the%20generation%20ban%E2%80%9D
Trevett, C. 2023. “Election 2023: National Vows to Scrap Discounts on EVs and ‘Ute Tax’ in 100 Days if Elected.” New Zealand Herald, September 30. https://www.nzherald.co.nz/nz/politics/election-2023-national-leader-christopher-luxon-sets-out-new-policy-as-concerns-about-campaign-safety-rise/INHI4QQZYFAV5MV7OZBNLQHPIM
Portugal
Portugal’s tax policy internalizes positive externalities primarily through subsidies and tax benefits. One noteworthy initiative in terms of tax expenditure is the SIFIDE, the Tax Incentive System for Business R&D. This program aims to enhance the competitiveness of companies by supporting their research and development (R&D) efforts through the deduction of corresponding expenses from corporate taxes.
Since 2015, companies have reported increased R&D investment within the framework of SIFIDE (ANI, 2023). This tool facilitates greater internationalization of national projects and businesses and simultaneously enhances Portugal’s efficiency and attractiveness to international investors. The more a company invests in R&D, the higher the percentage of the incremental rate.
Taxes with environmental relevance accounted for 5.3% of total revenues from taxes and social contributions in 2022, reflecting efforts to internalize negative externalities (INE, 2023). This was higher than the EU-27 average of 5% (Eurostat, 2023). However, the 2022 ratio decreased from 2021, when it was 6.6%, marking the lowest percentage since 1995. Consequently, Portugal’s gap with the EU-27 average narrowed from one percentage point in 2021 to 0.3 percentage points in 2022. Additionally, most of this tax revenue comes from taxes on oil, with minimal contributions from taxes on pollution and resources.
Portugal has recently increased its environmental subsidies to enhance its environmental footprint. The latest state budget introduces three new green taxation measures: a levy on ultralight plastic bags, incentives for scrapping end-of-life vehicles, and an increase in the Single Circulation Tax for older vehicles. These initiatives complement existing subsidies, such as tax incentives for energy rehabilitation works in buildings and the purchase of electric cars.
However, despite these proactive steps, the OECD has noted that Portugal’s green tax policies still lack consistent incentives to effectively reduce energy and water consumption and divert waste from landfills (OECD, 2023). This observation suggests that while progress has been made, more comprehensive and impactful measures are still needed to achieve significant environmental improvements.
Since 2015, companies have reported increased R&D investment within the framework of SIFIDE (ANI, 2023). This tool facilitates greater internationalization of national projects and businesses and simultaneously enhances Portugal’s efficiency and attractiveness to international investors. The more a company invests in R&D, the higher the percentage of the incremental rate.
Taxes with environmental relevance accounted for 5.3% of total revenues from taxes and social contributions in 2022, reflecting efforts to internalize negative externalities (INE, 2023). This was higher than the EU-27 average of 5% (Eurostat, 2023). However, the 2022 ratio decreased from 2021, when it was 6.6%, marking the lowest percentage since 1995. Consequently, Portugal’s gap with the EU-27 average narrowed from one percentage point in 2021 to 0.3 percentage points in 2022. Additionally, most of this tax revenue comes from taxes on oil, with minimal contributions from taxes on pollution and resources.
Portugal has recently increased its environmental subsidies to enhance its environmental footprint. The latest state budget introduces three new green taxation measures: a levy on ultralight plastic bags, incentives for scrapping end-of-life vehicles, and an increase in the Single Circulation Tax for older vehicles. These initiatives complement existing subsidies, such as tax incentives for energy rehabilitation works in buildings and the purchase of electric cars.
However, despite these proactive steps, the OECD has noted that Portugal’s green tax policies still lack consistent incentives to effectively reduce energy and water consumption and divert waste from landfills (OECD, 2023). This observation suggests that while progress has been made, more comprehensive and impactful measures are still needed to achieve significant environmental improvements.
Citations:
ANI – Agência Nacional de Inovação. 2023. “Indicadores do SIFIDE.”
https://www.ani.pt/pt/financiamento/incentivos-fiscais/sifide/
INE – Instituto Nacional de Estatística. 2023. “Impostos e taxas com relevância ambiental 2022.” https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=593750697&DESTAQUESmodo=2
Eurostat. 2023. “Environmental tax revenues.”
https://ec.europa.eu/eurostat/databrowser/view/env_ac_tax/default/table?lang=en
OECD. 2023. “OECD Environmental Performance Reviews: Portugal 2023.” https://www.oecd.org/environment/country-reviews/oecd-environmental-performance-reviews-portugal-2023-d9783cbf-en.htm
ANI – Agência Nacional de Inovação. 2023. “Indicadores do SIFIDE.”
https://www.ani.pt/pt/financiamento/incentivos-fiscais/sifide/
INE – Instituto Nacional de Estatística. 2023. “Impostos e taxas com relevância ambiental 2022.” https://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=593750697&DESTAQUESmodo=2
Eurostat. 2023. “Environmental tax revenues.”
https://ec.europa.eu/eurostat/databrowser/view/env_ac_tax/default/table?lang=en
OECD. 2023. “OECD Environmental Performance Reviews: Portugal 2023.” https://www.oecd.org/environment/country-reviews/oecd-environmental-performance-reviews-portugal-2023-d9783cbf-en.htm
Slovenia
As the European Environment Agency (2023) reported, the share of environmental taxes in total tax revenue varies among EU member states. Slovenia is among the countries that have seen the largest decrease (by more than 2%) between 2010 and 2021 – from 9.4% to 7.2%. According to the Slovenian Statistical Office (2023), environmental taxes accounted for 2.86% of GDP in 2022, compared to 3.12% in 2021. In 2022, €1,633 million in environmental taxes were paid in Slovenia, only 0.02% more than in the previous year. Energy taxes accounted for the largest share of environmental taxes (84.1%), followed by transport taxes (12.5%) and taxes on pollution and resources (3.4%). Private households paid 53.4%, and the corporate sector paid 43.1% of environmental taxes (3.5% were paid by non-residents – foreign transit across Slovenian territory).
Taxpayers in Slovenia can apply for a reduction in the tax base of up to 100% of the sum of investments in research and development during a certain period, up to a maximum of the amount of the tax base.
Taxpayers in Slovenia can apply for a reduction in the tax base of up to 100% of the sum of investments in research and development during a certain period, up to a maximum of the amount of the tax base.
Citations:
European Environment Agency. 2024. “Slovenia.” https://www.eea.europa.eu/en/analysisindicators
European Environment Agency. 2024. “Slovenia.” https://www.eea.europa.eu/en/analysisindicators
Netherlands
Under the terms of the 2019 Dutch Climate Accords – a “triumph for poldering” – large companies will face a carbon tax while also receiving subsidies to adopt cleaner practices using green hydrogen. Furthermore, they will be permitted to capture and store greenhouse gases in seabeds. Coal-fired power plants, scheduled to close by 2030, will receive “green” subsidies to facilitate the transition to greener technologies. By that year, thanks to new wind turbines and solar panels, 75% of Dutch electricity is expected to be sourced from renewable sources.
In terms of internalizing positive and negative externalities, the government adopts a balanced approach that differs from the conventional economic wisdom preferred by most experts. Rather than relying solely on punitive measures such as carbon taxes and regulatory levies, the government also incentivizes companies to adopt greener technologies through subsidies. This approach reflects a broader struggle between two policy paradigms: that of traditional neoclassical economists on the one hand, who advocate for correcting market failures through negative incentives like taxes and regulatory levies, and that of transition thinkers on the other, influenced by so-called science, technology and society (STS) theories. These latter thinkers argue that market-failure theory alone is not sufficient, and that addressing complexities, dependencies and uncertainties requires a more proactive role from government as a guiding force and coordinator (cf. Mazzucato), as exemplified by Dutch policymakers in various contexts (see e.g., “Circular Economy” and “Effective Climate Action”). Under this paradigm, successful ecological transitions also necessitate positive incentives such as “green” subsidies and tax exemptions for corporations, as well as nudging strategies aimed at citizens.
In terms of internalizing positive and negative externalities, the government adopts a balanced approach that differs from the conventional economic wisdom preferred by most experts. Rather than relying solely on punitive measures such as carbon taxes and regulatory levies, the government also incentivizes companies to adopt greener technologies through subsidies. This approach reflects a broader struggle between two policy paradigms: that of traditional neoclassical economists on the one hand, who advocate for correcting market failures through negative incentives like taxes and regulatory levies, and that of transition thinkers on the other, influenced by so-called science, technology and society (STS) theories. These latter thinkers argue that market-failure theory alone is not sufficient, and that addressing complexities, dependencies and uncertainties requires a more proactive role from government as a guiding force and coordinator (cf. Mazzucato), as exemplified by Dutch policymakers in various contexts (see e.g., “Circular Economy” and “Effective Climate Action”). Under this paradigm, successful ecological transitions also necessitate positive incentives such as “green” subsidies and tax exemptions for corporations, as well as nudging strategies aimed at citizens.
Citations:
extinction rebellion.nl. 2022. “Opinie fossielesubsidie.” https://extinctionrebellion.nl
Me Judice, den Butter. 2023. “Vervang fossiele subsidies door regulerende heffingen.” 6 November.
Me Judice, Metten. 2023. “Belastingvoordelen voor fossiele brandstoffen nog groter.” 23 March.
Bolhuis. 2023. “Beleidseconomen moeten weten wat transitiefalen is.” Economisch Statistische Berichten November 30.
PBL and CPB, Brink et al. 2023. “Afschaffing fossiele energiesubsidies: eerder een hersenkraker dan een no-brainer.”
PBL. 2023. “Afschaffen fossiele subsidies vooral nuttig als het energietransitie stimuleert.” 21 October.
extinction rebellion.nl. 2022. “Opinie fossielesubsidie.” https://extinctionrebellion.nl
Me Judice, den Butter. 2023. “Vervang fossiele subsidies door regulerende heffingen.” 6 November.
Me Judice, Metten. 2023. “Belastingvoordelen voor fossiele brandstoffen nog groter.” 23 March.
Bolhuis. 2023. “Beleidseconomen moeten weten wat transitiefalen is.” Economisch Statistische Berichten November 30.
PBL and CPB, Brink et al. 2023. “Afschaffing fossiele energiesubsidies: eerder een hersenkraker dan een no-brainer.”
PBL. 2023. “Afschaffen fossiele subsidies vooral nuttig als het energietransitie stimuleert.” 21 October.
UK
Fuel, tobacco, and alcohol duties, which together account for around 5% of total tax revenue, aim to internalize negative externalities. The fuel tax escalator (later renamed “stabilizer”), introduced in 1993, was intended to rise faster than inflation to deter fuel use. However, successive chancellors have often chosen not to apply it during periods of rising oil prices or wider cost-of-living pressures. Fuel duties were cut as a temporary measure in the 2022 budget and maintained for another year in the 2023 budget.
For businesses, various tax incentives stimulate investment and research, internalizing positive externalities. These incentives were reinforced in the November 2023 fall statement.
For businesses, various tax incentives stimulate investment and research, internalizing positive externalities. These incentives were reinforced in the November 2023 fall statement.
6
Finland
In Finland, there has been no major shift away from the taxation of labor toward environmental taxation; the share of environmental taxes in tax revenues remains moderate. There are also few other taxes and subsidies introduced to internalize negative externalities. These include taxes on tobacco products and alcoholic drinks. Similarly, very few taxes and subsidies have been introduced to internalize positive externalities. For example, there are no subsidies for basic research that benefits the public, except that foundations do not need to pay tax, regardless of the field of operation of the foundation.
Greece
The Greek tax system is somewhat aligned with the goal of internalizing externalities, particularly through the imposition of environment-related taxes. Among OECD countries, Greece has the highest environmental taxes relative to total tax revenues (OECD 2020).
The Hellenic Foundation for Research and Innovation (ELIDEK) provides grants for basic research across all scientific disciplines, with recent funding supported by Greece’s National Recovery and Resilience Plan, part of the EU Recovery and Resilience Facility (ELIDEK 2022). However, in terms of fund absorption, private businesses in Greece lag behind state universities and research institutions, which conduct the majority of basic research.
The Hellenic Foundation for Research and Innovation (ELIDEK) provides grants for basic research across all scientific disciplines, with recent funding supported by Greece’s National Recovery and Resilience Plan, part of the EU Recovery and Resilience Facility (ELIDEK 2022). However, in terms of fund absorption, private businesses in Greece lag behind state universities and research institutions, which conduct the majority of basic research.
Citations:
ELIDEK. 2022. “Basic Research Financing.” https://www.elidek.gr/wp-content/uploads/2022/03/%E2%80%9CBasic-Research-Financing%E2%80%9D-Horizontal-support-for-all-Sciences.pdf
OECD. 2020. “Environmentally related tax revenue.” https://stats.oecd.org/Index.aspx?DataSetCode=ERTR
ELIDEK. 2022. “Basic Research Financing.” https://www.elidek.gr/wp-content/uploads/2022/03/%E2%80%9CBasic-Research-Financing%E2%80%9D-Horizontal-support-for-all-Sciences.pdf
OECD. 2020. “Environmentally related tax revenue.” https://stats.oecd.org/Index.aspx?DataSetCode=ERTR
Ireland
Irish taxes and subsidies are underdeveloped in their capacity to address environmentally harmful behavior. However, a carbon tax has been introduced and will be increased over time by statute. Revisions to corporation tax have introduced positive externalities for corporate research and development, which arguably benefits the public. There are also limited tax subsidies for investment in personal education.
The share of environmental taxes in total tax revenue was low at 1.3% in 2021, down from 2.42% in 2006, and below the 2021 OECD average of 2% (OECD 2021). There has been substantial critique of the spillover impact of Irish taxation on the Global South. Killian (2020) documents case studies of Irish spillover effects and negative externalities on Kenya and other African states. Tax Justice Ireland highlights the impact of Irish tax policy on child development in the Global South. The Irish revenue system is well-regarded internationally for its administrative capacity and has contributed to capacity-building projects in Eastern Europe and beyond. It is not yet clear how recent OECD-led BEPS changes will impact negative and positive externalities, and Ireland is resisting some changes regarding the scope of what might be defined as corporate tax.
The Apple case is indicative of how Ireland handles externalities, often minimizing revenue intake and risking perceptions of complicity in tax avoidance, with potential compliance costs and reputational risks. After years of litigation regarding whether Ireland had facilitated Apple in avoiding the payment of €13 billion in corporate tax, the European General Court ruled in July 2020 that the European Commission “did not succeed in showing to the requisite legal standard” that Apple had received tax advantages from Ireland. However, the European Commission appealed this decision to the European Court of Justice. In November 2023, Advocate General Giovanni Pitruzzella recommended that the European Court of Justice annul the decision of the lower court, arguing that it did not correctly assess “the substance and consequences of certain methodological errors that, according to the Commission decision, vitiated the tax rulings.” The final judgment from the European Court of Justice is expected in 2024 and often reflects the Advocate General’s recommendations.
The share of environmental taxes in total tax revenue was low at 1.3% in 2021, down from 2.42% in 2006, and below the 2021 OECD average of 2% (OECD 2021). There has been substantial critique of the spillover impact of Irish taxation on the Global South. Killian (2020) documents case studies of Irish spillover effects and negative externalities on Kenya and other African states. Tax Justice Ireland highlights the impact of Irish tax policy on child development in the Global South. The Irish revenue system is well-regarded internationally for its administrative capacity and has contributed to capacity-building projects in Eastern Europe and beyond. It is not yet clear how recent OECD-led BEPS changes will impact negative and positive externalities, and Ireland is resisting some changes regarding the scope of what might be defined as corporate tax.
The Apple case is indicative of how Ireland handles externalities, often minimizing revenue intake and risking perceptions of complicity in tax avoidance, with potential compliance costs and reputational risks. After years of litigation regarding whether Ireland had facilitated Apple in avoiding the payment of €13 billion in corporate tax, the European General Court ruled in July 2020 that the European Commission “did not succeed in showing to the requisite legal standard” that Apple had received tax advantages from Ireland. However, the European Commission appealed this decision to the European Court of Justice. In November 2023, Advocate General Giovanni Pitruzzella recommended that the European Court of Justice annul the decision of the lower court, arguing that it did not correctly assess “the substance and consequences of certain methodological errors that, according to the Commission decision, vitiated the tax rulings.” The final judgment from the European Court of Justice is expected in 2024 and often reflects the Advocate General’s recommendations.
Citations:
OECD. 2021. OECD Environmental Performance Reviews: Ireland 2021. Paris: OECD Publishing. https://doi.org/10.1787/9ef10b4f-en
Tax Justice Network. 2022. “Ireland’s Responsibility for the Impacts of Cross-border Tax Abuse on the Realisation of Children’s Economic, Social and Cultural Rights.” https://taxjustice.net/wp-content/uploads/2022/08/Ireland_CRC_submission_august2022.pdf
Killian, S., O’Regan, P., Lynch, R., Laheen, M., and Karavidas, D. 2022. “Regulating Havens: The Role of Hard and Soft Governance of Tax Experts in Conditions of Secrecy and Low Regulation.” Regulation and Governance 16 (3): 722-737.
Tax Justice Network. 2021. “Corporate Tax Haven Index - 2021 Results.” https://taxjustice.net/country-profiles/ireland/
OECD. 2021. OECD Environmental Performance Reviews: Ireland 2021. Paris: OECD Publishing. https://doi.org/10.1787/9ef10b4f-en
Tax Justice Network. 2022. “Ireland’s Responsibility for the Impacts of Cross-border Tax Abuse on the Realisation of Children’s Economic, Social and Cultural Rights.” https://taxjustice.net/wp-content/uploads/2022/08/Ireland_CRC_submission_august2022.pdf
Killian, S., O’Regan, P., Lynch, R., Laheen, M., and Karavidas, D. 2022. “Regulating Havens: The Role of Hard and Soft Governance of Tax Experts in Conditions of Secrecy and Low Regulation.” Regulation and Governance 16 (3): 722-737.
Tax Justice Network. 2021. “Corporate Tax Haven Index - 2021 Results.” https://taxjustice.net/country-profiles/ireland/
Israel
Several measures are used to internalize externalities. There is a special tax on gasoline for cars and on the purchase of cars. Additionally, there is a special tax on tobacco products, including electronic cigarettes. The previous government promoted a tax on road usage during rush hours, although this initiative was dropping following the elections. The previous government also added a tax on plastic tableware and cutlery. However, the current government has removed this tax.
The government provides tax deductions for projects defined by the Authority for Innovation as research and development. Additionally, recognized research and development companies are entitled to other deductions and benefits.
The government provides tax deductions for projects defined by the Authority for Innovation as research and development. Additionally, recognized research and development companies are entitled to other deductions and benefits.
Latvia
Latvia imposes several taxes on environmentally harmful activities, including a natural resources tax and an excise tax on fossil fuel, both with varying rates. The transport tax also varies based on CO2 emissions. Since 2022, Latvia has introduced subsidies to encourage the use of electric cars – €4,500 per new car and €2,250 per secondhand car. However, electric cars have not been widely adopted due to inadequate charging infrastructure.
The parliament passed a law in December 2023 to provide additional support for mortgage holders facing difficulties with increased mortgage payments. The financial sector opposed the legislation, arguing that it would have detrimental effects on the banking industry and signaling the government’s intent to interfere in the market. The ECB also warned of potential negative impacts on future investments in Latvia.
The parliament passed a law in December 2023 to provide additional support for mortgage holders facing difficulties with increased mortgage payments. The financial sector opposed the legislation, arguing that it would have detrimental effects on the banking industry and signaling the government’s intent to interfere in the market. The ECB also warned of potential negative impacts on future investments in Latvia.
Citations:
European Central Bank. 2023. “Key ECB Interest Rates.” https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
LSM. 2023. “ECB flags ‘potential negative consequences’ of Latvia’s mortgage relief law.” https://eng.lsm.lv/article/economy/banks/18.12.2023-ecb-flags-potential-negative-consequences-of-latvias-mortgage-relief-law.a535809/
3. Baltijā restartējas atbalsts elektromobiļiem: kādi ir subsīdiju modeļi? https://uzladets.lv/baltija-restartejas-atbalsts-elektromobiliem-kadi-ir-subsidiju-modeli/
European Central Bank. 2023. “Key ECB Interest Rates.” https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html
LSM. 2023. “ECB flags ‘potential negative consequences’ of Latvia’s mortgage relief law.” https://eng.lsm.lv/article/economy/banks/18.12.2023-ecb-flags-potential-negative-consequences-of-latvias-mortgage-relief-law.a535809/
3. Baltijā restartējas atbalsts elektromobiļiem: kādi ir subsīdiju modeļi? https://uzladets.lv/baltija-restartejas-atbalsts-elektromobiliem-kadi-ir-subsidiju-modeli/
Lithuania
Many analysts and several international institutions, such as the IMF and the OECD, have for many years been recommending both shifting and expanding the tax burden to somewhat reduce labor taxation and instead increase property and environmental tax rates. Lithuania’s taxes in these areas are among the European Union’s least ambitious. The minister of environment in 2021 proposed a revamp to car taxation by abolishing the registration tax and introducing an annual tax, which would then be gradually increased over the succeeding years. He suggested it as a way of addressing negative externalities and reducing emissions, although opponents criticized the tax for not targeting the precise externalities and for being regressive. The parliament rejected the proposal in early 2022 amid disagreement among coalition partners and criticism from the opposition.
In 2023, the parliament adopted the increase of excise duties for certain types of fossil fuels, slated to come into effect in 2024 and later. The policy includes the abolishment of existing excise tax exemptions for certain types of fossils fuels, increases in the excise tax rate for diesel fuel, and increases in the excise tax rate for gasoline over time. However, the resulting public discontent made it likely that some of these policies would be withdrawn in the 1st half of 2024. Beginning in 2024, excise taxes on different types of alcohol were also increased.
There is also a reduced profit tax rate applied for investments in research and innovation. This policy is intended to motivate businesses to invest in such activities, which are associated with positive externalities. However, not all taxes intended to internalize positive externalities have functioned this way; rather, since they have not been abolished, they have become likely sources of negative externalities. One example is a reduced corporate income tax rate for micro enterprises, which was intended to incentivize their growth but instead provoked a bunching of enterprises at the threshold of the higher tax rate, while also producing incentives for engaging in other sorts of unproductive activities.
In 2023, the parliament adopted the increase of excise duties for certain types of fossil fuels, slated to come into effect in 2024 and later. The policy includes the abolishment of existing excise tax exemptions for certain types of fossils fuels, increases in the excise tax rate for diesel fuel, and increases in the excise tax rate for gasoline over time. However, the resulting public discontent made it likely that some of these policies would be withdrawn in the 1st half of 2024. Beginning in 2024, excise taxes on different types of alcohol were also increased.
There is also a reduced profit tax rate applied for investments in research and innovation. This policy is intended to motivate businesses to invest in such activities, which are associated with positive externalities. However, not all taxes intended to internalize positive externalities have functioned this way; rather, since they have not been abolished, they have become likely sources of negative externalities. One example is a reduced corporate income tax rate for micro enterprises, which was intended to incentivize their growth but instead provoked a bunching of enterprises at the threshold of the higher tax rate, while also producing incentives for engaging in other sorts of unproductive activities.
Citations:
World Bank. 2022. “TSI Project 20LT09 Micro Enterprises and Self-employed Tax Regulatory Assessment for Removing Hurdles to Growth: Report Assessing the Impacts of Tax Optimization and Bunching in MEs and Self-employed and Legal Entities Responses to Size-based Tax Rates in Lithuania. Output 2.”
Kalanta, Marius. 2021. “Special Corporate Income Tax Rate for Micro-Enterprises in Lithuania: Productive or Unproductive Incentive?” Enterprise Lithuania Report. Vilnius.
World Bank. 2022. “TSI Project 20LT09 Micro Enterprises and Self-employed Tax Regulatory Assessment for Removing Hurdles to Growth: Report Assessing the Impacts of Tax Optimization and Bunching in MEs and Self-employed and Legal Entities Responses to Size-based Tax Rates in Lithuania. Output 2.”
Kalanta, Marius. 2021. “Special Corporate Income Tax Rate for Micro-Enterprises in Lithuania: Productive or Unproductive Incentive?” Enterprise Lithuania Report. Vilnius.
Poland
In line with EU recommendations, environmental pollution-related taxes in Poland primarily target gases, particulates and CO2 emission rights. However, Poland is one of the few EU members that has not implemented a tax for owners of the most emissions-intensive vehicles. The government is introducing taxes to encourage healthy eating, such as a sugar tax, and is limiting access to unhealthy or dangerous products.
In 2016, Poland introduced the Research and Development Tax Relief (R&D relief) policy. Since 2022, companies have been able to deduct up to 200% of costs identified as innovation-related in their records. The government later expanded these incentives to include additional reliefs, such as the IP Box program, relief for innovative employees, relief for prototypes or the use of robotics, and expansion, which became eligible for tax deductions for the first time in 2023. Taxpayers have the right to an additional deduction of 50% of costs incurred for robotization from the tax base for the period 2022 – 2026.
In 2016, Poland introduced the Research and Development Tax Relief (R&D relief) policy. Since 2022, companies have been able to deduct up to 200% of costs identified as innovation-related in their records. The government later expanded these incentives to include additional reliefs, such as the IP Box program, relief for innovative employees, relief for prototypes or the use of robotics, and expansion, which became eligible for tax deductions for the first time in 2023. Taxpayers have the right to an additional deduction of 50% of costs incurred for robotization from the tax base for the period 2022 – 2026.
Spain
Spain performs slightly below the OECD average in green budgeting. In 2021, environment-related tax revenues amounted to 1.8% of GDP, compared to the OECD average of 2.0%. Pollution and resource taxes on waste, water pollution, and abstraction account for a small portion of environmental tax revenue. Additionally, energy and transport taxes contribute minimally to this category.
While autonomous communities have a history of legislating environmental taxes, the Spanish government adopted its first green taxes in 2023. A finance ministry expert committee recommended increasing environmental taxes, including higher rates on car registration, diesel, and agricultural fuel, and new taxes on airplane tickets.
Investments in knowledge transfer and job creation benefit from special tax treatment. Spain’s corporate tax rate within the eurozone is moderate at 25%, with incentives and tax exemptions reducing the effective rate to around 20%. Spanish regulations permit the carryforward of unused tax credits for research, development, and innovation (RDI) investments. Spain has one of the most advantageous “patent box” regimes in the EU, allowing up to a 60% exemption of net income from specific intangible assets.
Tax policies vary among autonomous communities. For example, the Community of Madrid approved a tax reduction for foreign investors in 2023, targeting individuals who have lived outside Spain for at least five years and wish to invest and transfer their tax residence to the region. Specifically, 20% of the total investment in financial assets or real estate may be deducted.
While autonomous communities have a history of legislating environmental taxes, the Spanish government adopted its first green taxes in 2023. A finance ministry expert committee recommended increasing environmental taxes, including higher rates on car registration, diesel, and agricultural fuel, and new taxes on airplane tickets.
Investments in knowledge transfer and job creation benefit from special tax treatment. Spain’s corporate tax rate within the eurozone is moderate at 25%, with incentives and tax exemptions reducing the effective rate to around 20%. Spanish regulations permit the carryforward of unused tax credits for research, development, and innovation (RDI) investments. Spain has one of the most advantageous “patent box” regimes in the EU, allowing up to a 60% exemption of net income from specific intangible assets.
Tax policies vary among autonomous communities. For example, the Community of Madrid approved a tax reduction for foreign investors in 2023, targeting individuals who have lived outside Spain for at least five years and wish to invest and transfer their tax residence to the region. Specifically, 20% of the total investment in financial assets or real estate may be deducted.
Citations:
OECD. 2023. “Countries on Green Budgeting.”
https://www.oecd.org/publication/government-at-a-glance/2023/country-notes/spain-a91a38d3/
OECD. 2023. “Countries on Green Budgeting.”
https://www.oecd.org/publication/government-at-a-glance/2023/country-notes/spain-a91a38d3/
The tax system is only somewhat aligned with the goal of internalizing externalities.
5
Belgium
Belgium performs moderately well in terms of environmental taxes. In 2021, revenues from environmental taxes were above the European average, constituting 2.49% of GDP compared to the EU average of 2.24%. Energy taxes were the primary component, accounting for 1.77% of GDP, closely aligning with the EU average of 1.76%. Transport taxes made up 0.62% of GDP, surpassing the EU average of 0.41%, while taxes on pollution and resources amounted to only 0.11%, slightly exceeding the EU average of 0.08%. Environmental taxes represented 5.72% of total tax revenue, higher than the EU average of 5.52%. Despite this, some significant shortcomings remain. According to a report in the Flemish newspaper De Standaard, Belgium allocated €2.79 billion in subsidies for diesel fuel sales, with a substantial portion benefiting foreign companies. Fossil fuel subsidies are estimated at €13 billion, or 2.8% of GDP, leading one expert to assert that “in Belgium, we subsidize fossil fuels more than we tax them” (see press article). Regarding research and innovation, following the 2002 Barcelona European Council meeting, the Belgian federal government implemented tax incentives to bolster business R&D starting in 2005. These tax benefits, in addition to significant direct support (subsidies) from the three Belgian regions, included partial exemption from withholding tax on R&D personnel wages and tax credits for R&D investment and patent income deduction. The popularity of these incentives grew steadily, resulting in substantial budgetary costs, reaching €2,782 million in 2019 (0.59% of GDP), primarily driven by an increase in corporate income taxation benefits. Dumont (2022) suggests that certain corporate tax incentives may lead firms to reduce their own R&D spending. Given the significant portion of budgetary costs for supporting business R&D, enhancing the efficiency of R&D tax incentives by implementing a cap on total public support is recommended.
Citations:
Share of environmental taxes in total tax revenues: https://ec.europa.eu/eurostat/databrowser/view/SDG_17_50/default/table?lang=en
Environmental tax revenues: https://ec.europa.eu/eurostat/databrowser/view/env_ac_tax/default/table?lang=en
Press article on diesel subsidies: https://www.standaard.be/cnt/dmf20230731_97443573
Press article on environmental taxation:
https://www.lesoir.be/art/d-20230616-H02P2D?referer=%2Farchives%2Frecherche%3Fdatefilter%3Dlastyear%26sort%3Ddate%2Bdesc%26word%3Destelle%2Bcantillon
Dumont, M. 2022. Public Support to Business Research and Development in Belgium-Fourth evaluation. Federal Planning Bureau. https://www.plan.be/publications/publication-2305-en-public_support_to_business_research_development_in_belgium_fourth_evaluation
Share of environmental taxes in total tax revenues: https://ec.europa.eu/eurostat/databrowser/view/SDG_17_50/default/table?lang=en
Environmental tax revenues: https://ec.europa.eu/eurostat/databrowser/view/env_ac_tax/default/table?lang=en
Press article on diesel subsidies: https://www.standaard.be/cnt/dmf20230731_97443573
Press article on environmental taxation:
https://www.lesoir.be/art/d-20230616-H02P2D?referer=%2Farchives%2Frecherche%3Fdatefilter%3Dlastyear%26sort%3Ddate%2Bdesc%26word%3Destelle%2Bcantillon
Dumont, M. 2022. Public Support to Business Research and Development in Belgium-Fourth evaluation. Federal Planning Bureau. https://www.plan.be/publications/publication-2305-en-public_support_to_business_research_development_in_belgium_fourth_evaluation
Canada
There is little connection between the tax system and externalities in Canada, except for carbon taxes. Canada applies some environmental taxes and research subsidies to address minor externalities. For example, some provinces and local governments tax or charge for landfill waste disposal to cover disposal costs. Fuel taxes are expected to cover some road maintenance costs and help capture local air pollution impacts but underestimate environmental damage per liter. Many forms of water pollution and toxic chemical releases remain untaxed.
In one major deviation from this model, the federal government of Canada has implemented carbon pricing mechanisms and successfully imposed them on the provinces, though current prices are likely below estimated climate damage costs.
Positive externalities are supported through tax credits, which aid some R&D spending by private sector companies. The government of Canada allocates approximately $3 billion annually in generous tax credit incentives through the Scientific Research and Education Development Program.
Research grant programs from tri-council funding agencies also subsidize academic research and graduate training. The spillover benefits of training skilled workers are also not fully captured.
In one major deviation from this model, the federal government of Canada has implemented carbon pricing mechanisms and successfully imposed them on the provinces, though current prices are likely below estimated climate damage costs.
Positive externalities are supported through tax credits, which aid some R&D spending by private sector companies. The government of Canada allocates approximately $3 billion annually in generous tax credit incentives through the Scientific Research and Education Development Program.
Research grant programs from tri-council funding agencies also subsidize academic research and graduate training. The spillover benefits of training skilled workers are also not fully captured.
Citations:
https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/evolution-program-a-historical-perspective.html
https://www.canada.ca/en/revenue-agency/services/scientific-research-experimental-development-tax-incentive-program/evolution-program-a-historical-perspective.html
Hungary
In 2023, several new pieces of legislation in the environmental sector were introduced, but administrative problems remain. Taxation has not been harmonized with ecological sustainability and quality goals for a long time. Although environmental tax revenues in Hungary have been slightly higher than the EU average, issues persist with Hungary’s tax structure due to numerous exemptions and special taxes (e.g., subsidies for reorganizing the coal sector). Over the past two decades, environmentally related tax revenue has consistently declined as a percentage of total tax revenue. VAT on cross-border digital services (27%) has been introduced. Recently, the government introduced the extended producer responsibility (EPR) principle, significantly impacting green taxation. So far, green taxation has served as both a financing tool for the Hungarian waste management system and a measure to increase the price level of environmentally harmful goods. The first role will be shifted to the new EPR regime, and the sole purpose of the green tax will be tackling harmful goods via price (Andersen, 2023). This will also affect the circular economy.
To address CO2 emissions, the government introduced new payment obligations for operators of facilities receiving free emission allowances (Government Decree No. 320/2023. (VII. 17.)), also known as the CO2-quota tax. Additionally, transaction fees will apply.
In terms of internalizing positive externalities, the government provides selected companies with corporate tax breaks and direct subsidies in exchange for investments in R&D, education and training through the so-called Strategic Partnership Agreements. Although these agreements have not been fully transparent and have provided advantages to these companies on top of the already extremely low corporate income tax rate, they have led to partnerships between higher education institutions and companies, mostly in the car manufacturing industry and related disciplines (Martin 2023).
To address CO2 emissions, the government introduced new payment obligations for operators of facilities receiving free emission allowances (Government Decree No. 320/2023. (VII. 17.)), also known as the CO2-quota tax. Additionally, transaction fees will apply.
In terms of internalizing positive externalities, the government provides selected companies with corporate tax breaks and direct subsidies in exchange for investments in R&D, education and training through the so-called Strategic Partnership Agreements. Although these agreements have not been fully transparent and have provided advantages to these companies on top of the already extremely low corporate income tax rate, they have led to partnerships between higher education institutions and companies, mostly in the car manufacturing industry and related disciplines (Martin 2023).
Citations:
Andersen. 2023. “Extended Producer Responsibility – Significant changes in the Hungarian green tax legislation.” https://hu.andersen.com/news/extended-producer-responsibility-significant-changes-in-the-hungarian-green-tax-legislation
Martin, J. P. 2023. “From Dual Economy to Parallel Universes: Attitudes and Coping Strategies of Businesses vis-à-vis Crony State Capitalism – the Case of Hungary.” CIPE Working Paper. https://www.cipe.org/resources/from-dual-economy-to-parallel-universes-attitudes-and-coping-strategies-of-businesses-vis-a-vis-crony-state-capitalism-the-case-of-hungary/
Andersen. 2023. “Extended Producer Responsibility – Significant changes in the Hungarian green tax legislation.” https://hu.andersen.com/news/extended-producer-responsibility-significant-changes-in-the-hungarian-green-tax-legislation
Martin, J. P. 2023. “From Dual Economy to Parallel Universes: Attitudes and Coping Strategies of Businesses vis-à-vis Crony State Capitalism – the Case of Hungary.” CIPE Working Paper. https://www.cipe.org/resources/from-dual-economy-to-parallel-universes-attitudes-and-coping-strategies-of-businesses-vis-a-vis-crony-state-capitalism-the-case-of-hungary/
Italy
Italy provides some subsidies for basic research, but aside from programs to attract foreign researchers or Italians conducting research abroad (e.g., individual tax credits), there are no significant subsidies or tax credits for research institutions or universities. Regarding taxes and subsidies to address environmentally harmful behavior, Italy is among the most demanding countries in the EU, although most revenues are not invested in environmental policy.
Citations:
https://www.openpolis.it/come-vengono-gestite-e-impiegate-le-tasse-ambientali
Istat. 2023. “GLI INCENTIVI ALLE IMPRESE PER LA RICERCA E SVILUPPO.” https://www.istat.it/it/files//2023/09/Focus_incentivi_RS_DEFINITIVO.pdf
https://www.openpolis.it/come-vengono-gestite-e-impiegate-le-tasse-ambientali
Istat. 2023. “GLI INCENTIVI ALLE IMPRESE PER LA RICERCA E SVILUPPO.” https://www.istat.it/it/files//2023/09/Focus_incentivi_RS_DEFINITIVO.pdf
Japan
The share of environmental taxes in Japan’s total tax revenues (1.27%) is below the OECD average (1.40%). As the Global Warming Countermeasures Tax on the consumption of fossil fuels is set at a very low level of JPY 289 (approximately €1.80) per ton of CO2, it only internalizes environmental pollution costs to a very limited extent. In addition, the carbon levy, planned to be introduced in 2028, is expected to be set at the relatively low level of JPY 1,500 (approximately €9.50) per ton of CO2.
Despite hikes in recent years, the tobacco excise tax remains relatively low, which fails to combat health issues connected with smoking. Japan performs better in internalizing the problem of traffic congestion through high automobile taxes.
Japan has a comprehensive R&D tax credit system, under which tax deductions are available for basic or applied research and experimental development up to the ceiling of 25% of the corporation’s or 40% of the R&D venture corporation’s national corporate income tax liability. In September 2023, the Kishida government considered the introduction of additional tax breaks for investments in areas such as batteries, electric vehicles and semiconductor chips.
Despite hikes in recent years, the tobacco excise tax remains relatively low, which fails to combat health issues connected with smoking. Japan performs better in internalizing the problem of traffic congestion through high automobile taxes.
Japan has a comprehensive R&D tax credit system, under which tax deductions are available for basic or applied research and experimental development up to the ceiling of 25% of the corporation’s or 40% of the R&D venture corporation’s national corporate income tax liability. In September 2023, the Kishida government considered the introduction of additional tax breaks for investments in areas such as batteries, electric vehicles and semiconductor chips.
Citations:
Influence Map. 2023. “Carbon Taxes.” https://japan.influencemap.org/policy/Carbon-Tax-5346
Masao Ichikawa and Takahiro Tabuchi. 2022. “Are Tobacco Prices in Japan Appropriate? An Old but Still Relevant Question.” Journal of Epidemiology 32 (1). https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8666320/
Innotax. 2023. “General type R&D tax credit.” https://stip-pp.oecd.org/innotax/incentives/JPN1
Leussink, Daniel. 2023. “Japan to deliberate tax breaks for major corporate investments.” https://www.reuters.com/markets/asia/japan-govt-deliberate-tax-breaks-major-corporate-investments-2023-09-27/
OECD. “Environmentally related tax revenue.” https://stats.oecd.org/Index.aspx?DataSetCode=ERTR
Influence Map. 2023. “Carbon Taxes.” https://japan.influencemap.org/policy/Carbon-Tax-5346
Masao Ichikawa and Takahiro Tabuchi. 2022. “Are Tobacco Prices in Japan Appropriate? An Old but Still Relevant Question.” Journal of Epidemiology 32 (1). https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8666320/
Innotax. 2023. “General type R&D tax credit.” https://stip-pp.oecd.org/innotax/incentives/JPN1
Leussink, Daniel. 2023. “Japan to deliberate tax breaks for major corporate investments.” https://www.reuters.com/markets/asia/japan-govt-deliberate-tax-breaks-major-corporate-investments-2023-09-27/
OECD. “Environmentally related tax revenue.” https://stats.oecd.org/Index.aspx?DataSetCode=ERTR
USA
The complex U.S. tax system contains a variety of incentives for activities associated with positive externalities. For example, the federal government provides tax credits for renewable energy projects (Newell et al. 2019). The Investment Tax Credit (ITC) and the Production Tax Credit (PTC) support investment and production in wind, solar, and other renewables (Sherlock 2020).
Another example of a tax institution that internalizes positive externality is the Low-Income Housing Credit. It encourages the construction and refurbishment of affordable housing by providing tax credits to developers working on projects in this area.
Negative externalities are more often addressed at the state level through the tax system (Hines 2007). For example, many states impose various “sin taxes” on alcohol, tobacco, recreational drugs, gambling, fast food, and sugar (Perkins 2014). The federal government briefly had a luxury tax, introduced in 1990, which applied to high-end cars, planes, yachts, and fur coats (Green 2010). However, the tax proved so unpopular with the wealthy that it was repealed by the Bill Clinton administration in 1993 (Conlon et al. 2022).
Another example of a tax institution that internalizes positive externality is the Low-Income Housing Credit. It encourages the construction and refurbishment of affordable housing by providing tax credits to developers working on projects in this area.
Negative externalities are more often addressed at the state level through the tax system (Hines 2007). For example, many states impose various “sin taxes” on alcohol, tobacco, recreational drugs, gambling, fast food, and sugar (Perkins 2014). The federal government briefly had a luxury tax, introduced in 1990, which applied to high-end cars, planes, yachts, and fur coats (Green 2010). However, the tax proved so unpopular with the wealthy that it was repealed by the Bill Clinton administration in 1993 (Conlon et al. 2022).
Citations:
James Hines. 2007. “Taxing Consumption and Other Sins.” Journal of Economic Perspectives.
Rachel Holmes Perkins. 2014. “Salience and Sin: Designing Taxes in the New Sin Era.”
Rebecca Green. 2010. “The Ethics of Sin Taxes.” Public Health Nursing.
Christopher Conlon, Nirupama Rao, and Yinan Wang. 2022. “Who Pays Sin Taxes? Understanding the Overlapping Burden of Corrective Taxes.” Review of Economics and Statistics.
Sherlock, Molly. 2020. “The Renewable Electricity Production Tax.” Congressional Research Service.
Richard Newell, William Pizer, and Daniel Raimi. 2019. “U.S. Federal Government Subsidies for Clean Energy: Design Choices and Implications.” Energy Economics.
James Hines. 2007. “Taxing Consumption and Other Sins.” Journal of Economic Perspectives.
Rachel Holmes Perkins. 2014. “Salience and Sin: Designing Taxes in the New Sin Era.”
Rebecca Green. 2010. “The Ethics of Sin Taxes.” Public Health Nursing.
Christopher Conlon, Nirupama Rao, and Yinan Wang. 2022. “Who Pays Sin Taxes? Understanding the Overlapping Burden of Corrective Taxes.” Review of Economics and Statistics.
Sherlock, Molly. 2020. “The Renewable Electricity Production Tax.” Congressional Research Service.
Richard Newell, William Pizer, and Daniel Raimi. 2019. “U.S. Federal Government Subsidies for Clean Energy: Design Choices and Implications.” Energy Economics.
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Australia
The Australian taxation system has been criticized for its low taxation of the high-polluting mining and energy sectors (Denniss 2022). Furthermore, recent Australian governments have been reluctant to use the tax system to advance progress toward environmental goals, following a short-lived experiment with a carbon tax (2012-14) during the government led by Julia Gillard, which was immediately abandoned by her successor as prime minister, Tony Abbott. Recent research (Rajabi 2023) demonstrates that a carbon tax could be both economically and environmentally effective in Australia.
More broadly, there is relatively little built into the Australian taxation system to internalize externalities, with notable exceptions being excise taxes on tobacco, alcohol, and motor vehicle fuel. However, in the case of motor vehicle fuel, the rationale is raising revenue for road building and maintenance rather than addressing externalities, since farmers and miners using vehicles that do not use public roads are entitled to rebates on fuel excises. The exemption of fresh food, healthcare, and education from the goods and services tax, and large subsidies for health care and education, can also be interpreted as improving incentives to undertake activities with positive externalities.
More broadly, there is relatively little built into the Australian taxation system to internalize externalities, with notable exceptions being excise taxes on tobacco, alcohol, and motor vehicle fuel. However, in the case of motor vehicle fuel, the rationale is raising revenue for road building and maintenance rather than addressing externalities, since farmers and miners using vehicles that do not use public roads are entitled to rebates on fuel excises. The exemption of fresh food, healthcare, and education from the goods and services tax, and large subsidies for health care and education, can also be interpreted as improving incentives to undertake activities with positive externalities.
Citations:
Denniss, R. 2022. “It’s Time to Tax Mining and Energy Giants Properly.”The Australia Institute. https://australiainstitute.org.au/post/its-time-to-tax-mining-and-energy-giants-properly-struggling-australians-should-share-in-their-record-profits
Rajabi, M.M. 2023. “A carbon tax can have economic, not just environmental benefits for Australia.” The Conversation. https://theconversation.com/a-carbon-tax-can-have-economic-not-just-environmental-benefits-for-australia-210380
Denniss, R. 2022. “It’s Time to Tax Mining and Energy Giants Properly.”The Australia Institute. https://australiainstitute.org.au/post/its-time-to-tax-mining-and-energy-giants-properly-struggling-australians-should-share-in-their-record-profits
Rajabi, M.M. 2023. “A carbon tax can have economic, not just environmental benefits for Australia.” The Conversation. https://theconversation.com/a-carbon-tax-can-have-economic-not-just-environmental-benefits-for-australia-210380
Slovakia
The fact that the Slovak tax system is not an effective tool to internalize negative externalities is stressed by the 2022 European Semester Report (European Union, 2022: 8-9): “Fiscal policy and taxation are not yet sufficiently supporting the green transition. Addressing the pricing of CO2 emissions is essential, as they are generally too low given their environmental costs. Despite the economy’s energy intensity, environmental taxes were only 2.4% of GDP in 2020. Road taxes and vehicle registration fees could better reflect emission intensity by increasing them for polluting vehicles. Additionally, environmental charges related to waste management and air pollution could be adjusted accordingly to better promote resource efficiency.”
Taxes are not used to internalize positive externalities; this government role is realized through subsidies. Various subsidies exist for this purpose. However, the European Semester 2022 (European Union, 2022: 8) report states, “The use of economic incentives and disincentives lacks coherence and is not always in line with the polluter pays and the user pays principles.”
Taxes are not used to internalize positive externalities; this government role is realized through subsidies. Various subsidies exist for this purpose. However, the European Semester 2022 (European Union, 2022: 8) report states, “The use of economic incentives and disincentives lacks coherence and is not always in line with the polluter pays and the user pays principles.”
Citations:
European Union. 2022. 2022 Country Report – Slovakia. Brussels: European Union.
European Union. 2022. 2022 Country Report – Slovakia. Brussels: European Union.
Switzerland
Corresponding to the general liberal-conservative approach of Swiss tax policy, taxes do little to internalize externalities. The rejection of a comprehensive CO2 law in 2017 in a popular vote supports this observation. This law would have internalized negative externalities. After the popular vote, the federal government proposed a new law in December 2021, substantially watering down the failed CO2 law and renouncing any new attempts to tax CO2 emissions. Rather, this new measure relies almost entirely on positive incentives, and any attempts to increase the price of gasoline by additional taxes have been opposed vehemently in the political process.
However, there are also examples of tax policy that incentivizes environmental protection. A CO2 levy on fossil fuels has existed since 2008. Two-thirds of its revenue is redistributed to the population and the economy. For citizens, this redistribution is administered via a reduction of health insurance premiums. Similarly, there has been a tax on volatile organic compounds – for instance, those present in solvents and those responsible for ozone pollution – since 2000 (OFEV n.d.); once again, the benefits are redistributed to the population through the health insurance system. Evidently, these initiatives are far from enough to foster a general dissuasive dynamic regarding environmentally harmful behavior.
However, there are also examples of tax policy that incentivizes environmental protection. A CO2 levy on fossil fuels has existed since 2008. Two-thirds of its revenue is redistributed to the population and the economy. For citizens, this redistribution is administered via a reduction of health insurance premiums. Similarly, there has been a tax on volatile organic compounds – for instance, those present in solvents and those responsible for ozone pollution – since 2000 (OFEV n.d.); once again, the benefits are redistributed to the population through the health insurance system. Evidently, these initiatives are far from enough to foster a general dissuasive dynamic regarding environmentally harmful behavior.
Citations:
OFEV: https://www.bafu.admin.ch/bafu/fr/home/themes/air/info-specialistes/mesures-de-protection-de-l-air/taxe-d_incitation-sur-les-cov.html
OFEV: https://www.bafu.admin.ch/bafu/fr/home/themes/air/info-specialistes/mesures-de-protection-de-l-air/taxe-d_incitation-sur-les-cov.html
The tax system is not at all aligned with the goal of internalizing externalities.
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