Study on Tax Reform in Europe over the next decades: implications for the environment, for eco-innovation and for household distribution


December 2008 to November 2009

PSI researchers:

Roger Salmons

Simon Dresner

Background, summary and aims

Background, Scope and Aims

This project follows on from the ongoing petrE project (Resource productivity, environmental tax reform and sustainable growth in Europe). It involves seven European research institutions and is led by Kommunalkredit Public Consulting in Vienna. The underlying aim of the project is to identify and outline options for substantial environmental tax reform (ETR) policies across EU member states that would reduce the use of natural resources and the creation of pollution by encouraging eco-innovation, while permitting significant reductions in other taxes, primarily labour taxation, with potentially positive impacts on employment.

Project Design

The project comprises three tasks:

Task A Eco-innovation

The objectives of this task are to assess how eco-innovation technologies and services are likely to respond to the shifts in the tax base resulting from ETR and to analyse the role of complementary public policies; to assess the extra investment which could flow into the development and deployment of these technologies, and the sectoral economic and environmental benefits which such an investment could yield; to assess the impact on employment of such a substantial ETR, with a focus on environmental industries; to assess the implications of a limited earmarking of environmental tax revenues in the framework of the financial policies that directly incentive eco-innovation.

Task B Distributional implications

The objectives of this task are to assess the direct and indirect distributional effects of environmental taxes, associated price changes and of reduced labour taxes, particularly on lower income groups; to explore policy options to offset any negative distributional impacts; to assess the distribution of resultant reductions in pollution and resource use between different income groups, and the extent to which these mitigate “environmental injustice”.

Task C Feasibility of implementing a radical ETR and its acceptance

The objective of this task is to analyse the legal feasibility and political acceptability of a radical ETR within the broader context of EU policies.

PSI’s main involvement is in Task A, in which it is responsible for reviewing the literature on the relationship between environmental policy interventions and innovation, synthesising the findings of this review with the results of economic modelling work undertaken by another project partner and identifying policy implications.

Importance of Research

The project is timely as it addresses two important issues that are currently high on the political agenda – the need to encourage eco-innovation and develop environmental industries; the reduction in the labour tax base relative to total population over the coming decades as the population ages in most EU member states and hence the working population declines. While ETR has the potential to address both of these issues, successful implementation will require careful design to ensure that it provides effective incentives for change, while avoiding undesirable social and economic consequences. This project should provide some significant insights that can make a valuable contribution to this process.