The number of environmental tax policies around the world in 1960 was a lowly 57, according to the OECD. Such innocent times. Skip ahead nearly 65 years into our hyper-climate-change-aware present, and there are some 1,700 green taxes making up 1.4% of global GDP, which is, however, distinctly unimpressive given net-zero targets.
In fact, environmental tax revenue fell over the decade to 2021 in the EU – from 6% in 2010 to 5.4% in 2021 – and the region is now considered a global outlier in the push for net zero greenhouse gas (GHG) emissions.
'We have a plethora of instruments at our disposal but you almost need to rip them up and start again'
In terms of the big earners from environmental taxation, the top 15 (see graphic) unsurprisingly features many European countries, but Canada comes in second and Japan fifth.
Notable by its absence is the US, whose revenue from environmental taxation stood at just 0.7% in 2021, way below top-placed Greece’s 4.2% and the OECD average of 1.5%, which itself has been steadily decreasing from 2.3% in 2010.
Lack of consensus
Environmental tax specialist Jayne Harrold of Evelyn Partners thinks a global consensus is missing. ‘In the UK, for example, a lot of businesses have no clue how much carbon tax they're paying,' she says. 'Carbon is the big problem globally; it requires a consensus because if a country enacts a policy in isolation, it might push it out of step with other countries.
'We have a plethora of instruments at our disposal, especially on climate and carbon, but you almost need to rip it up and start again to form an overall long-term strategy with a clear vision of what we’re trying to achieve and understanding how one policy can affect another, both domestically and globally.' To truly bring about behaviour change, Harrold says, ‘individual taxes need to be well designed, simple and easy to apply, so everyone understands them, from administrators to taxpayers to investors’.
'The costs and compromises of radical reform equate to enormous long-term political costs'
We shouldn’t hold our breath for an alternative model or a global consensus. As ACCA’s report Public trust in tax: building trust in tax for a sustainable future 2023, says: ‘Any fundamental shift in tax bases will take time, and however compelling the logical arguments, tax does not exist in a vacuum. The costs and compromises of radical reform equate to enormous long-term political costs, which few governments have the scope to contemplate.’
Who’s doing what?
Tax instruments are designed to encourage sustainability and change behaviour in both consumers and businesses by discouraging activities that harm the environment while generating revenue for tax authorities.
Typical methods focus on GHG emissions, waste generation, energy consumption, resources, transport and pollution, with examples being carbon pricing mechanisms such as Pigouvian ‘polluter-pays’ taxes, emissions trading schemes (ETS) and carbon border adjustment mechanisms (CBAM), as well as traffic congestion charges, plastic bag fees and landfill taxes.
In 2023, revenues from carbon pricing reached US$104bn, according to the World Bank, with progress in large middle-income countries including Brazil, India, Chile, Colombia and Turkey.
In ASEAN, Singapore leads the way in carbon taxation, as Koh Puay Hoon, RSM Singapore partner and head of tax, explains. ‘The government has committed to increasing tax rates significantly over the coming years – from S$25 per tonne of carbon dioxide equivalent today to S$50-S$80 by 2030 – in order to reduce 36% of emissions by 2030 and work towards net zero by 2050.’
'Sweden's green taxes are well integrated with other national and EU policies'
Armine Alajian, founder of the Alajian Group, notes that Japan was one of the first Asian nations to introduce a carbon tax. ‘The country has since had a steady decrease in emissions, partly through its policy of investing all revenue from the tax towards renewable energy, and energy efficiency projects, helping them move closer to their goal of reducing GHG emissions by 80% by 2050,’ she says.
In Europe, the EU is deploying various schemes as part of its ‘Fit for 55’ package. Referring to the EU’s target of reducing net GHG emissions by at least 55% by 2030, the green plan includes an ETS, the recently rolled out CBAM, and a review of its Energy Taxation Directive (ETD), which is proving a challenge. The ETD sets minimum taxes on fuel, energy and electricity across the EU, which are widely considered too low to support the bloc’s climate objectives. Yet its overhaul has faced consistent delays, with countries wrangling over exemptions for certain sectors and seeking long phase-in periods.
Driving change
Where the rubber hits the road is proving difficult in Australia, too. The Victorian government owes electric vehicle (EV) drivers millions of dollars after a high court found that the state had imposed an unconstitutional tax.
Sticking with vehicles, Iceland may have found a solution to the key environmental taxation conundrum of losing revenue from traditional sources, while incentivising a move to renewable energy (see the AB article ‘Mileage taxation on horizon’). If passed into law, fuel levies will no longer be paid at the pump/battery charger, but via regular bills based on kilometres driven and vehicle weight. It’s claimed the financial incentive will come from the new system heavily favouring EVs.
‘South Korea's environmental tax revenues consistently exceed the OECD average'
Sunil Kansal, head of consulting and valuation services at Shasat, highlights Sweden for its high carbon taxes, but also for its environmental taxes covering sectors such as energy, transport and pollution. ‘Revenue from these is reinvested into renewable energy projects, energy efficiency programmes and social welfare initiatives, thereby enhancing both environmental and social benefits,’ says Kansal. ‘Moreover, Sweden's green taxes are well integrated with other national and EU policies, reinforcing the overall effectiveness of environmental regulations.’
Poland and South Korea are two further examples he cites for their robust approaches to environmental tax, with the latter collecting more than 10% of the country’s total tax revenue.
‘South Korea's environmental tax revenues consistently exceed the OECD average, indicating a well-structured and effective system,’ Kansal says. ‘The country also integrates these taxes into broader policy frameworks, which, along with increased public awareness, support sustainable practices.’
Poland, meanwhile, targets energy, transport and pollution with a range of policies that provide stable revenue also in excess of the OECD average. ‘Poland's focus on air pollution taxes highlights a targeted approach to mitigating environmental harm, reflecting the country's significant air quality issues,’ says Kansal.
