This year not only marks
the 50th anniversary of the Treaty of Rome,
but also 35 years of European Union environmental
policy. The European Environment Agency
celebrates the occasion by looking back
at the last 50 years and reflecting on the
environmental challenges that lie ahead.
What we are celebratingOn 25 March 1957,
six countries signed the Treaty of Rome,
establishing the European Economic Community.
Their aim was to create a Common Market
in order to secure prosperity, peace and
stability. Environment was not part of the
policy package.
But rising awareness, the first major environmental
disasters in the 1950s and the 1960s, and
the iconic images of our fragile planet
as seen for the first time from space, led
to the breakthrough of the environmental
movement in the 1970s.
In 1972, the EU’s environmental policy
was formally founded by a European Council
declaration and the first five-year Environment
Action Programme was adopted.
Today, sustainable development and environmental
protection are among the core values of
the European Union, which now counts 27
Member States. The EU is a frontrunner on
many environmental issues, in terms of policy-making
as well as information-provision.
New water information system for Europe
(WISE) unveiled
WISE (Water Information System for Europe)
— a new interactive Internet tool that informs
Europe’s citizens about water quality and
EU water policy — was jointly released by
the European Commission and the European
Environment Agency (EEA) today at the European
Water Conference 2007 in Brussels.
Becoming wiser about water...
This new tool offers citizens the opportunity
to monitor water quality in their neighbourhood.
By entering their region and river basin
district, the user can check drinking water
quality, bathing water quality and wastewater
treatment. Experts can also find further
data and in-depth analysis of all European
river basins.
The themes and data section of WISE also
provides insight into Europe's rivers, lakes,
reservoirs and groundwater as well as up-to-date
scientific information on water pollution
and water monitoring. Other features include
monthly articles on European water issues,
such as nitrate pollution in Europe's rivers.
The system offers the public access to
water data and information reported by Member
States to the EEA and the European Commission
under the Water Framework Directive. WISE
is the result of a joint project by the
European Commission — DG Environment, Eurostat,
the Joint Research Centre and the European
Environment Agency.
Green tax reform can boost eco-innovation
and employment
A gradual shift of today’s taxes away from
personal income and capital towards taxes
on consumption, pollution, and inefficient
use of energy and resources can boost employment,
eco-innovation and protect the environment.
This is the message Jacqueline McGlade,
Executive Director of the European Environment
Agency, will deliver today at Brussels Tax
Forum 2007. Ecological Tax Reform can help
us to realign a European economy that is
still characterised by an insufficient use
of labour resources and an excessive use
of natural resources
Jacqueline McGlade, Executive Director of
the European Environment Agency
'Ecological Tax Reform can help us to realign
a European economy that is still characterised
by an insufficient use of labour resources
and an excessive use of natural resources,'
says Professor Jacqueline McGlade.
'Taxation for sustainable development'
is the theme of Brussels Tax Forum 2007,
organised by the European Commission. The
conference will bring together policy-makers,
experts, stakeholders and the general public
from all over the world. Discussion will
focus on the contribution that taxation
can make to sustainable development and
how it can promote policy objectives, especially
within environment and
Experience with the Use of Economic Instruments
in Europe
Speech by Professor Jacqueline McGlade
Executive Director, European Environment
Agency at The Brussels Tax Forum: Taxation
for Sustainable Development, Brussels 19
March 2007.
Mr Blokland, Ladies and gentlemen,
I would like to start by offering you two
quick facts.
The average new passenger car in Europe
consumes about 6.5 litres of fuel per 100
kilometres. The average passenger car in
the United States uses over 40% more over
the same distance.
Why is this the case?
Wholesale prices for car fuel are roughly
the same in the European Union as in the
USA. But it is the prices at the pump in
Europe which are different. Here these include
taxes in the range of 60-75%, compared with
only 20-25% in the USA.
Is there a connection between higher fuel
prices and better fuel economy in cars?
Of course, there is!
Is there a cultural difference that makes
Americans adore big cars more than Europeans
do? Maybe there is, but Europeans are also
buying Sports Utility Vehicles. The crucial
point is that Europeans – just as Americans
- are encouraged to buy SUVs if the tax
reduction conditions provide them incentives
to do so.
A basis for motor fuel taxation was laid
down with the European Energy Tax Directive
of 2003. Such taxation is of course what
environmental policy-makers usually refer
to as a market-based instrument (or MBI).
But it is not always recognised as such,
because energy taxation, which was already
widespread when environmental policy making
made its way up the political agenda, never
actually had environmental protection as
its raison d’être. Its main purpose
was to raise funds for government spending.
But it has worked to protect the environment
as well.
The European Environment Agency – which
set up office in Copenhagen in 1994 - has
played a key role in analysing economic
instruments from its earliest days. We needed
to do this in order to fulfil our task of
providing timely, targeted, relevant and
reliable information and assessments that
inform policy and debate.
The five-yearly State of the Environment
and Outlook report, which we published in
November 2005 provided a comprehensive assessment
of the state of Europe’s environment. It
analysed key developments and their main
driving forces. One of the main conclusions
was that reform has at last begun in sectors
like agriculture, transport and energy provision.
But a great deal remains to be done if these
sectors – which impact so heavily upon the
environment - are to perform sustainably.
The Agency’s main strategic contribution
to sustainability is to raise awareness
about environmental problems amongst consumers,
producers, politicians and other policy
makers.
Regulations can of course help internalise
environmental costs, but market-based instruments
provide a continuing and dynamic incentive
to reduce pollution and for economic activities
to become more resource efficient.
So today I would like to draw on our experience
and illustrate some of the lessons that
have been learnt from the application of
market based instruments in Europe in recent
decades[1].
******
Water Pollution
Let me start with water pollution.
It is estimated that the costs of water
pollution control from households and industries
have been about 50 per cent of total environmental
investments in the EU over the last three
decades. In fact, it is generally accepted
that the 1991 Urban Waste Water Treatment
Directive is the single most investment-intensive
directive in the Union’s environmental acquis.
A recent EEA study looked at the experiences
of six Member States in implementing the
directive – Denmark, France, the Netherlands,
Spain, Poland and Estonia.
Each case study reveals interesting experiences
in its own right, but it is the comparison
between the policy measures adopted in the
Netherlands and Denmark that brings out
the clearest lessons about how MBIs can
be useful in both applying the polluter
pays principle and in achieving reduction
of pollution at source.
Already from the 1970s – so before the
introduction of the directive - the Netherlands
adopted both full cost user fees, for access
to water treatment plants, and realistic
levies on discharges of pollution to open
water, based on the polluter pays principle.
The revenues were then used to construct
water treatment plants and crucially also
to provide technical and financial support
to help the most polluting industries to
install cleaner technologies – for example
the food, chemicals and paper industries.
Together with the substantial pollution
levies, this helped them to reduce their
discharges of polluted water, which then
in turn required less treatment plant to
be constructed.
By contrast, Denmark mainly invested in
end-of-pipe public water treatment plants
until around the mid-11000s when they introduced
pollution levies and clean technology support
programmes.By then, however, most treatment
plants were already constructed, and had
begun to generate additional operating and
maintenance costs.
The most important reasons for the different
experiences of these two Member states were
the early use in the Netherlands of full
cost recovery user fees and realistically
high levies on pollution combined with the
targeted application of their recycled revenues
– in other words “hypothecation” - to support
eco-efficiency measures.
In the minds of people then, it was clear
that by using less they would pay less.
If we look at industrial air pollution and
wastes, we can see a similar pattern with
the nitrogen oxide charge in Sweden, the
Landfill Tax in the United Kingdom and other
such taxes elsewhere.
A key design feature of a successful MBI
is steadily rising and pre-announced tax
rates on units of pollution or environmental
pressure. These provide both increased incentives
to innovate and help to maintain tax revenues.
******
Energy and CO2
The European Council meeting here in Brussels
two weeks ago confirmed that energy and
CO2 emissions are at the very top of the
political agenda.
Two significant economic instruments are
in use to address energy consumption and
CO2 emissions: energy taxation and the EU
Emissions Trading System (ETS).
These differ substantially in structure
and functioning, but they are basically
two sides of the same coin – that is, putting
a price on emitting CO2. Taxes do it through
a price on the fuel, while the trading system
creates scarcity by limiting the total CO2
emissions. Taxes have a known price and
an uncertain outcome; ETS has a known outcome
but an uncertain price.
So which is better? The answer is provided
not by theory but by real-world conditions.
Actual conditions and context influence
which of the two approaches – or, which
combination of the two approaches - should
be preferred. Where there is an agreed absolute
policy target, as in the case of the EU
climate change policy, then the ETS is a
logical choice for point sources. At the
same time, energy product taxes are optimal
for addressing the environmental performance
of diffuse sources.
The emissions trading system, which is
the first of its kind in the world, has
alerted financial directors in 11,000 installations
in Europe as to the impact on costs of a
price for their CO2 emissions. In most member
states, these had previously cost them nothing.
Overnight, the externality of climate change
has been made transparent and brought directly
into the bottom line of companies.
******
Transport
I started my speech today on fuel taxation
but let me now return to the subject of
transport more generally.
The environmental externalities of transport
are much larger than those in the energy
production sector, amounting to some 650
billion Euros. Thankfully, at least some
of these costs are being internalised through
a variety of taxes and charges ranging from
fuel taxes and fuel tax differentiation,
distance based charges and congestion charging.
But there are of course limitations to
internalising transport externalities via
fuel taxes in one country when the transport
is international. Germany has experienced
the limitations of taxing transport fuel
in one country. After five years of steadily
increasing taxes, “fuel tank tourism” -
as it is known - undermined the efforts
of the authorities.
The fuel tax differentiation on leaded
and unleaded petrol in many countries in
the 1980s, in combination with other measures,
eliminated sales of leaded gasoline much
more quickly than expected.
Distance based charges for heavy goods
vehicles - which are generally a more efficient
way to internalise transport externalities
than fuel taxes - are being used in Switzerland,
Austria and Germany. These will be extended
across Europe through an improved Eurovignette
Directive over the next few years.
There are also plans in the EU to diversify
annual road taxes according to environmental
characteristics of the car, and gradually
abolish the registration tax applied in
most EU Member States. The aim of this is
of course to charge for the use of the car
rather than the ownership.
Congestion charging is another instrument
that has been successfully introduced in
central London where the steadily rising
revenues are being recycled into improving
public transport.
It therefore makes sense to use a balanced
policy mix – as well as co-ordinating the
use of instruments across Europe - to address
the ever-growing environmental impact of
traffic.
This is particularly true with regard to
subsidies.
One of the main requirements for long term
success in the use of MBIs is the need to
remove environmentally perverse subsidies.
In a technical report that the Agency is
launching today on transport subsidies,
we estimate that nearly 300 billion Euros
of subsidies are being provided every year
across the four transport modes of road,
rail, water and air. These subsidies clearly
need further investigation if we are to
understand properly their environmental
impacts.
******
Ladies and gentlemen,
This short overview of the use of market
based instruments in Europe shows that there
is already a lot of experience out there
to learn from.
But that does not mean that there is universal
acceptance. The introduction of MBIs is
often opposed by three main arguments, all
of which can be rebutted:
First, the counter-argument that “the disadvantaged
will suffer most”. It is of course true
that poor people often pay proportionately
more for energy, transport and housing.
But this can be offset by smart policy design
and the use of exemptions or tax free thresholds.
Second, there is the counter-argument that
“competitiveness will be damaged”. But OECD
evidence and other studies have shown that
this is rarely the case at the macro-economic
level: it is often companies with already
uncompetitive products and cost-bases that
have difficulty absorbing their external
pollution costs. In any case, short term
effects on the competitiveness of particular
sectors can be offset by long introduction
periods; temporary compensatory measures;
border tax adjustments etc.
Third, critics say that ‘environmental
tax revenues will shrink’ as the taxes encourage
the reduction of pollution and increase
eco-efficiency. However, the tax per unit
of pollution, or of inefficient energy use,
can increase as eco-efficiency improves,
thus maintaining both the incentive to do
better and the tax revenue.
Long term trends in labour, energy and
resource productivity illustrate the scope
for shifting the focus of innovation from
labour to nature. Between 1960 and 2000
labour productivity in the EU 15 rose by
270 % whilst materials productivity only
rose 100% but energy productivity rose by
only 20%.
So we need tax reform to realign a European
economy that is still characterised by an
insufficient use of labour resources and
an excessive use of natural resources.
Europe has shown that it is prepared to
take the lead in the fight against climate
change. What is needed now is greater leadership
by the EU on the roll-out of taxation reform
and other market based instruments to embed
sustainable development.
Let me leave you with one closing thought.
Progress in the wider use of market based
instruments for environmental protection
and environmental tax reform depends to
a great extent on how societies see the
role of taxes.
As Franklin D Roosevelt pointed out when
he introduced comprehensive income tax for
the first time in the 1930s: “taxes are
the price of a civilised society”.
Thank you for your attention.
