Enabling conditions Box 6: Environmental taxes and innovation

In a recent study, the OECD found that placing a price on pollution creates opportunities for innovation as firms seek out cleaner alternatives. For instance, in Sweden the introduction of a tax on NOx

emissions led to a dramatic increase in

the adoption of existing abatement technology – from 7 per cent of the firms adopting the technology prior to the tax to 62 per cent the following year.

Taxation has an advantage over more

unsustainable competitors. In addition to their price effects, some of these policies also have the potential to increase public revenue, which could make an important contribution to the financing of a green economy. Generally, the key actors involved in creating this change are governments, although, as will be made clear in the subsequent discussion, there are challenges regarding data, implementation and politics that other actors can help overcome.

Environmentally related taxes As noted above, failing to reflect environmental externalities in prices makes it harder for sustainable alternatives to compete, biasing the market against investment in green sectors and retarding the development of green economic activity. A solution to this problem is to use pricing techniques to internalise the cost of the externality in the price of a good or service via a corrective tax, charge or levy, also sometimes referred to as full-cost pricing. Another solution is to use other market-based instruments, such as tradable permit schemes.

Environmentally related taxes can be broadly broken down into two categories: “polluter pays” focused on charging producers or consumers at the point that they are responsible for the creation of a pollutant; and “user

prescriptive instruments, such as regulations, by encouraging innovation across a range of activities from the production process to end-of-pipe measures. The study also found that the design of the measure is of critical importance. Taxes that are levied closer to the source of pollution (e.g. taxes on CO2

emissions versus taxes on motor vehicles)

provide greater opportunities for innovation (OECD 2010b).

pays”, which focuses on charging for the extraction or use of natural resources. Such taxes can provide clear incentives to reduce emissions and use natural resources more efficiently. Environmentally related taxes have also been shown to be particularly effective in stimulating innovation (see Box 6).

The revenue raised from environmental taxes can be used to mitigate the damage done by unsustainable production and consumption; to promote green economic activity; or to contribute to other priority spending areas. The overall tax burden can be kept unchanged by lowering incentive-distorting taxes simultaneously with the introduction of environmentally related taxes. This can help make green taxes politically more acceptable and may also result in a double or even triple dividend – a reduction in pollution at the same time as an increase in efficiency and, possibly, employment (Green Fiscal Commission 2009) (see Box 7).

Tradable permit schemes Like taxes, other market-based instruments, such as tradable permits, are being increasingly used to address a range of environmental issues. As opposed to taxes which fix a price for pollution and then allow the market to determine the level of pollution, tradable permit

Box 7: Green tax shifts – A double dividend for jobs and the environment

Governments can use taxes to put a price on pollution and the use of scarce natural resources, and, at the same time, maintain the same amount of overall tax revenue by proportionately reducing taxes on socially beneficial activity, such as human labour. A study by the International Labour Organization (ILO) on the impact on the global labour market found that

imposing a price on carbon emissions and using the revenue to cut labour costs by lowering social security contributions would create 14.3 million net new jobs over a period of five years, which is equivalent to a 0.5 per cent rise of world employment (ILO 2009). Even carbon-intensive industries see an increase in employment (ILO 2009).

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