Shifting consumer attitudes are persuading more businesses to ‘go green’, reducing their impact on the environment. Now the European Commission is planning to encourage them to do even more, by calling for its member states to inflict tax penalties on companies that refuse to change their ways.
The European Union set tough targets to cut carbon dioxide emissions at a heads of government meeting earlier this year. The goal is to cut Europe’s CO2 emissions by 20% by 2020, compared with 1990 levels. That is a big ask, considering that EU countries are struggling to meet their existing targets under the Kyoto Protocol on climate change. These call for a reduction in emissions of 8% by 2012.
To hit its target, the Commission has so far focused on encouraging companies to reduce harmful emissions by joining its carbon trading scheme. But this will not be enough on its own: the EU will have to find new ways to change business behaviour if it is to meet its new goal. Hence the plan for tougher taxes.
The paper covers a wide range of areas where the Commission would like to see taxes used to encourage green behaviour. These include energy use, the impact of transport on the environment, sustainable water management, waste management, protection of biodiversity and reduction of air pollution.
The idea might sound reasonable, but is it? And the Commission will have to do something to hit its targets, but tax is a sensitive political issue in Europe. Some of the Union’s member states are vehemently opposed to any policy that talks about harmonising tax rates across Europe, seeing this as a threat to their national sovereignty. The Commission would need the unanimous support of the union’s 27 members to introduce legislation, which is currently unlikely.
Nevertheless, the Commission has had some success with harmonised green taxes, using worries about climate change as a clever way of combating objections. There are minimum fuel tax rates that are considerably higher than in the United States, which makes fuel at the pump more expensive and thereby encourages car manufacturers to produce environmentally friendly cars. In the EU, vehicles are on average 30% more fuel-efficient than in the US.
Germany currently holds the rotating EU presidency and is trying to push the unpopular tax agenda forward. ‘Citizens are more and more confronted by the consequences of the changing climate and of environmental pollution,’ said German Finance Minister Peer Steinbruck recently. ‘I think the understanding and the willingness to pay for it have increased.’
Businesses are unlikely to be quite so enthusiastic, if reaction to one of the Commission’s early efforts to harmonise green taxes is anything to go by. Plans to force an increase in commercial diesel prices have been heavily criticised. There have been objections from industry groups - which could be expected - and also from within the Commission itself.
The aim here is to stamp out what the Commission calls ‘fuel tourism’, where trucks take lengthy detours so they can fill their tanks in the countries where diesel is cheapest. This adds to journey miles, causing unnecessary pollution.
Differences in national rates also make it hard for individual countries to introduce their own green taxes on fuel. Germany’s green taxes have encouraged drivers to nip over the border into Poland or the Czech Republic to buy fuel. This cost the country €1.9bn in lost revenue in 2004.
The Commission first tried to tackle this issue back in 2002, when it published plans to harmonise tax levels on commercial diesel. Member states couldn’t agree, so the idea failed. It came back to the problem in March of this year. A new proposal called for an increase in the minimum tax on commercial diesel fuel by nearly 20% over the next seven years. In 2012, excise duties would be lifted from the current €302 per 1,000 litres to €359. In 2014, the tax would be raised to €380 per 1,000 litres.
Fuel tourism isn’t the only target of diesel taxes. The Commission says a harmonised rate on diesel would remove the fiscal advantage that diesel cars have over petrol cars, which would help to reduce harmful emissions of Nitrogen oxide.
The International Road Transport Union, which represents coach and truck operators, said that low-taxing countries would have to increase their rates, but that high-taxers would hike theirs too, maintaining the existing differentials. ‘This will have the effect of penalising the European road transport industry’, it said in a statement, adding that the environmental benefits ‘if any, will be negligible’.
The International Automobile Federation (FIA) has also criticised the plan, saying that the private car consumer will suffer.
‘Any moves that lead to a tax differentiation between commercial and private vehicle use would lead to a further increase in the cost of motoring and increased administrative bureaucracy and is not in line with current environmental policy goals’, it said. Members of the Commission have attacked it, too. Charlie McCreevy, responsible for the internal market, said it was anti-competitive.
If businesses are concerned about the impact of the diesel tax proposals, how might the Commission’s wider adoption of green taxes affect them? Over the long term, it might be good news. ‘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 Jacqueline McGlade, executive director of the European Environment Agency.
Long-term trends show there is plenty of scope for businesses to think harder about how they consume energy, she says. Between 1960 and 2000, business innovation saw labour productivity in the EU - when there were 15 members - increase by 270%. But, in the same period, energy productivity rose by just 20%.
What about concerns that green taxes will damage competitiveness? McGlade cites studies from the OECD and others that show this is rarely the case, or at least not at a macro-economic level. Some companies would struggle to absorb their external pollution costs, but they tend to be the ones that already have uncompetitive products and cost-bases, she says.
‘Europe has shown that it is prepared to take the lead in the fight against climate change’, says McGlade. ‘What is needed now is greater leadership by the EU on the roll-out of taxation reform.’
John Hontelez, Secretary General of the European Environmental Bureau, also wants to see the Commission raising its game, accusing it of being too cautious. ‘Basically, the Commission has merely offered its services to EU countries to voluntarily share best practice’, says Hontelez, whose organisation is the largest federation of environmental citizens’ groups in Europe. ‘This isn’t going to make any difference. Many polluting activities are still effectively subsidised because their environmental impacts are not reflected in the price.’ Without a major EU-wide initiative, ‘this is simply not going to change’, he says.
