The Role and Development of Environmental Taxes in EU Member States

Generally, taxes are used to raise revenue. Environmental taxes, in contrast, aim to internalise negative externalities by pricing environmentally harmful activities. Unlike regulatory approaches, market-based incentives let agents choose their abatement strategies, promoting cost efficiency and innovation. The design of environmental taxes requires the balancing of various objectives. In addition to ecological effectiveness and economic efficiency, distributional and competitiveness impacts must be considered. A key aspect is the use of tax revenues. A "double dividend" can be achieved by revenue recycling via reducing labour-related taxes or supporting green investments. EU member states already implement a variety of environmental taxes, with a particular focus on energy and transport. Despite existing efforts and the increase in carbon pricing, greater ambition is needed to meet climate policy objectives.