Taxation in Support of Green Transition: An Overview and Assessment of Existing Tax Practices to Reduce Greenhouse Gas Emissions

The role of environmental taxation, and especially of carbon taxes, as key market-based instrument is widely acknowledged in the literature. In the EU context, carbon taxes are of special relevance to reduce greenhouse gas emissions of the sectors not covered by the European Emission Trading System (ETS). The most important of these sectors is transport, where greenhouse gas emissions have been rising continuously in the past and are now making up for more than 20 percent of overall EU greenhouse gas emissions. The adoption of carbon taxes varies among EU countries and there is considerable heterogeneity in terms of scope and implementation of these policies. Most commonly, these taxes target the transport sector; only some member countries have broadened the scope of fuel carbon taxes to other sectors than transport. Various strategic documents issued at the EU level stress the role of environmental taxes and particularly of fuel taxes as important tools to support the transition to sustainable transport and as one element of tax shifts making European tax systems more growth- and environmentally-friendly. Explicit or implicit carbon taxes are also relevant for other non-ETS sectors, in particular the housing sector. The objective of the study is to define a set of concrete policy recommendations to enhance efforts to reduce the emissions of greenhouse gases effectively. Based on a solid benchmarking, the study will identify tax measures incentivising individuals and/or companies to change towards more sustainable behaviours. The identification of policies will be based on a set of criteria to support EU member countries to develop national strategies that are fair, efficient as well as economically and politically viable to reduce their greenhouse gas emissions. While explicit and implicit taxes are among the key measures explored, related tax measures will also be covered. These include tax incentives aiming at reducing greenhouse gas emissions (e.g., tax breaks for the purchase of electric vehicles) as well as the removal of harmful tax disincentives (e.g., tax privileges for company cars or diesel fuel).