Author: McKitrick, Ross.
Summary: This paper reviews the debate on the double dividend hypothesis and presents empirical evidence to suggest that the double dividend approach can significantly reduce the costs of CO2 emissions control in Canada and possibly eliminate aggregate welfare and output reductions due to implementation of a carbon tax.
Relevance: This is a fairly technical paper. However, it is one of the only studies that has explored the possibility of a double dividend in the context of carbon taxes in Canada.

Encouraging Environmentally Sustainable Growth in Canada

Author: Organisation for Economic Co-operation and Development.
Summary: In this paper, the OECD reflects on Canada’s use of tax incentives related to non-renewable resources, as well as the use of voluntary agreements in Canada. The author evaluates Canada’s progress in reaching environmental objectives related to water, Atlantic fisheries, toxins, air pollution and climate change. The report includes several recommendations for areas in which increased use of fiscally oriented policies could benefit the environment.
Relevance: This paper provides a comprehensive evaluation of Canada’s progress towards environmental sustainability. It concludes that Canada is lagging behind other countries in the move towards sustainability, and that there is substantial scope in Canada for increasing the use of economic instruments to achieve environmental objectives. One of the main conclusions of the author is that greater reliance on price signals will be needed to put Canada on a more sustainable growth path.

Environmental Tax Shift: A Discussion Paper for British Columbians

Author: Taylor, Amy, Mark Jaccard, and Nancy Olewiler.
Summary: This is a discussion paper on environmental tax shifting that was commissioned by the B.C. Ministry of Finance. It describes what environmental tax shifting is and the rationale for its implementation. It describes the benefits and challenges of environmental tax shifting and presents several examples of environmental tax shift policies that have been implemented in various jurisdictions. Examples of policies that could be implemented in British Columbia are identified, but no analysis or recommendations are presented.
Relevance: This paper represents some of the only work that has been done specifically on environmental tax shifting in Canada at a government level.

Environmental Taxes: Recent Developments in Tools for Integration

Author: European Environment Agency (EEA).
Summary: The purpose of this paper is to provide an overview of the use and implementation of environmental taxes in Europe. It briefly sets out the rationale for environmental taxes and identifies the environmental themes towards which they are directed. The paper evaluates the effectiveness of the environmental taxes from an environmental point of view. As well, it describes how to overcome barriers, such as impacts on low-income earners and competitiveness.
Relevance: This paper provides a good summary of environmental taxation initiatives in European countries. This is one of the few evaluations of the environmental effectiveness of environmental taxes that has been done. It provides a good cross-country comparison of the use of environmental taxes, including Australia, Austria, Belgium, Canada, Denmark, Finland, France, Iceland, Italy, Mexico, Norway, Portugal, Sweden and the United States.

European Environmental Taxes and Charges: Recent Experience, Issues and Trends

Author: Ekins, Paul.
Summary: This is a survey of the use of environmental taxes and charges in OECD countries. The use of environmental taxes increased by 50% between 1987 and 1994 in OECD countries. Environmental taxes have been pursued on their own or as part of a systematic shift in taxes away from labour and onto the use of environmental resources. A number of ways of mitigating impacts on competitiveness and low-income earners exist and have been implemented.
Relevance: This paper provides the results of a recent survey of environmental taxes and charges in OECD countries. There is also a good discussion of the options for mitigating negative impacts of environmental taxes. In addition, this paper is useful for people who want background information on environmental taxes. Specifically, the paper includes a discussion of the rationale for environmental taxes and types of environmental taxes.

Green Budget Reform: An International Casebook of Leading Practices

Author: Gale, Robert, Stephan Barg, and Alexander Gillies.
Summary: This book gives detailed examples of taxation and subsidy measures that were developed in order to achieve specific results. It shows how governments have met some of the challenges of integrating environmental and economic issues in developing tools that fit their needs. Examples are from various sectors, including: energy and automotive; agriculture; air and water; waste management; and environmental and development policy. Examples from numerous countries are described, including Canada, the United States, Australia, Denmark, Germany, the United Kingdom, France, Sweden and the Netherlands.
Relevance: The book provides a great, easy-to-read summary of each of these policies, including the impetus for the policy and the details of the policy development. Several of the examples are Canadian.

Greening the Budget: Budgetary Policies for Environmental Improvement

Author: Clinch, J. Peter, Kai Schlegelmilch, Rolf-Ulrich Sprenger, and Ursula Triebswetter.
Summary: This book is based on the work of a European research network called Concerted Action on Market Based Instruments, funded by the European Union. The focus of the book is on the use of budgets as instruments of environmental policy. It examines the elements of the public budget that affect the environment and explores the scope for greening both the revenue and expenditure side.
Relevance: Topics include: environmentally damaging subsidies, the introduction of new green taxes following the polluter pay principle, and the issue of public purchasing and green procurement.

Greening the Golden State: A Tax Reform for California’s Future

Author: Hammond, Jeff, Gary Wolff, Clifford Cobb, and Mark Frame.
Summary: This book provides several illustrations of what environmental tax shifting could look like in the state of California. It describes various taxes or fees that could be reduced as part of a revenue-neutral environmental tax shift. Taxes discussed include personal and corporate income taxes, payroll taxes, sales taxes and property taxes. Also, a number of different options for replacement fees/taxes that could be implemented or increased are presented. These include energy, electricity, air pollution, water pollution, toxic waste, transportation and parking, land use, solid waste and water use.
Relevance: This book provides background information on issues of regressivity and revenue neutrality.

Harnessing the Tax Code for Environmental Protection

Author: Hoerner, J. Andrew.
Summary: This is a survey of state-level environmental taxation, subsidy and credit initiatives in the United States. The study lists the most important rationales for state environmental tax provisions, illustrating them with examples from state practice.
Relevance: This is the most comprehensive survey of state-level initiatives in place in the U.S. This paper is useful for familiarizing readers with trends in the United States. The paper describes the breadth of instruments used.

Toward a Canadian Agenda for Ecological Fiscal Reform: First Steps

Author: National Roundtable on the Environment and the Economy.
Summary: This report is a summary of the National Round Table on the Environment and the Economy’s (NRTEE’s) EFR Program Phase 1. The NRTEE’s EFR program was established to gain insight into the key challenges and opportunities related to EFR, and to explore the potential for EFR in Canada. Phase 1 of the program reviewed the international experience with EFR, and initiated three case studies on the potential application of EFR in the Canadian context.
Relevance: This is some of the most substantive work that has been done on ecological fiscal reform in Canada. The NRTEE’s EFR program concluded that there is a role for EFR in Canada, and EFR is uniquely appropriate to the challenge of implementing sustainable development. They also concluded that EFR can offer many benefits over traditional policy instruments, and open new opportunities.

Ecological Tax Reform/Environmental Tax Shift – Ecological tax reform (ETR), or environmental tax shifting, can involve adjusting existing taxes to make them sensitive to environmental impacts. An example of this kind of policy is exempting ethanol from fuel taxes based on the environmental merits of the use of ethanol as a motor fuel. ETR might also involve levying new ecological taxes to offer incentives to reduce environmental impacts and “recycling” the revenue from the new taxes. The revenue can be recycled in numerous ways, including funding reductions in existing taxes, new credit or subsidy programs, or refunds to taxpayers. An example of this kind of ETR policy is the introduction of carbon taxes, combined with reductions in payroll taxes.

Double Dividend – The use of ecological tax reform (ETR) policies has often been praised for resulting in a double dividend of benefits. The first dividend results from the environmental improvement that ensues as a result of the incentive effects associated with ecological taxes. The second dividend results from a reduction in the cost of the tax system when existing distortionary taxes are reduced. For example, to the extent that payroll taxes distort the cost of labour and thus discourage employers from hiring additional employees, the second dividend would be the increased employment that results when payroll taxes are reduced. Not all ETR policies will result in a double dividend.

Deadweight Loss – A result of the impact of a tax that distorts economic signals. For example, to the extent that a tax on labour distorts the true cost of labour and thus discourages employers from hiring employees, a tax placed on labour will result in deadweight loss equal to the amount of employment that is discouraged by the tax.

Pigouvian Taxes – Taxes levied on the quantity of a good/service consumed – e.g., a tax on the carbon content of fossil fuels. This tax does not vary by price and is the kind of tax that could incorporate the value of a negative externality into the price of a good or service.

Ad Valorem Taxes – Taxes levied on the price of a good/service that are equal to a certain percentage of the price – i.e., a sales tax.

Environmental Externality – Environmental damage that results from the consumption and/or production of a good or service that is not directly reflected in the price charged for the good or service or compensated for in some other, non-price way. Environmental externalities usually exist because relatively open access to the environment (air, water, land) means that it can be treated as a free receptacle for the wastes of production and consumption. Reduction in air quality due to vehicle emissions is an example of an environmental externality.

Market Failure – The result when the price of goods and services do not reflect the true costs of producing and consuming those goods and services. In the context of environmental externalities, a market failure occurs when the price of goods and services does not reflect full societal costs, which are conventional financial costs plus environmental externalities. The result is that market prices are too low and more of the good or service is likely to be consumed than would be the case if all costs were taken into account. Many argue, therefore, that environmental externalities need to be included in the cost of producing and consuming goods and services in order for society to make better decisions about how much of the good or service to produce and/or consume.

Feebate System – A system that places a charge on the purchase of a good that is associated with high environmental impacts (e.g., inefficient automobiles) and provides a rebate or credit towards the purchase of a good that is associated with relatively lower impacts (e.g., efficient automobiles).

Property Tax Shift – A process that involves shifting some of or the entire property tax base from buildings to land, removing or reducing a disincentive to improve or renovate older, rundown buildings.

Revenue Recycling – Recycling revenue that is generated from a particular tax back to society in the form of refunds, subsidies, credits or reductions in existing taxes. This process implies a substantial degree of transparency with respect to the amount of revenue that is raised and the amount that is recycled.

Revenue-Neutral Revenue Recycling – Occurs when all of the revenue associated with a new tax is recycled so that the introduction of the tax does not result in an increase in total government revenues.

Regressivity – Occurs when high-income taxpayers pay a smaller fraction of their total income towards a tax than low-income taxpayers. Carbon taxes are considered regressive because they take a greater portion of income from low-income earners than from high-income earners. Regressivity can be mitigated through tax exemptions.

Polluter Pay Principle – The principle used to allocate the cost of pollution prevention and control measures in order to encourage the rational use of scarce environmental resources. The polluter pay principle requires that those who cause environmental damage and destruction be responsible for the costs associated with prevention, mitigation or control of that impact.

Own Price Demand Elasticity – A measure of the response of demand to a change in price. It is calculated as the percentage change in demand per percentage change in price. The own price demand elasticity reflects current preferences, technology and the availability of substitute goods. Demand is considered elastic when a percentage change in price results in an equal or greater percentage change in demand. This would be the case, for example, if the price of wind power declined by 5% and the demand for wind power increased by more than 5%. Demand is considered inelastic when a percentage change in price results in a proportionately smaller change in demand. This would be the case if the price of wind power declined by 5% and the demand for wind power increased by less than 5%.

Cross Price Demand Elasticity – A measure of the response of the demand for one good to a change in the price of another good – for example, the increase in the demand for wind power that results from an increase in the price of coal.

Border Tax Adjustment – Used to limit impacts of environmental taxation on export markets, while maintaining the effect of the tax locally. Border tax adjustments (BTAs) involve imposing equivalent taxes on imported goods and eliminating the environmentally related tax on exported goods.

Similarly, EFR can provide incentives to participate in voluntary programs. Again, this might involve the use of credits, subsidies or taxes to entice households or businesses to participate in a voluntary program. Alternatively, the EFR policy might be used to provide funds needed to finance the voluntary program, while not necessarily directly providing incentives to participate in the program. In this case, the fiscal policy might involve levying a small tax on an activity or good and using the revenue from the tax to fund a voluntary program. A good example of such a policy is the Agricultural Management Account of the state of Iowa’s Groundwater Protection Fund. The Agricultural Management Account is partially made up of revenue from pesticide manufacturer registration fees, pesticide dealer licensing fees and nitrogen fertilizer taxes. The revenue from these charges is used to finance, among other programs, a voluntary education and demonstration project on crop management techniques that reduce the need for fertilizer and pesticide application.

A broad restructuring occurs when a portion of the total government tax burden is shifted from the current tax base to an activity or good whose consumption results in negative ecological impacts. For example, the government might shift a portion of the tax burden from employment to carbon dioxide emissions by reducing taxes on income and increasing them on fossil fuel consumption. Or it could reduce corporate capital taxes and implement an offsetting tax increase on automobile use. A broad restructuring might also involve a shift in government expenditure, credit or subsidy programs away from pollution-intensive activities – for example, fossil fuel exploration and consumption – and towards more environmentally benign goods or activities by offering incentives such as subsidies for the purchase of zero-emission automobiles.

A sector-specific EFR occurs when the reform takes place within a particular sector. A sector-specific EFR might involve levying an emissions tax on a particular industry and reinvesting the revenue from the tax in the same industry in the form of a subsidy for investment in pollution reduction technologies. A second example of a sector-specific ecological fiscal reform would be adjusting or shifting some level of a current subsidy program so that it is increasingly consistent with sustainable development objectives, where the subsidy nonetheless remains within the same industry. For example, a portion of a subsidy that is currently awarded to the agriculture industry and online insurance industry might be modified to support certain behaviour within the same industry, such as a movement towards organic farming or the formal preservation of agricultural land.

Taking an even more micro perspective, EFR can occur at the level of the individual consumer. This might involve, for example, levying a tax on the purchase of a particular good and using the revenue from the tax to finance refunds to individuals in return for certain behaviour, such as participation in recycling programs. A common example of this kind of reform is a deposit refund system for beverage containers. Here, the same person pays the charge associated with the purchase of a beverage container and receives the rebate upon recycling the container. Similar policies could be applied to other products, including automobiles, household appliances, small engines and computer hardware.

Nitrogen Oxide Emissions – Sweden taxes nitrogen oxide emissions from large combustion plants engaged in energy production. The revenue from the tax finances rebates to energy producers in proportion to their relative energy production.

Excess Manure – Both Belgium and the Netherlands levy surplus manure charges based on emissions of phosphorus and/or nitrogen in excess of environmentally acceptable maximum loads per hectare.

Land Conservation – Canada has provisions in its Income Tax Act that promote the donation of ecologically sensitive lands, covenants, easements and servitudes for conservation purposes to the Crown, a qualified registered charitable organization or any incorporated Canadian municipality. A donation qualifies for a 100% income tax deduction.

Carbon Dioxide Emissions – Sweden, Norway, Denmark, the United Kingdom and Finland levy charges on carbon dioxide emissions.

Solid Waste – The United Kingdom taxes waste going to landfills. The revenue from the tax finances reductions in employers’ National Insurance contributions.

Hazardous Waste – Both the state of Vermont and Denmark have EFR policies that address issues associated with hazardous waste. Vermont levies higher tax rates on hazardous waste than any of the other U.S. states. The Vermont hazardous waste tax is based on the quantity of hazardous waste generated, as well as the ultimate destination of the waste – that is, whether it is destined for recycling, treatment or land disposal. The majority of the tax revenues are deposited into an environmental contingency fund used to mitigate the environmental impacts of hazardous waste and to improve hazardous waste management throughout Vermont. Denmark has made a concerted effort through the use of EFR policy to reduce hazardous waste and toxic chemicals in the country. The Danish government has agreed to eliminate emissions of all hazardous chemicals into the environment by 2020. To that end, it has introduced taxes on chlorofluorocarbons (CFCs), halons and chlorinated solvents.

Transportation – Numerous countries have tax differentials for fuels, which reflect, to a certain degree, the environmental impacts associated with the use of the particular fuel. British Columbia, for example, exempts natural gas and ethanol and methanol blends of 85% or more from provincial fuel taxes. Similarly, almost all OECD countries that still allow leaded fuel tax leaded and unleaded fuel at different rates. Encouraging technologies that augment fuel consumption such as tire studs instead of tire chains is another method.

Congestion – In Italy, Milan has introduced a peak period area-licensing scheme, whereby car owners must buy a permit to take their vehicles into the city during certain times of the day.

Toxins – The state of Connecticut recently implemented a policy to help reduce hazardous waste and associated impacts from dry cleaning facilities in the state. Under this program, dry cleaners are eligible for up to $50,000 (U.S.), to be used to offset site remediation costs and implement pollution prevention measures within the facility. The funds are financed by a 1% surcharge on dry cleaning services in the state.

Material Throughput – Various product charges are in place around the world to try to reduce material throughput. For example, product charges are levied on batteries, pesticides, beverage containers, plastic bags, throwaway cameras and razors, industrial packaging and disposable cutlery.

Automobiles – Several countries, including the United Kingdom, Denmark and Germany, levy charges to discourage the purchase of high-polluting vehicles. In these policies, charges on vehicle sales are based on the relative emissions associated with a particular vehicle such as a dodge laramie or other. Other countries have implemented programs to encourage the purchase of low-emitting vehicles. For example, the U.S. Energy Policy Act of 1992 included a federal tax credit on the purchase of an electric vehicle. As well, the U.S. National Energy Plan, recently released by President Bush, includes a plan to set aside $4.2 billion (US) over 10 years to finance a temporary income tax credit available to those who purchase hybrid and fuel cell vehicles. In late 1997, when Toyota’s Prius was introduced in Japan, tax incentives and manufacturer subsidies helped to lower relatively high upfront costs by $2,000 (US) to $3,000 (US).

EFR includes reforms or redirections of subsidy, credit and direct expenditure programs, as well as what is commonly called ecological tax reform (ETR), or environmental tax shifting. ETR involves adjusting existing taxes to make them sensitive to environmental impacts, or levying new ecological taxes to offer incentives to reduce environmental impacts and “recycling” the revenue from the new taxes. ETR revenue can be recycled in numerous ways – for example, by using it to fund reductions in existing taxes, new credit or subsidy programs, or refunds to taxpayers.

The creation and maintenance of this site was made possible by the work and support of Environment Canada. At Environment Canada, work and analysis on green fiscal policy and economic incentives is done at the Environmental Economics Branch.