Environmental Taxation and Well-Being in the Context of Globalisation and Sustainability

Abstract

Environmental taxation exemplifies and emphasises the global dynamics of sustainability. Combining environmental taxation and well-being can contribute to broad aims of sustainability, such as the survival of humankind, protection of the biosphere and its biodiversity, social solidarity and justice and the preservation and development of our natural and cultural heritage. As a result of environmental market failures, hardly any market price reflects the true overall cost. Environmental taxation can provide suitable counters to such market failures. Global dynamics of sustainability clearly show in issues such as marine litter, air pollution, and climate change. Recognising the reality of 195 different states, environmental taxes would often be most effective if true international cooperation would be achieved. Unilateral environmental taxes may trigger relocation or dumping/burning abroad. The choice for, and design of, environmental taxes affects the distribution of environmental burdens and benefits, now and in the future. Critical scrutiny is needed, for example, if effects of environmental taxes are particularly felt in certain regions or parts of the population, or if such taxes unfairly affect competition. In this chapter, and in relation to environmental taxes and the global dynamics of sustainability, practices and possible strategies are assessed, and recommendations are made.

1. Introduction

Environmental taxation provides key examples of, and attention points regarding, the global dynamics of sustainability. Namely, and in the context of sustainability and of the Sustainable Development Goals (SDGs), environmental taxation can be seen to start from the proposition that an environment adequate for health and well-being is essential for all human beings including future generations and that sustainability requires views of human needs and well-being that also incorporate variables such as health, clean air and water, and the protection of natural beauty [1, 2]. Taxes can be used to stimulate behaviour where it is beneficial to the environment (one may think of incentivising less-polluting automobiles) or to discourage behaviour where such behaviour is detrimental to the environment (for example, specific tax levies on polluting consumption of fuels or plastics) [3]. More in general, environmental taxes can be implemented for instance as charges to cover costs, as instruments to incentivise behaviour, and/or as revenue-raising tools for spending on environmental causes [4]. There is therefore a clear potential role of environmental taxation in supporting sustainability transitions [5].

In a world which is currently divided into 195 states, the classic argument is for state intervention to focus on the externalities of behaviour which is harmful for the environment. However, and especially with the current global forms of organisations and enterprises, it is not always easy to make the polluter pay [6]. Here, the global dynamics of sustainability clearly show. Namely, and notwithstanding that many environmental issues are local, there are also many environmental aspects that have a global dimension to them [7]. Consider, for instance, the cross-border problems caused by marine litter, air pollution, and climate change. Simply put, what is consumed and produced in one country can generate waste elsewhere [8]. Natural processes are to a large extent global, since the impacts of matters such as climate change, overpopulation, and contamination of oceans, rivers, and atmosphere are not contained within states’ borders. In this regard, the possibility of negative as well as positive environmental spillover effects implies that the impacts of actions aimed at the environment oftentimes carry over to also affect well-being abroad [7]. A clear example is that environmental taxes can have cross-border effects on business competition, which may affect the environment via relocation of production and/or via a shift of environmental damage elsewhere [4]. Considering the global aspects of environmental effects (for instance, climate change due to carbon dioxide emissions), such relocation can even result in overall environmental losses in case polluting activities are relocated to a low/non-taxing states that score worse on environmental efficiency [4]. Also in view of the before mentioned, a global distribution of environmental burdens and benefits has been argued in the literature [9].

Moreover, and again in the sphere of sustainability, environmental impacts also carry over into the future. Also here, various dynamics of sustainability are involved. As example: climate change more heavily affects future generations, while emission reductions more heavily affect current and near-future generations [10]. Environmental capacities which are weakening now may reduce nature’s possibilities to sustain the well-being of future generations [8]. Environmental challenges therefore clearly call not only for a short-term but also for a long-term vision [8].

Taking a step back, the current and practical reality is that of the existence of different states that – by and large – each implement and apply their own systems and rules of (environmental) taxation. At the same time, whenever states take on an environmental focus, such requires significant considerations by states in determining who or what are in scope of their environmental taxes. Likewise, there are choices to be made regarding the distribution of environmental benefits and the distributional impacts of environmental taxes, whereby the appreciation of a certain policy instrument also depends on the weight accorded to such distributional aspects [11]. This may directly or indirectly affect dimensions of sustainability and of the SDGs. More specifically, environmental taxes might detract from obtaining distributional objectives, especially insofar lower-income households, relatively speaking, consume more energy-intensive goods [12]. In terms of environmental action, such as environmental taxes, the choice for a specific measure can thus affect whether or not, and if so to what extent, redistribution from rich to poor occurs, for example, through targeting international emission reduction at richer regions [10, 13].

There are examples of environmental taxation that were designed specifically with the international aspects of environmental issues in mind. One example is the European Union (EU)‘s Carbon Border Adjustment Mechanism (CBAM), intended to put a fair price on carbon emitted during the production of carbon-intensive goods that are entering the EU and to thus encourage cleaner industrial production in countries outside the EU [14]. Such measures, at the same time, may raise concerns, for instance, regarding unfair welfare losses in the form of overburdening of developing countries [15], which may adversely affect other dimensions of sustainability and of the SDGs.

The before-mentioned illustrates the global dynamics of sustainability involved in environmental taxation. In this chapter, and in relation to well-being aspects of environmental taxes, the above-introduced questions, practices and possible strategies are further addressed, and recommendations are made.

1.1 Materials and methods

The research was performed through desk studies, most notably literature review and also case law, legislation and policy research. Materials used and referenced are predominantly in the English language. The topic is addressed from multiple perspectives: from the perspective of (tax) law and also, to some extent, from perspectives such as economics, social sciences, politics, and psychology.

The search for the literature was initiated through applying keyword searches – for example, environmental taxes/taxation, well-being, welfare, globalisation, sustainability, sustainable development goals, effectiveness, efficiency and combinations thereof - in various online databases, including the online databases of Tilburg University, Westlaw International and HeinOnline. Snowball search and citation search methods were also applied.

Selection of environmental taxation examples involved non-probability sampling, primarily purposive sampling (i.e., selection of examples based on the expertise and opinion of the author) and also convenience sampling (i.e., selection of easily accessible examples). Examples were sought to allow illustration with a broad potential relevance and with plausible or at least intuitive connections with well-being and/or the global dynamics of sustainability. As examples are primarily used for illustrative purposes, the research output is not expected to be invalidated by possible bias in the example selection process.

Recommendations regarding design and implementation of environmental taxes are often drawn from research focusing on welfare and/or environmental assessments, which research is expected to be relevant, although not all-encompassing and therefore second-best, for drawing inferences regarding well-being and the global dynamics of sustainability.

2. Environmental taxation and well-being in the context of globalisation and sustainability

2.1 Well-being aims in environmental taxes

The focus in this chapter is on environmental taxes and well-being in the context of globalisation and sustainability. A few words here on the terminology used. The environment is taken to be the natural world and all that is related to it. The term ‘environmental taxes’ is employed here in a broad sense to refer to taxes with a specific base that has a clear negative effect on the environment, or which seek to tax certain activities, goods or services so that environmental costs may be included in the respective price and/or so that producers and consumers are oriented towards activities that better respect the environment [16]. The well-being concept is used here to describe that which is ultimately, or non-instrumentally, good for a person while leaving room for the realistic possibility of different concepts of well-being and divergent views on what constitutes or contributes to well-being. Besides human well-being, concern could furthermore be had for the well-being of (other) animals or other species (such as plants) [17], or for the well-being of the environment as such [8]. It should be noted that views on the (desired) scoping of environmental taxes, in the context of well-being and sustainability, depend to a large extent on ecological, social and cultural perspectives, which perspectives may in turn differ depending on, amongst other things, time and place.

What seems rather uncontroversial is the proposition that environmental conditions can affect well-being in many ways, for instance, the joy of living in an environment rich with nature or the impact on health of clean water, pollution levels, noise or natural disasters [18]. Access to green spaces is one of the significant factors (acting independently) to predict mental well-being, whereby dissatisfaction with green spaces is a predictor of poor mental well-being [19]. Areas that face a rapid loss of wild nature often face relatively high poverty and dense human settlement and are also more often characterised by social conflict [17]. The Organisation for Economic Co-operation and Development (OECD) concluded that our well-being relies on resources and environmental services that natural assets provide and that, in order to ensure that progress in living standards does not grind to a halt, new ways of producing and consuming would have to be found, and (how to measure) progress would have to be redefined to include amongst other things contributions to well-being [7]. While information may still sometimes be patchy, the consequences of the great erosion of wild nature for human well-being are likely on the whole to be both negative and substantial, which gives reason for due consideration. There is a need, in this regard, for models that describe the linkages between nature, human well-being and the drivers of ecosystem change, even if those may initially be crude and inaccurate, as well as a considerable need for local field studies quantifying the impacts on human well-being of natural changes [17]. Ideal approaches (such as studying how climate change affects human welfare through health and nature in each area around the world) are, however, expensive and time consuming, as a result of which a choice is often made for monetised estimates using economic values [20]. Expressed in monetary value, and as an example, the environmental damage caused by emissions to air, earth, and water in 2015 in the Netherlands was calculated to translate into a loss of more than 31 billion euro [21]. In any case, environmental taxation is one of the ways which can be employed to try and better reflect (the consequences of) such environmental damage into market prices [21].

As mentioned in the introduction, environmental taxes can be seen to be targeted towards environmental protection (reducing harm done to the environment) [22] or towards environmental promotion (improving environmental conditions). A recommendation that is often found in the literature is that environmental taxes are targeted at the pollutant or polluting behaviour, and aims other than environmental may best be addressed using other or complementary policy instruments [23]. A risk is that attempts to address, via taxation, both environmental and other aims (for example distributional concerns) may result in the tax not achieving either of those aims (or not to satisfaction) [23].

Environmental aims and well-being do not always fully correlate, especially in the short run. For instance, environmentally beneficial innovations and green overhauls can in the short-term result in well-being losses in the forms of, for example, obsolescence of certain current employee skills and of physical capital, unemployment, transport to new industries and new locations, (re)training and equality costs in terms of windfall gains and losses imposed on particular societal groups [24]. Notwithstanding, in the long run and in the absence of proper environmental policy measures, predicted future losses of wildlife are very likely to considerably erode well-being [17]. An example in the field of environmental taxation is that the phasing out of non-environmentally friendly tax exemptions can have negative consequences for some countries or population groups in the short term, while such phasing out may be expected to have overall positive economic, environmental and well-being impacts in the long term [7].

Arguably, an important role that well-being can play in matters of the environment, and in matters of environmental taxation, is to ensure that public policy consideration goes beyond economic (welfare) aspects [25]. Sustainability issues require states to consider environmental measures and effects not in isolation (for instance only with regard to income, or only with regard to health) but in integration, taking into account how different government policies affect each other. In that sense, the combination of environmental taxation and well-being can contribute to pursuing broader aims of sustainability, such as the survival of humankind, the protection of the biosphere and its biodiversity, social solidarity and justice and the preservation and development of our natural and cultural heritage in the long term.

Most often, positive well-being effects of environmental ‘gains’ (e.g. reduced pollution or improved natural conditions) attained through environmental taxes will not be limited to one specific group, as such environmental gains can be expected to spread through positive externalities to positively affect the well-being of many. Poorer regions and persons may be more exposed to environmental damages (e.g. fine-particles pollution, traffic noises or desertification of land) [26], and at the same time, high-income households’ well-being can be affected by ‘luxuries’ such as pristine wilderness or high-quality public parks [24]. The before-mentioned again illustrates the global dynamics of sustainability, which warrant careful consideration when dealing with environmental taxation.

2.2 State intervention in the environment

Given the current lack of an authorised global organisation or effective cooperation system (undisputedly) representing the common interests of humankind efficiently, it is typically held that states should intervene in the environment, considering associated and otherwise unaddressed environmental market failures.

For instance, air pollution, noise and parks and green spaces all have important (negative or positive) externalities, since related decisions made and actions undertaken by individuals affect other individuals as well [27]. As mentioned, public intervention can be designed to increase positive externalities and decrease negative externalities, for instance, via environmental taxation [25].

Benefits of nature are often substantial and at the same time also generally non-marketed and public (e.g. fresh air) [17]. As a result, decisions and activities that carry negative consequences for the environment may make narrow economic sense, in that such decisions and activities – for instance, habitat conversion, or overexploitation - can generate private gains for the firms involved [17]. There is no, or almost no, market incentive for firms and households to take into account environmental damages caused, as environmental damages often come with little to no (direct) cost to the polluter [23]. However, those private gains are typically more than offset by accompanying societal losses, so that overall, the activities are detrimental and can from that perspective be considered undesirable [17].

Next to negative externalities, environmental actions also encounter market failures regarding positive externalities, namely in those situations where environmental benefits are enjoyed by others than those investing in the environmental actions, which may result in underinvestment [16].

Furthermore, there are environmental market failures caused by coordination failures such as lacks in effective and efficient cooperation on an international level and by asymmetric information (for instance, resulting in uncertainty regarding risks and returns of projects, which uncertainty tends to be high for environmental investments that typically are long term) [16].

As a result of environmental market failures such as those discussed before, hardly any market price reflects the true overall cost (including environmental costs and benefits) [8]. These market failures are a main cause of environmental decline and require adequate intervention that is often best achieved through collective – and international – action [28]. For many environmental concerns and especially in open economies, the possibilities for effective national policy intervention through environmental taxes are limited if international coordination between states is not feasible [28]. Environmental taxes would in many situations be most effective and lead to the highest welfare and well-being gains if effective international cooperation would be achieved (for instance, in the form of global carbon emission taxation) [27, 29]. Such a global way of international and local cooperation in environmental taxation, for instance, through an authorised global organisation or effective cooperation system which would represent the common interests of humankind efficiently, is, however, currently not the status quo. As mentioned in the introduction, there are examples of environmental taxation designed with the international aspects of environmental issues in mind, such as the EU’s CBAM. However, for now, such measures seem second-best, for instance, when considered from the perspective of international inclusivity versus policing/coercive mechanics.

2.3 Environmental taxes compared to alternatives

When considering environmental taxation as a potential strategy in the context of sustainability, assessments should be made in comparison to other public policy instruments [12]. Also, in this regard, the current tendency – or practical reality – is to focus on state, rather than global, intervention.

Environmental taxes can be employed as a form of price- and market-based policy instruments, that is, policy instruments that aim to achieve market prices that better reflect all costs involved [21]. Tradable emission rights or subsidies for pollution reduction are examples of other market-based policy instruments which can contribute to correcting market failures as regards environmental prices [21].

A benefit of – stable – environmental taxes in comparison to tradable emission rights or other market-based instruments is that environmental taxes can provide an ongoing, strong incentive to keep on innovating, whereas in the case of tradable emission rights, adoption of new technology may simply reduce the prices of the tradable rights/permits to a level below the optimal tax rate – and thus weaken incentives for innovation in the future [28]. In addition, it is sometimes argued that environmental taxes have a benefit over tradable emission rights in the form of revenue collection and the subsequent possibility to recycle such revenues into reduction of other, economically distortionary taxes [11]. However, it can be questioned whether such a benefit actually exists, as environmental taxes come with their own distortionary effects [30], and considering that successful environmental taxes may generate reduced budgetary income in the future. The choice for one or the other policy therefore seems more properly directed to considerations other than revenue, such as effectiveness, ease of administration, enforceability, compliance or political viability [31]. When environmental aims are pursued through tax incentives, costs associated with those incentives may not always be proportionate to the environmental gains achieved. As an example, tax incentives that were introduced in the Netherlands in 2007 to stimulate fuel-efficient and electric driving for cars resulted in relatively low carbon dioxide emissions related to newly sold automobiles and in a relatively high percentage of electric cars in use [32]. These results came at the cost, however, of increased complexity, reduced tax revenue, high expenses and increased fraud [32].

In comparison to environmental taxes, subsidies can allow for better targeting and can alleviate free-rider problems that may occur if taxes are broadly set. Targeted subsidies, however, bring complexity and possibly related higher administration and compliance costs [22]. Also, where subsidies and other environmental policy tools typically have to consider long-term horizons in order to see effects, environmental taxes can work over shorter periods of time as well [4]. Moreover, subsidies effectively do not make the polluter pay for environmental damage but rather, and effectively, have all taxpayers (who may already be suffering negative externalities from such environmental damage) pay in order to induce pollution reduction, which can go against perceptions of fairness in society [11].

Governments can also use a whole range of non-market environmental instruments, for instance, command-and-control regulations – legislation, permits, bans, minimum performance standards, liability rules and pollution quotas – state financing, public-private partnerships, information campaigns or green tech support policies [4].

In general, environmental taxes are quite favourably assessed in comparison to regulatory policy instruments such as standards, quotas or product bans [22]. One of the main advantages of environmental taxes, and of other market-based instruments, such as tradable emission rights, is that market-based instruments provide an efficient way to reduce environmental damage that can avoid deadweight losses [11]. Environmental taxes, if properly set, can induce polluters in a flexible and rather cost-efficient way to optimally reduce pollution [33]. Moreover, environmental taxes can provide a continuing, dynamic incentive for polluters to reduce their pollution (for instance, through green innovation), while regulatory instruments typically only incentivise polluters up to a certain point [28]. Environmental taxes are likely to be particularly valuable when wide-ranging behavioural changes are needed across a large number of activities, in which cases the costs of direct regulation would be (too) large [33]. That said, conventional command-and-control instruments have proven to be very effective in directing change and can be especially useful when environmental problems are complex or when international coordination, needed for many market-based instruments, turns out to be unattainable [28]. Caution should be had to avoid that environmental taxes are seen as a legitimation of polluting behaviour [33] or that environmental taxes generate unintended behaviour that detracts from the environmental goal, such as how energy taxes may accelerate the depletion of fossil fuel if such taxes raise the expected future energy prices [33, 34].

Ultimately, the assessment of environmental taxes in comparison to other policy instruments depends significantly on the specifics of the measures at hand. For instance, emission taxes come with uncertainty and associated monitoring and enforcement costs that can make other instruments preferable, notwithstanding the fact that emission taxes can be effectively targeted to the externality in question [11]. Sometimes, a mixture of different policy instruments is optimal [11].

2.4 Recommendations regarding effectiveness and efficiency of environmental taxes

Next, and taking into account the global dynamics of sustainability, general recommendations are made regarding effective and efficient design and implementation practices and strategies for environmental taxes:

• For reasons as discussed before, it is recommendable to focus on the careful design of environmental taxes that aim for important long-term environmental objectives, rather than focusing on the revenue-raising function of such environmental taxes [28].

• Careful coordination, design and planning with other policy instruments are required to prevent suboptimalities caused by conflict or overlap [28].

• The introduction of complementary policy instruments that stimulate innovation is recommendable if environmental taxes target technological development in areas that tend to build on existing technologies (such as based on fossil fuel) and that therefore face high costs associated to the adoption of new technologies [28].

• .Incentivising effects of environmental taxes can be increased if the environmental taxes result in a gradual and predictable increase of the market prices over long time periods or, alternatively, if existing exemptions or other tax expenditures are gradually reduced [4].

• Environmental taxes typically work best when they are part of a broader policy package with other, complementary instruments which, for instance, stimulate green innovation or raise environmental awareness [35].

• Environmental taxes are most effective if they are directly targeted at the polluter or polluting externality that causes the environmental damage [28].

• Taxes that result in a fixed amount of charge per unit of quantity (e.g. tonnes of emissions) are preferable to taxes that are charged as a percentage of the price of such units or goods, since the latter also cover activities not directly related to the environmental damage (such as management or marketing costs), and since the latter effectively favour relatively cheap activities, which are often the most polluting, and may therefore exacerbate undesired shifting of production abroad [28].

• Environmental taxes would in many situations be most effective and lead to the highest gains in terms of the environment, well-being and sustainability if effective international cooperation would be achieved (for instance in the form of global carbon emission taxation) [29].

• To increase efficiency, environmental taxes are recommended to have a broad scope and be simple, containing as little exceptions as possible [23].

• Administrative and compliance costs can be reduced where environmental taxes can be easily included in already existing tax systems (such as excise taxes, sales taxes or value added taxes), instead of implementation via separate, new tax systems [28].

• It is often argued that optimal environmental taxes should be set below the marginal social benefit (i.e. below the Pigouvian rate that reflects the marginal external damage from the polluting activity) [11]. This takes into account that environmental taxes bring additional costs, for instance, in the form of monitoring costs, distributional effects and increases of labour distortions [11].

• Environmental taxes are recommended to be sufficiently substantial in order to outweigh related administrative and compliance costs and to justify their use in terms of effectiveness [24].

• Environmental taxes need to be sufficiently flexible and dynamic to develop alongside new technologies and unexpected opportunities and with economic or environmental developments [24]. Such flexibility, however, can generate conflict with the certainty required for long-term investments and therefore requires a thorough effectivity and efficiency assessment [24].

• It is in any case recommended to ensure that critical assessments of environmental taxes are performed, both beforehand as well as after implementation, to ensure regular monitoring and evaluation of the effectiveness and efficiency of the measures at hand.

2.5 International legitimacy aspects of environmental taxes

In the context of globalisation, sustainability and well-being, the consideration of environmental taxes also requires due concern for their potential international legitimacy issues [36].

For instance, international and supranational bodies of rules or laws to a certain extent restrict the possibilities for environmental taxes. Environmental taxes can be in conflict with the EU’s internal market, for example, or with the World Trade Organisation (WTO) rules [4].

Within the EU, some aspects of environmental taxes are regulated at EU level. Already mentioned was the EU’s CBAM. As another example, Council Directive 2003/96/EC of 27 October 2003 sets an EU framework (including minimum levels of taxation and obligatory exemptions) for the taxation of energy products and electricity [37]. Tax laws of EU Member States need to adhere to the requirements set out in this Directive, so as to not infringe on the legality of the taxes imposed [38]. Furthermore, environmental taxes of EU member states also need to adhere to the EU rules on fundamental freedoms and state aid, which seek to foster fair and open competition in the European market [39]. This, for instance, means that a tax on stopovers for tourist purposes by aircrafts used for the private transport of persons cannot be imposed only on operators whose tax domicile is outside the territory of the EU member state concerned [40]. Furthermore, the effective protection and sustainable management of forests and forest areas are environmental issues of a cross-border kind that imply a common responsibility of the EU member states, considering that one forest area can extend across multiple jurisdictions [41]. Thus, an inheritance tax exemption applicable only to sustainable forests located in a certain EU member state, with exemption aims of environmental protection, constituted an unjustified infringement of the European free movement of capital [41].

Environmental taxes, applied by WTO members, also need to conform to the requirements following the WTO agreements. The non-discrimination requirements following from these agreements, such as requirements of national and most-favoured-nation treatment, can affect environmental taxes, notwithstanding that exceptions, carve-outs, lack of use in practice and/or political stalemates may mitigate their impact [42].

Other restrictions may, for instance, be imposed through international treaties (such as the European Convention on Human Rights, and the International Covenant on Civil and Political Rights), (other) trade agreements (such as the North American Free Trade Agreement) or double tax conventions or may concern more political, non-binding restrictions via soft-law instruments (such as the European’s Code of Conduct for business taxation, or the reviews conducted by the OECD’s Forum on Harmful Tax Practices) [43]. States are sometimes held accountable and obliged, under current law, to take environmental action. An example can be found in the judgement of the Court of Appeals of The Hague from October 2018, in which the Netherlands was found to violate its responsibilities towards the protection of civilians within its jurisdiction under Articles 2 (right to life) and 8 (right to respect for private and family life) of the European Convention on Human Rights by not striving for an at least 25 per cent reduction of greenhouse gasses by the end of 2020 [44]. The mentioned judgement of the Court of Appeals of The Hague was upheld by the Dutch Supreme Court in December 2019, in case No. 19/00135 [45].

From the perspective of globalisation and sustainability, environmental taxes can raise equal treatment concerns, for instance, if the effects of such environmental taxes are particularly felt in certain regions or parts of the population or if those taxes lead to discrimination between (otherwise comparable) economic activities [46]. More generally, environmental taxes, at least when viewed in isolation, can conflict with conceptions of ability-to-pay, as environmental taxes are typically based on the contribution to pollution (and may therefore have stronger incentivising effects on lower-income taxpayers) [28]. Environmental taxes can also affect competition in a way that is perceived to be unfair, when environmental taxes are in effect primarily borne by certain groups (for instance, by domestic rather than by foreign enterprises) [42]. As mentioned in the introduction, the EU’s CBAM has been criticised for causing unfair welfare losses in the form of overburdening of developing countries [15, 47].

2.6 Environmental taxes and behavioural impacts

Behavioural impacts of environmental taxes can in various ways affect global dynamics of sustainability. If environmental taxes make polluters pay for the pollution they cause, this prevents free-rider behaviour (i.e. behaviour whereby businesses or consumers burden the environment without facing the related costs) and thus can create conditions which increase well-being [28]. However, and as previously mentioned, environmental taxes could have adverse effects, for instance, if taxpayers believe that paying those taxes legitimises polluting behaviour [33]. One view in this regard is that pollution is a ‘crime against nature’ that should be stigmatised by legal regulations (e.g. bans or punishments) rather than being condoned through tax payment [24].

If environmental taxes come in the form of tax expenditures and subsidise environmentally beneficial actions (a common example is accelerated tax depreciation for environmentally friendly investments), environmental taxes might partially be seen as rewarding polluters who have up to now performed undesirable, environmentally damaging behaviour. In such cases, environmental taxes do not make the polluters pay but rather distribute the tax burden amongst the recipients of pollution to pay for inducing pollution reductions [11].

Environmental taxes can also spark, or curb, tax competition between states. Competition can be beneficial from a sustainability perspective [48]. An example is where environmental gains arise as a result of more optimal allocation or innovation triggered by tax competition [49]. If, however, environmental taxes merely result in competition between states for tax revenues, for instance, in the case of neighbouring countries involved in a race to the bottom for excise taxes on fuel, such competition is likely overall harmful in a beggar-thy-neighbour sense –achieving low or no environmental gains, or even causing environmental losses, while simultaneously resulting in an overall erosion of tax revenues with related detrimental effects on well-being [50]. Or, in the absence of international cooperation, environmental taxes can trigger legal or illegal dumping (or burning) abroad or other forms of behaviour with negative spillover effects to other regions or states [51]. International cooperation, setting minimum taxation that restricts the inefficiencies arising from a tax race to the bottom, while still allowing non-harmful competition, can assist in stimulating desirable behaviour [49]. However, as long as there is a lack of international law forcing international cooperation, there will be incentives for free-rider behaviour, as states can enjoy positive externality spillovers from the environmental actions of other states, without (fully) bearing the associated costs [52]. As previously discussed, environmental taxes also affect the distribution of costs and benefits over different market participants and, in doing so, directly or indirectly affect dimensions of sustainability and of the SDGs next to the environmental dimensions. Win-win situations are rare, especially when viewed in the short-term, as environmental taxes are often intended to generate welfare gains for pollution victims and welfare losses for polluters [28]. Environmental taxes that might be seen as efforts to try and curb tax competition (or even to stimulate a race to the top) – such as the EU’s CBAM which puts a price on carbon emitted during the production of carbon-intensive goods that are entering the EU – come with concerns of unfairness from a distributive perspective [53].

In general, public support for environmental taxes seems to be favourable. A Eurobarometer Poll conducted in 1995 concluded that the vast majority of Europeans favourably view (gradually introduced) green taxes as a solution to reduce the environmentally harmful effects of our lifestyles, even if such taxes would cause a slight economic slowdown [54]. It was deduced that almost 90% of Europeans are in favour of application of the polluter-pays principle [54]. However, where it concerns views on the effectiveness of ways to tackle air pollution, European respondents favoured command-and-control and information mechanisms (such as stricter pollution controls on industrial and energy production activities) over, for instance, tax incentives for low-emission products or increasing taxation on air polluting activities [55].

The before-discussed potential regressive effects of environmental taxes can decrease public support for such measures [24]. The possibility that low-income consumers and households pay proportionally more external environmental costs, because they spend proportionally more on most environmentally sensitive goods than do richer groups, calls for serious political attention in order to ensure that there is sufficient public support for environmental taxes [4]. In France in 2018, a proposed increase in fossil fuel tax, intended to fight climate change through encouraging conservation and alternative energy use, was suspended after violent protests [56]. Analysts suggested that the proposed tax increase would fall the hardest on people with stagnating incomes and with limited transportation options outside of automobile usage [56]. As reporters observed, “Rather than spurring the effort to cut fossil fuel use, the misstep now threatens to set it back.” [56] To counterbalance undesired distributive effects, states can complement environmental taxes with other, progressive measures (e.g. via revenue-recycling) [7].

3. Conclusions

In this chapter, and in relation to environmental taxes and the global dynamics of sustainability, practices and possible strategies are assessed, and recommendations are made.

Environmental taxation starts from the proposition that an environment adequate for health and well-being is essential for all human beings, including future generations. It is possible to design tax measures that effectively and efficiently provide incentives for behaviour beneficial to the environment or disincentives for behaviour detrimental to the environment. The combination of environmental taxation and well-being can contribute to pursuing broad aims of sustainability, such as the survival of humankind, the protection of the biosphere and its biodiversity, social solidarity and justice and the preservation and development of our natural and cultural heritage in the long term.

As a result of environmental market failures, hardly any market price reflects the true overall cost including environmental burdens and benefits, and environmental taxation can sometimes provide a suitable instrument to counter such market failures. In the practical reality of a world currently divided into 195 states, the classic argument is for state intervention to focus on the externalities of behaviour which is harmful for the environment. It is, however, not always possible for states to make polluters pay. With the current multinational forms of organisations and enterprises, the global dynamics of sustainability clearly show. Environmental taxes would in many situations be the most effective and lead to the highest welfare and well-being gains if true international cooperation would be achieved. There are many environmental aspects that have a clear global dimension to them, such as cross-border issues and environmental spillover effects caused by marine litter, air pollution and climate change. The choice for and design of a specific environmental tax affects the distribution of environmental burdens and benefits, for instance, through targeting international emission reduction at richer regions to try and prevent overburdening of developing countries. Win-win situations are rare, especially when viewed in the short term. To counterbalance undesired distributive effects, states can complement environmental taxes with other policy measures.

Environmental issues impact intergenerational sustainability dynamics. Whereas emission reductions more heavily affect today’s and near-future generations, the current weakening of environmental capacities may reduce nature’s possibilities to sustain the well-being of later generations. Focus can be had for the careful design of environmental taxes that aim for important long-term environmental objectives, notwithstanding that environmental taxes can achieve effect over shorter time periods as well.

In the context of globalisation, sustainability and well-being, the consideration of environmental taxes also requires due concern for potential international legitimacy issues. Environmental taxes might come in conflict with the EU’s internal market, or with the WTO rules, for instance. Environmental taxes can also raise concerns, for example, if the effects of such taxes are particularly felt in certain regions or parts of the population or if such taxes affect competition in a way that is perceived to be unfair. Tax measures can spark, or curb, competition between states. In the absence of international cooperation, environmental taxes can trigger legal or illegal dumping or burning abroad or other forms of behaviour with negative spillover effects to other regions or states. International cooperation and setting minimum taxation that restricts the inefficiencies arising from a tax race to the bottom, while still allowing non-harmful competition, can assist in stimulating desirable behaviour. As long as there is a lack of effective and inclusive international cooperation, there will be incentives for free-rider behaviour that is detrimental or suboptimal from a global sustainability perspective.

Acknowledgments

Parts of this chapter build on the doctoral thesis research performed by the same author at the Fiscal Institute Tilburg of Tilburg University, published for example in: Van Hulten MJ. Aiming for Well-Being Through Taxation: A Framework of Caution and Restraint for States. Fiscale Monografieën No. 160. Deventer. Kluwer; 2019. ISBN: 9789013156850.