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Taxes and the Environment: What green taxes do European countries impose?

Many European countries have used pollution taxes more than the United States, imposing taxes on emissions of common air pollutants such as sulfur dioxide and nitrogen oxides. The European Union has also instituted a "cap-and-trade" system to limit carbon dioxide emissions as a way of meeting targets for limiting greenhouse gas emissions agreed to in the Kyoto Protocol. Almost all of these allowances are given away to polluters. Only a handful of member states reserve any emissions allowances to be auctioned off, and these auctioned allowances account for only a tiny fraction of the total.

  • The European Commission defines an environmental tax broadly as "a tax whose base is a physical unit (or a proxy of it) of something that has a proven, specific negative impact on the environment." This definition includes taxes that were not enacted with environmental goals in mind. In fact, according to Eurostat, most of these taxes are on energy (76 percent of all environmental tax revenue) and transportation (21 percent), leaving a small fraction for pure pollution taxes.
  • Revenue from these taxes is equivalent to about 3 percent of GDP in Europe, and 7 percent of total revenue (figures 1 and 2). That fraction has not increased in recent years, despite growing concern about the environment and growing enthusiasm for market-based environmental policies.

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