Environmental damage and energy tax reform: the Dutch challenge
The ‘green result’ of the Dutch energy tax system could be significantly improved by better aligning the tax structure with overall environmental damage costs. For some energy products, such as natural gas and electricity for households, tax rates in the Netherlands are higher than the cost of the environmental damage they cause (the so called Pigovian rate). Conversely, tax rates for some fossil fuels, such as coal, are currently (much) too low. Moreover, pricing of environmental damage focuses on climate costs, overlooking the significant contribution of fuels to air pollution. Energy tax reform in the Netherlands should be prioritised on the basis of its long-term contribution to a robust tax structure, not only in terms of its revenue-raising capacity but also its environmental regulatory impact. These are the main findings of a recent study by PBL Netherlands Environmental Assessment Agency, which has now been made available in English.
The main challenge for further green tax reform in the Netherlands is to find an optimal, future-proof balance between raising 'green revenue' from energy taxes and achieving a 'green result' from these taxes; thus, reducing environmental damage from energy consumption. This is a delicate balance. Green tax reform aimed solely at increasing or stabilising tax revenue for the treasury will favour environmental tax bases that are unlikely to 'erode', but will not necessarily contribute much to improving the environment. Whereas environmental taxes aimed primarily at achieving a green result run the risk of subsequently yielding lower tax revenues, due to, for example, changes in production or consumer behaviour.
The Dutch economy is not only very open but also fossil-fuel intensive. Despite their vulnerability to international tax competition, the present taxes on energy products, such as natural gas, electricity and motor fuels, generate considerable revenue for the Dutch treasury. The PBL analysis shows that the Dutch energy tax structure has been designed to tax environmental damage from fossil fuels mostly indirectly, that is, via consumption rather than via the production of natural gas, electricity and motor fuels.
In the Policy Brief, the researchers explore the tension between two objectives of green tax reform: raising revenue from environmental taxes, and reducing environmental pollution. This tension between 'green revenue' and 'green result' is certainly present in the Dutch energy tax system, which has a long tradition of green fiscal reform. The Policy Brief not only describes the current energy tax structure in detail (tax bases, rates and exemptions), but also explicitly discusses the implications of the damage estimates for improving the energy tax structure. One policy implication, for instance, is that welfare is likely to be increased if tax rates for electricity would be lowered in favour of higher tax rates for natural gas.