Green tax reforms for industrial transformation: Overcoming institutional inertia with consumption taxes

Economic incentives such as environmental taxes can create attractive markets for environmentally sound products and process technologies. Many European countries have a long tradition with environmental taxes but recent figures indicate that the share of green tax revenues in the EU-15 GDP is slightly declining. This is surprising since several governments had declared they would gradually shift the fiscal burden from labour to pollution. This paper tries to explain the fiscal inertia by analysing the role of the taxation base, fiscal neutrality, government failure with respect to the use of economic instruments and the dependence of government budgets on consumption-driven economic growth. We conclude that the initial focus on the double dividend hypothesis has strongly limited the impact of green taxes. A green tax reform based on consumption taxes that are differentiated according to the environmental impact of products could be more effective and efficient. Copyright (c) 2006 John Wiley & Sons, Ltd and ERP Environment.