Limits to green? Greening tax system in the Netherlands

The central issue considered in this report is the extent to which a further extension of environmental taxation can contribute to building a sustainable economy. In the context of the present study, a sustainable economy is taken to mean that the risks associated with climate change and resource depletion are reduced to an acceptable level by 2050.

One strategy towards achieving this aim could comprise the following key elements:  

1. Introduction of a new carbon tax as part of the Energy Tax.
2. A broadening of the scope of the Energy Tax to include sectors like agriculture and industry and removal of other fiscal subsidies and reduced rates.
3. Extension of the tax system to include new taxes on the import/production of natural resources (timber, fish, meat) and land use.
4. A European agenda on green tax reform.

The proposed ‘additional greening’ package comprises:

• An increase in the duty on motor fuels combined with the proposed carbon tax (average overall increase in tax on motor fuels: 20%).
• Abolition of Energy Tax reductions for business and industry by setting the second and third tier rates equal to the first, combined with subsidies for energy conservation.
• On top of the existing Energy Tax, introduction of a CO2 indexed component of 50%, to induce further energy-saving and introduce differentiation with respect to the carbon content of the various energy sources.
• Introduction of a tax on meat or animal feed that ensures that the harmful impacts of meat consumption, many of them outside the Netherlands, are passed on to Dutch consumers.
• Abolition of tax breaks such as that in force for ‘red diesel’ and reduced Energy Tax rates for greenhouse horticulture and industry.
• Introduction of a tax on ‘green-field’ land development.

Tax revenues
With the ambitious package of environmental taxes outlined, a 20% share of green tax revenue is feasible in the Netherlands, equivalent to 5% of the country’s Gross Domestic Product. This figure of 5% is in line with what international studies anticipate as being the fiscal limits of a green tax system. For this level of greening, Euro-pean coordination is not essential. In calculating the figure of 20% green tax revenue, due allowance has been made for the fact that reduced pollution will lead to declining tax revenues. Expectations are that this package will make a major contribution to achieving the government’s environmental and climate targets, particularly the latter. With this package, an additional greening of around € 8 billion can be achieved over and above existing green revenues of some € 19 billion. The share of green taxes would then rise from 14% today to around 20%. These revenues can be recycled in the form of lower taxes on corporate profits or labour, with the additional option of using some fraction to incentivise further energy-saving by selected target groups.