The use of consumption taxes to re-launch green tax reforms

Between 1995 and 2001, the share of green tax revenues in the EU-15 GDP slightly declined. This is a surprising evolution but there are, however, strong economic efficiency arguments to set environmental taxes at low levels, and hence below the Pigovian or marginal pollution damage level. This paper presents an alternative to re-launch the debate on green tax reform in Europe; consumption taxes that are differentiated according to the environmental impact of products. Given the long tradition of consumption taxes in Europe, this instrument requires less institutional innovations than emission taxes. We show that a pragmatic classification of products in a sustainable and hence low VAT category can strongly limit the economic costs of the tax reform while the price reduction for green products can limit undesirable distributional consequences. (c) 2006 Elsevier Inc. All rights reserved.