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Environmental economics

The use of market-based instruments

Capacity building in the field of environmental taxation, including further analysis of the subject with a focus on pollution and resource taxes, and exchanges of best practice and experience, involving stakeholders, the civil society and governments/parliaments (2017)

Notwithstanding the increasing interest in economic-, or market-based instruments (MBIs), in particular environmental taxes to tackle environmental problems, such instruments have not been widely used and has led only marginal changes in taxation systems, leaving further scope for their wider application which could lead to further economic, social and environmental benefits. To date, environmental taxation efforts have mainly focused on energy, transport and climate issues.

The study investigates the use of economic instruments in further environmental areas, namely for pollution and natural resource use to improve the knowledge base, to stimulate exchanges of experiences and best practices amongst civil society stakeholders and to build civil society capacity to better participate in MBI-related policy-making processes at different levels. The study takes a broad definiton of civil society, including NGOs, business, academia and citizens to ensure a balanced representation of stakeholder inputs throughout the project. The study is organised around three tasks, including an inventory of market-based instruments, an analysis of their use for pollution and resource consumption, as well as workshops organised throughout the EU with the participation of around 30 stakeholders in each of them. In total, 40 specific eonomic instruments, grouped into 8 environmental areas were selected for detailed analysis (constituting 40 case studies).

Enhancing comparability of data on estimated budgetary support and tax expenditures for fossil fuels (2014)

Previous studies on environmentally harmful subsidies have emphasized the importance of transparency and the availability of reliable data as a precondition for successful subsidy reform. This report is contributes to this by developing a harmonized approach to the identification and quantification of government support to fossil fuels and by applying this approach to all 28 EU Member States. In estimating support levels, the ‘transfer measurement’ approach is used, in which the transfer of public money to those benefiting from the support is estimated using budget data and other statistical information. Tax expenditures, however, are not systematically reported by all Member States. Moreover, they require a benchmark in order to be able to estimate subsidy amounts. The study proposes few benchmarks and discusses the outcomes.

Compared to the existing databases, the information reported in this study also covers a slightly wider range of support types, for instance by including subsidies to fossil fuel infrastructure such as pipelines. Data are reported for 2010 or 2011 and compared with the situation 5 to 10 years earlier. The estimated support levels include support to fossil fuel based electricity (by multiplying the total support to electricity by the share of fossil fuels in each Member State’s electricity generation.

Exploring potential Demand for and Supply of Habitat Banking in the EU and appropriate design elements for a Habitat Banking Scheme (2013)

This study provides a critical assessment of the EU legislative framework for addressing the No Net Loss (NNL) of biodiversity and explores potential demand for and supply of habitat banking in the EU, and appropriate design elements for a habitat banking scheme. NNL is not explicitly stated in EU legislation but it is implicit in a number of Directives (Birds, Habitats, EIA and SEA Directives), while several EU laws also require compensation and remediation of damages to biodiversity (EIA, SEA and Environmental Liability Directive), which covers impacts to biodiversity from accidents). Moreover, several Member States have additional national or even regional provisions. Despite these provisions, there is no concrete and coherent framework for NNL in the EU. The new EU initiative on NNL will aim to cover the identified gaps. 

Demand for offsets under a NNL policy can be driven by land use changes, which in the EU account for 50,000 to 100,000 ha per annum, without taking account land changes and biodiversity loss due to natural disasters. Further loss of biodiversity and ecosystem services due to degradation, as well as impacts to global biodiversity from EU actors and actions could also be taken into account, increasing the above figures. To provide for this potential demand, the supply of grassland and wetland habitats for restoration, enhancement or re-creation is least constrained, while coastal, freshwater, forests and heathland habitats are slightly more limited.  Dunes and rocky habitats are the most difficult habitats to restore or replace and therefore provide limited opportunities for offsetting. Currently however, the largest constraint on supply is the availability and accessibility of land. Most available evidence in the EU suggests that the total costs of offsets are likely to range from between €30,000 and €100,000 per hectare, but could be higher than this in some circumstances. Offset costs represent only a small proportion of total development costs. Globally, the annual market for biodiversity offsets has been estimated to be worth at least $2.4 billion and possibly over $4.0 billion.

Biodiversity offsets have the potential to compensate for biodiversity loss, but a number of technical, ecological, geographical and economic constraints mean that this is not possible or appropriate in all circumstances. In cases of particularly vulnerable and/or irreplaceable biodiversity, ‘like for like’ offsets should be preferred. Where the biodiversity affected is not vulnerable or irreplaceable, ‘trading up’ to conserve higher conservation priority biodiversity may be the best outcome. For habitat banking and offsetting to be successful, there is a need for a strong regulatory framework to create demand, establish basic standards, and drive the process. The study explores how roles and responsibilities should be defined, including robust mechanisms for monitoring, enforcement, compliance and safeguarding against potential risks and uncertainties to ensure that benefits from offsets are sustained in the long term.

Budgetary support and tax expenditures for fossil fuels. An inventory for six non-OECD EU countries (2013)

The study provides information on measures supporting the production or consumption of fossil fuels in six EU Member States: Bulgaria, Cyprus, Latvia, Lithuania, Malta and Romania. In order to ensure comparability, the methodology and approach taken were as similar as possible to that taken by the OECD in the “Inventory of estimated budgetary support and tax expenditures for fossil fuels”.

Each country section presents a general description of the energy sources and energy market structure in the Member State. Next, energy price regulations, taxes and support mechanisms are described. Quantitative information on specific budgetary support and tax expenditure are given if possible over several years (back to 2002).

Integrating resource efficiency and EU State aid (2012)

The study provides an evaluation of resource efficiency considerations in the current EU State aid guidelines. It also assesses state aid cases and schemes to identify whether resource efficiency considerations have been taken into account. Finally, it develops practical ideas and options for integrating resource efficiency in the review of horizontal state aid guidelines.

A study supporting the phasing out of environmentally harmful subsidies (2012)

The study focused specifically on EHS at the level of EU Member States; it identifies and analyses key types of EHS and examines cases of existing EHS across a range of environmental sectors and issues; it assesses the economic, environmental and social impact of particular EHS. The study also analyses examples of good practices in the reform of EHS in EU Member States and the lessons that can be learnt from these cases. Finally, it develops practical recommendations on phasing out and reforming EHS to support the objectives of the Europe 2020 Strategy and the resource efficiency agenda.

Innovative Use of Financial Instruments and Approaches to Enhance Private Sector Finance of Biodiversity (2012)

This study explored ways that innovative financing through new instruments and approaches can be used to finance biodiversity and ecosystem services, responding to the needs of the new EU Biodiversity Strategy to 2020. In addition to the EU co-financing, there is still room to engage more actively the private sector (businesses and financial institutions, the utilities sector and municipalities) and to put forward proposals for bankable projects. The study looked to various types of biodiversity projects with a bankable potential, and analyse the project promoters and beneficiaries that can bring forward these projects. The study examined in detail the following 3 intervention areas: Market-based Instruments & Offsets, Establishing Green Infrastructure and Supporting Carbon Credit Actions, while also it looked to a lesser extent the provision of support for biodiversity-friendly businesses. Furthermore it explored 2 cross-cutting issues that are of concern for all type of biodiversity related investments, i.e. how to address investment and policy risks and how to collect and provide market information about biodiversity. Through interviews with market specialists and investors, as well as key stakeholders (EIB and the financial sector) they explored the potential for investment into the respective areas examined and made recommendations on Private finance opportunities in relation to biodiversity and on the European interventions that can bring these about. 

The role of market based instruments in achieving a resource efficient economy (2011)

This study offers a systematic collection of experience from various countries on market based instruments addressing resource efficiency; it identifies best practices, explores in quantitative terms how taxes, charges and other market based instruments influence the scale of resource extraction and consumption, identify gaps and places for improvement, and provide a basis for policy makers about the way that these would need to be used to achieve resource efficiency. 
The study feeds into the Commission work on resource efficiency under the Resource-efficient Europe flagship initiative of the Europe 2020 strategy.

The use of market-based instruments for biodiversity protection - the case of Habitat Banking (2010)

This study investigates the scope for using market-based instruments (MBI) and more specifically Habitat Banking to protect biodiversity at Community level – and the possible conditions and limitations for their use. The use of MBI is gaining acceptance as cost-effective , with Habitat Banking a potentially efficient MBI to get business to compensate for unavoidable harm from development projects. Habitat Banking can also contribute towards meeting the post 2010 EU biodiversity target and enhance the provision of ecosystem services.

The final study results indicate that although Habitat banking can be done voluntarily, a viable market of biodiversity credits will only be created by regulation that defines equivalence between those debits and credits, and enforces compensation obligations on those creating debits by developing, polluting or damaging, thereby ensuring sufficient levels of credit demand. The comparison of Habitat banking with other MBI for biodiversity, suggests that it can offer a useful additional instrument to help biodiversity policy move towards a "no net loss" objective, which remains part of the post 2010 biodiversity target and will feature in the future policies. Moreover, the creation of market incentives can stimulate private investment in biodiversity conservation, and facilitate economies of scale and efficiencies in delivering biodiversity offsets. The study also identifies a number of other opportunities but also risks associated with delivering biodiversity conservation through Habitat Banking, while it describes some possibilities for establishing an efficient system of Habitat Banking that can work in conformity with the existing EU legislative framework.

Environmentally Harmful Subsidies: Identification and Assessments (2010)

The objective of this study is to develop a methodology for identification, assessment and quantification of environmentally harmful subsidies (EHS). The study tested the tools developed previously by the OECD on six case studies of subsidies in energy, transport and water sector. Based on this analysis and on results of a workshop, the study developed the "EHS Reform tool" for screening, integrated assessment and reform of environmentally harmful subsidies. The study includes also a methodological guidance how to assess the value of subsidies, illustrated on concrete cases.

The Potential Benefits of using Differential VAT for Environmental Purposes (2008)

Using differential VAT rates on products which are environmentally beneficial compared to their substitutes may bring about greater sales of those products in a more cost-efficient way than other policy mechanisms. This may act as a form of marketing, changing consumer behaviours. This study looks at the potential impacts of changing current VAT rates to align them with environmental goals in some specific cases - domestic energy supply (where there are currently reduced rates in some countries), food and dairy products, insulation materials, white goods and boilers. It finds that the suitability of differential VAT as a policy instrument differs greatly across products, in particular depending on the nature of the market failure in consumer behaviour which the VAT rate would be trying to correct.

Environmentally Harmful Subsidies study (2007)

This study focuses on presenting information relating to the definitions of subsidies and environmentally harmful subsidies, their quantification, arguments for the reform of Environmentally Harmful Subsidies and on identifying practical lessons for taking forward the reform of Environmentally Harmful Subsidies. The report attempts to offer practical insights into subsidy reform drawing on existing literature, the knowledge and expertise of the contributors and a number of case studies that were selected and studied.

The Use of Market Incentives to Preserve Biodiversity (2006)

This study examines 204 examples of market based instruments currently being used to preserve biodiversity including: taxes, fees and charges; subsidies; tradable permits; eco-labelling; financial mechanisms; and liability and compensation schemes. Overall, the evidences is that well-designed and credibly implemented instruments that are tailored to local needs are able to deliver biodiversity objectives cost-efficiently. Many of the examples of market based instruments show that they work best not as a substitute to regulatory approaches, but complementary to them. Certainly, there seems to be wider scope for their application and a number of recommendations are made in how to use them most efficiently.

Economic and Environmental Implications of the Use of Environmental Taxes and Charges in the European Union and its Member States (2001)

This study evaluates the economic and environmental implications of the use of environmental taxes and charges by the EU Member States. It thus constitutes a follow-up to the Commission´s 1997 communication on Environmental taxes and charges in the Single Market (COM(97) 9).

Executive Summary and Table of Contents (pdf ~320K)

As such taxes and charges are increasingly used by Member States as a cost-effective instrument to implement the ‘polluter-pays’ principle, it is important to compare their approaches and analyse the impacts. An overview (pdf ~480K) chapter presents those taxes in all Member States and also the CEEC accession candidates. Given that taxes on energy products (incl. CO2 and SO2 taxes) and vehicle taxes have already been extensively researched, the study looks in detail at 9 different types of "small" environmental taxes (in terms of revenue): NOx (pdf ~150K), water abstraction (pdf ~90K), waste water (pdf ~140K), pesticides (pdf ~220K), fertilizers (pdf ~160K), landfill (pdf ~260K), aggregates (pdf ~160K), packaging (pdf ~160K), batteries (pdf ~160K). 

For each of the 9 types of taxes, three cases of application are analysed in detail (2 cases for water abstraction taxes/charges, 4 cases for fertilizer taxes). For each of the taxes, basic issues, such as its design, administration, revenue and its use are explained. Furthermore, a detailed analysis of its environmental effects, effects on competitiveness, the internal market, trade and employment is undertaken. Please also look at the summary (pdf ~290K) of these taxes in tabular form.

Finally, for three taxes (UK landfill tax (pdf ~380K), German waste water tax (pdf ~230K), Danish pesticides tax (pdf ~290K)), a more detailed and more quantitative analysis of these effects is undertaken (individual icons for each tax). The conclusion (pdf ~120K) summarizes the key results of the analyses concerning the effects of environmental taxes and presents some key lessons for future environmental tax policy.

Economic analysis of EU-wide emissions trading in CO2 (2000)

In preparation of the Green Paper on greenhouse gas emissions trading within the European Union (2000), the cost implications of EU-wide emissions trading carbon dioxide were estimated by E3-Lab with the PRIMES (*) energy systems model. The results are available here:

In addition, the Institute for Prospective Technological Studies (IPTS) made a preliminary aggregate analysis using the POLES (**) energy systems model. These results are available here:

Although the models are different in some major characteristics they come to fairly similar conclusions about the achievable cost savings. They estimate them to be 25 and 30 percent compared with a situation without EU-wide emissions trading. The models are restricted to energy-related CO2 emissions and thus fail to capture the impacts of the six gas basket and the inclusion of carbon sinks as means to implement the Kyoto commitments. However, this omission is not likely to alter the main conclusions.

(*) PRIMES is a partial equilibrium model focusing on European Union energy markets and as such very useful in analysing in detail the impact of various forms of carbon emission trading on energy markets. On the other hand it fails to capture some of the impacts which carbon emission trading may induce in the wider economy (e.g. exchange rate effects, trade balances). PRIMES generates results for each of the 14 Member States (Luxembourg is excluded) separately and has also been used to investigate the effects of carbon emission trading limited to a subset of Member States. Because of the detailed sectoral breakdown it allows also for the analysis of carbon emission trading restricted to a number of economic sectors.

(**) POLES is a partial equilibrium world-wide energy market model, but has a different geographical split than PRIMES. It encompasses the whole world, but has a less detailed breakdown of Member States. This renders it an excellent tool to shed light on interactions with international energy markets as a consequence of EU carbon emission trading. As a deficit POLES is less suited to illuminate in detail the effects of sectorally and geographically limited permit markets. As PRIMES, the POLES model fails to capture general economy-wide effects like changes in international trade.

Study on the relationship between environmental/energy taxation and employment creation (2000)

The study provides an overview and a comparative analytical assessment of the available literature as well as existing macro-econometric models and a bottom-up engineering model on the employment effects of environmental taxation, in particular of the existing Commission proposals for CO²/energy and energy products taxes. It also identifies the economic conditions under which a tax shift from labour taxes to ecotaxes is most likely to result in positive employment effects.

A possible EU wide charge on cadmium in phosphate fertilisers: Economic and environmental implications (2000)

This report examines the economic and environmental effect of introducing an EU wide charge on the cadmium content of phosphate fertilisers. The objective of such a charge would be to reduce cadmium contamination of soils in a cost effective way. The main conclusions are that the economic impact of such a charge on EU agriculture and industry will be small. However, it may lead to a major shift in the supply of raw phosphate to the EU, creating potential problems for some developing countries.

Study on a European wide regulatory framework for levies on pesticides (1999)