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Is Eco-Tax Effective?
The Basics

Is Eco-Tax Effective?

The Basics is a series that explores the essential questions of purposeful business.
29th Sep 2021

What is eco-tax?

Environmental degradation is complicated. It’s intricate, everywhere and difficult to solve. One solution? Tax anything that’s bad for the planet – and hopefully people will do it less. 

Eco-tax does what it says on the tin: it adds a charge to goods, services and activities that are bad for our planet. And revenue from the taxes can make up around 2-3% of a country’s GDP (2.3% for the UK, and 2.4% for the EU in 2019)

Eco-taxes can largely be split into four categories: energy, pollution, resources and transport. But when it comes to effect and revenue, it’s not an even split.

What does it look like in practice?

Despite what you might think, taxes on pollution and resources only account for a tiny portion of total eco-tax revenue – just 3% in the UK in 2017 to be exact. 

The real heavyweight is energy, making up nearly three-quarters of eco-tax revenue. And the biggest culprit within energy is hydrocarbon oil tax, or fuel duty, which accounted for nearly 60% of all eco-tax revenue in the UK in 2017. 

On a smaller scale, one of the most common – and successful – eco-taxes is the plastic bag charge, first introduced in Ireland in 2002. Within 14 years, plastic bags went from making up 5% of Ireland’s plastic waste to just 0.13% and generated €200 million to be reinvested in environmental projects. 

A similar levy was introduced in the UK in 2015. Plastic bags use decreased by 95% while the revenue was donated to good causes (in 2017, £66 million was donated to charities).

Fuel duty accounts for nearly 60% of total eco-tax revenue

And what about climate change?

Well, there’s good news: an eco-tax on carbon has been positioned as a potential solution to climate change. 

Even Elon Musk is on board (take that as you will). The IMF has suggested that taxes on carbon use could significantly help countries to meet the climate targets needed in order to mitigate an eco-disaster. 

In the UK, fuel duty (57.95 pence per litre) has been frozen since 2010 – which could have cost us the release of up to 18 million tonnes of CO2 compared with if the tax had continued to rise with inflation. So clearly, eco-tax has a role to play in fighting the crisis.

Sounds great! Are there any downsides?

Because the majority of eco-tax revenue comes from energy taxes, households are often hit pretty hard (in the UK, over 40% of eco-tax revenue comes from households). 

Eco-tax has been criticised for disproportionately affecting lower income households.

Although eco-tax has the potential to provide accountability for ecological harm, it can also heighten income inequality by passing the burden onto lower-income consumers – rather than large organisations or suppliers. 

The bottom line is that eco-taxes work, but they must target the right people

“We must rapidly begin the shift from a ‘thing-oriented’ society to a ‘people-oriented’ society.” 

Naomi Klein