Understanding environmental taxation

Sustainable finance brings the ecological transition and social progress into economic thinking. Environmental taxation is part of this movement.

Since it is being driven by the French Ministry for the Ecological Transition (Ministère de la Transition Écologique), it is important to understand environmental taxation, its future, its impact and what is at stake.

What is environmental taxation?

Environmental taxation, or green taxation, covers the taxes, levies and charges incurred by a so-called polluting company or by a product or service that has a negative impact on the environment.

The principle is simple: penalize the most polluting companies with heavier taxation. This is known as the "polluter pays" principle. The goal is to accelerate the ecological transition in the companies with the greatest environmental impact by increasing the cost of the activities that are most harmful to the planet.

Activities considered harmful to the environment are those that contribute to global warming by generating large amounts of greenhouse gases, consuming scarce and non-renewable resources, or producing non-recyclable waste.

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Energy taxes

As the main instrument of environmental taxation, there are more than forty taxes based on the "polluter pays" principle. 75% of these taxes relate to the consumption of fossil fuels. The remaining 25% cover various activities that pollute water and air, contribute to climate change, affect biodiversity or consume non-renewable natural resources.

These environmental tax measures brought in 56.4 billion euros for the French government in 2019.

The Green Economy Committee

The new regulations and tax penalties adopted under the environmental taxation project are driven by the Green Economy Committee (Comité pour l'économie verte).

This committee is made up of various stakeholders such as environmental associations, trade unions, government representatives and employers' organizations. This working group issues opinions on green taxation, the financing of the green economy and economic instruments such as labels, energy savings certificates and permits.

These opinions are then either approved or rejected and incorporated into law. The Green Economy Committee is behind several changes in the law, such as:

-       The addition of a carbon component to the energy tax, initially created in 2014

-       The 2016 increase in the tax on polluting activities related to waste

-       The creation of the "jaune budgétaire" (an annex to the French budget bill) presenting the changes in environmental taxation and their impact on economic players within the finance bill.

How does environmental taxation help fight climate change?

Since its introduction, environmental taxation, and in particular the introduction of environmental taxes, has proven effective according to the French Ministry for the Ecological Transition.
This applies in particular to measures aimed at French households, with taxes on fossil fuel consumption that are said to have enabled France and Europe to reduce their consumption compared with the United States.
The same goes for incentive-based waste pricing, which charges for waste collection according to weight and is said to have reduced the volume of non-recyclable waste by 30% among the 5 million French people concerned.

The biggest advantage of these new environmental taxes for the government remains above all the revenue they generate. In 2016, they were the fifth largest source of tax revenue in France, with 51 billion euros generated that year.

The government therefore states that making polluters pay makes it possible to reduce taxation in other areas such as investment or innovation.
Its goal is also to reinvest this revenue in financing environmental public policies. One example is the tax collected by the water agencies, which is reinvested in the management and improvement of water resources.

What impact does environmental taxation have on companies?

For so-called polluting companies (those using fossil fuels, emitting large amounts of CO2, etc.), environmental taxation will represent a significant annual cost. That is precisely the point! The government aims to accelerate the ecological transition within these companies.

It is hard to imagine a future without environmental taxation, as economic impact currently seems to be the only way to accelerate change in favor of the environment.

However, we can imagine that the most polluting companies will pay less tax as this money is invested in innovation, enabling them to find solutions to reduce their environmental impact.

See our article: Everything you need to know about sustainable finance

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