Green Tax

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on January 30, 2024

Get Any Financial Question Answered

Green Taxes (aka Environmental Taxes or Eco-Taxes)

Green taxes, also known as environmental taxes or eco-taxes, are taxes imposed on activities that pollute or cause harm to the environment.

Green taxes are based on the "Polluter Pays principle" in which pollution costs are borne by the polluter and reflected in the prices of their goods and services.

A carbon tax is an example of a green tax because it penalizes industries and organizations that emit carbon dioxide, a gas that is harmful for the atmosphere.

Other examples of green taxes are the gas guzzler tax, applicable to new cars that do not meet government-prescribed fuel efficiency standards in the United States, and noise taxes on institutions that exceed sound limits.

Proponents of green taxes cite their efficacy in reducing pollution levels, increased government revenue, and development of new green technologies as their benefits.

Critics of green taxes point to the increased cost of doing business for certain industries and the absence of standardized definitions and implementations for such taxes as reasons to remain wary of the taxes.

Understanding Green Taxes

Green taxes are examples of Pigouvian taxes. Such taxes are meant to penalize individuals or industries that make goods or have production processes that cause harm to society.

Pigouvian taxes internalize the negative externality of the adverse effects of pollution on the environment.

By paying taxes in proportion to the amount of pollution they cause, companies and industries absorb or internalize the harm they are causing to their surroundings.

In the process, green taxes inflate production costs for such industries.

Higher prices on the goods will have the effect of discouraging consumers from purchasing them and further reducing their impact on pollution.

Duties on fossil fuels have been around since the beginning of the 20th century. Taxes on purchases of cars and gas also helped governments around the world to earn revenue.

But these fiscal instruments were indirect forms of taxation. The movement towards a direct form of green taxes began in the 1970s, when environmental concerns gained public spotlight.

The prevalence of energy-intensive economies powered by fossil fuels, however, made it difficult for governments to take comprehensive action against polluting industries.

Finland was the first country in the world to propose a carbon tax in 1990. Sweden and Denmark followed a year later.

Currently, there are 16 countries in Europe which charge a tax on carbon from polluting industries.

Some countries, like France, have extended the conceptual framework of green taxes to include other forms of pollution, such as noise pollution by levying a noise tax on commercial and non-commercial airport operators taking off from its busy airports.

Green taxes can be applied to a variety of polluting instruments and industries. Some of the most common ones are:

  • Air pollution
  • Waste Management
  • Energy Creation
  • Mining
  • Noise Pollution

The Pros and Cons of Green Taxes

Like any other policy instrument designed to achieve certain ends, green taxes have their set of benefits and drawbacks. The benefits of green taxes are:

  • They promote sustainable practices among individuals and corporations and reduce pollution. Taxes of carbon emissions and fuel efficiency are a useful tactic to aid the transition away from fossil fuels towards a green economy powered by renewable energy sources.

    According to data from the World Bank, Finland was successful in reducing its carbon dioxide emission levels from 10.71 metric tons per capita in 1991 to 8.66 metric tons in 2023.

    The widening scope of green taxes also means that they cover more stakeholders, who have more incentives to reduce their ecological footprint.
  • Carbon taxes have become an important and growing source of revenue to governments, especially in developing countries, around the world.

    An OECD report estimated that green taxes accounted for 8% and 8.6% of overall tax revenue in Denmark and the Netherlands. In India, they accounted for 18% of total tax revenue.

    The energy industry, long considered among the planet's biggest polluters, accounted for 76.9% of all green taxes collected in the European Union followed by the transportation industry, which accounted for 19.6% of green taxes.
  • Green taxes provide additional revenue for social welfare initiatives. For example, most countries use revenue mopped up through carbon taxes for programs that are aimed at society's poorest.

    Alternatively, they refunded the taxed amount back to citizens. For example, Canada offers rebates of up to 90% to citizens for funds raised through carbon taxes.
  • Green taxes can also spur investment into alternate technologies because conventional fossil fuel technology becomes too expensive for producers and consumers.

    The ecosystem for green technologies has thrived after the pace and amount of green taxation spiraled upwards. More venture capitalists and investment firms are betting that alternate green technologies will power society's future.

While they have been beneficial in reducing the overall levels of carbon dioxide emissions in the atmosphere, green taxes have had a mixed effect on the ground. The drawbacks of green taxes are:

  • There are no set standards or definitions for green taxes, leading to their arbitrary implementations. An example of this differing approach is the carbon tax instituted by countries around the world.
  • In some European nations like Sweden, it can run to as high as $126 per metric ton of carbon dioxide released in the atmosphere. At the other end, the United States currently does not have a tax on carbon at all.

    The difference in approach might lead a layperson to believe that carbon emissions are a serious problem (and cause more environmental harm) in Sweden as compared to the United States.

    But America had four times as much carbon dioxide emissions as Sweden in 2023.
  • The situation becomes trickier in developing countries like India and China because they have to balance competing demands of development with environment conservation imperatives.

    Coal is still the dominant fuel supply in these countries and green taxes are subject to compromises so that they do not impede industry. The result is a watered down green tax which does not amount to a substantial penalty for industry.
  • Green taxes can increase the cost of manufacturing and lead to higher overall product costs. If a company is saddled with taxes because it uses fossil fuels, then it will pass on those increases to customers.

    Research has proved that such price rises disproportionately affect low-income consumers and also have a significant impact on social welfare programs.

    For example, Finland's carbon taxes are a net negative on its social welfare spending. Researchers have determined that Finland's welfare spending will suffer a loss of $3.5 billion after applying a $150 per metric ton carbon tax.

    At a carbon tax of $80 per metric ton, the welfare spending loss will be $1.8 billion.

Green Tax FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

Search for Local Tax Preparers

Find Advisor Near You