Analysis The implications for households of environmental tax reform (ETR) in Europe ☆ Paul Ekins a, ⁎, Hector Pollitt b , Jennifer Barton b , Daniel Blobel c a UCL Energy Institute, University College London, Central House, 14 Upper Woburn Place, London WC1H 0NN, United Kingdom b Cambridge Econometrics, United Kingdom c Ecologic, Germany abstract article info Article history: Received 4 January 2011 Received in revised form 3 August 2011 Accepted 7 August 2011 Available online 9 September 2011 Keywords: Environmental tax reform Distributional impacts European Union Econometric modelling The paper discusses the distributional implications of environmental tax reform (ETR) for households, and presents new results from modelling the impacts of a major ETR for the European Union. The distributional effects arise from the new environmental taxes, any tax reductions made as part of the ETR, the wider macroeconomic impacts from the ETR, any special provisions in the ETR, and the environmental benefits from the ETR. The paper's literature review makes clear that while the impacts from taxes on the household use of energy are very often regressive, transport taxes tend not to be, although the impacts differ between urban and rural households. Moreover, the net distributional impact is often less regressive, or not at all, once the wider distributional effects are taken into account. Residual regressive effects can in principle be removed by further adjustments in the tax or benefits system. The modelling results suggest that an ETR in Europe will actually increase real incomes across the EU as a whole, and will not be generally regressive, although the results differ by country and for different socio-economic groups. The political acceptability of ETR may depend on the worst effects on these groups being mitigated in some way. © 2011 Elsevier B.V. All rights reserved. 1. Introduction The European Environment Agency has defined environmental tax reform (ETR) as “a reform of the national tax system where there is a shift of the burden of taxes from conventional taxes such as labour to environmentally damaging activities, such as resource use or pollution” (EEA 2005, p.84). ETR is therefore a particular kind of policy instrument, which seeks to apply revenue-raising economic instruments (which may be taxes or auctioned permits in an emissions trading scheme) to resource use and pollution, in order to increase the efficiency of resource use (resource productivity) and improve the environment, and reduce other taxes such that the policy is revenue neutral overall. ETR is therefore a tax shift, rather than a tax increase, whereby taxation is shifted from ‘goods’ such as labour (e.g. income taxes, social security contributions) or capital (e.g. corpora- tion taxes) to ‘bads’ (pollution, resource depletion). ETR was implemented on a relatively small scale in a number of North European countries in the 1990s and early 2000s, with broadly positive environmental and economic results (Anderson and Ekins 2009). In the European Commission's Impact Assessment Guidelines (EC, 2009), equity issues such as social inclusion and the protection of particular groups are clearly labelled as impacts that should be considered ahead of any proposed change in policy or regulation. In particular, Table 2 (p. 35) asks the question: Does the option affect specific groups of individuals (for example the most vulnerable, or the most at risk of poverty, children, women, elderly, the disabled, unemployed or ethnic, linguistic and religious minorities, asylum seekers), firms or other organisations or localities more than others? The literature review in Section 2 of this paper shows that such considerations are relevant to ETR, because there is substantial evidence that increases in environmental taxes can be regressive, meaning that they fall disproportionately on low-income and rural households, because these groups spend a relatively high proportion of their income on domestic heating. This can affect the political feasibility of an ETR package, so that policy makers considering ETR need to understand the impacts of the package on the distribution of income across individuals and households and, if necessary, implement measures that will reduce or eliminate the regressivity. There is therefore an important research question in this area, which is addressed by this paper: what would be the distributional implications of a major ETR in Europe, and how might any negative distributional outcomes be mitigated? The research question was addressed by the use of a macro- econometric model to help gain an understanding of the impacts of a broad-based ETR on the distribution of income across individuals and Ecological Economics 70 (2011) 2472–2485 ☆ Note: This paper derives from a report from a recent project on ETR commissioned by the European Environment Agency. Tax reform in Europe over the next decades: implications for the environment, for eco-innovation and for household distribution’, European Environment Agency, Copenhagen, forthcoming. ⁎ Corresponding author. Tel.: + 44 20 3108 5990; fax: + 44 20 3108 5986. E-mail address: p.ekins@ucl.ac.uk (P. Ekins). URL: http://www.ucl.ac.uk/energy (P. Ekins). 0921-8009/$ – see front matter © 2011 Elsevier B.V. All rights reserved. doi:10.1016/j.ecolecon.2011.08.004 Contents lists available at SciVerse ScienceDirect Ecological Economics journal homepage: www.elsevier.com/locate/ecolecon