Taxing Energy as Innovation Driver in the European Union

Abstract

A significant European Union’s concern is overcoming dependence on fossil fuels and generating sustainable and environmentally friendly growth. Public decisions must be adopted to ensure this objective considering the widespread agreement about promoting energy change implies a technological transformation derived from R&D. This chapter is focused on the relationship between energy taxation and environmental R&D. The question is whether European taxation’s role is suitable for promoting energy change. The main conclusion is that beyond the fact that green taxes are a low percentage of the total collection, their configurations are more designed to internalise pollution’s cost than favour R&D. Despite energy taxation has been directed at the fundamental objective of revenue collection, it is necessary that public tax policies should be designed considering their role as a driver of environmental R&D. Taxes on traditional energy sources should adapt their structure considering the level of CO2 emissions as well as the impact of investment tax credits on the Corporate Income Tax should be assessed as drivers of environmental R&D. A limitation of this study is the lack of available data to link these incentives to the patents on green energy sources which constitutes an objective to achieve in future research.

1. Introduction

This chapter focuses on environmental taxes’ role in achieving the EU’s goal of net zero emissions by 2050. It is claimed that taxation is a representative instrument of public policies, which means that taxation measures have the potential to contribute decisively to accomplishing important political and economic goals. The purpose of this document is fixed on how the main corporative taxes configuration can orientate private investment through environmental research and development (R&D). A proper context needs to briefly analyse to support the relationship between taxation and the new energy consumption model. According to our aim, the framework also requires an overview of the amount of green taxes European countries have created and what they are their imposable objects. However, the primary approach is to analyse if we can stand a real impact between tax incentives related to R&D on new sources of green energy or, at least, on more efficient processes of its consumption. This chapter offers an analysis of the role of taxes as instruments that should guide the behaviour of taxpayers. In other words, beyond the collection figures obtained and the variety of taxes created, the question raised is whether they promote investment in R&D, specifically in the new technologies that will make it possible to achieve the goals of the European 2030 Agenda.

In recent decades, we have become accustomed to terms such as climate change, global warming, or greenhouse gases, and we have witnessed efforts of diverse kinds that international institutions and states have put in place to try to curb these phenomena that deteriorate our environment. Yet, without going into the weight of human action in environmental destruction, the fact is that its impact is undeniable, and corrective measures for production processes and consumption decisions that generate pollution have proliferated, with greater or lesser success in their results.

There is extensive literature on taxation and different aspects of environmental policies, which has provided multiple policy directions concerning the role of environmental taxes. However, on the whole, the studies conclude that environmental taxes play a relevant role in mitigating greenhouse emissions. Moreover, in-depth empirical analyses emphasise that we should consider that implications obtained from the interdependence among environmental taxes, environment, energy consumption, and economic growth are different across developed, developing, and emerging countries.

The analysis of public intervention through tax regulations usually focuses on the penalisation of environmental pollution; however, one of the most outstanding aspects of fiscal action is its capacity to promote technological innovation and the development of processes that make it possible to overcome the adverse effects that our economic model generates, i.e., the so-called eco-innovation. As Jaffe & Stavins state, the success or failure of environmental protection depends mainly on the impact of public policies on technological development [1].

The research and development of these innovative technologies, or their adaptation to production processes, requires superior levels of investment and the assumption of significant risks. Therefore, innovation to protect the environment is crucial in public policies and taxation. The generation of new sources of clean energy is where incentives for R&D and innovation provided for in corporate taxes can be applied. Still, in a complementary manner, environmental taxes should contribute to sustaining and strengthening them, hence the relevance of their analysis.

In addition to penalising environmentally damaging behaviour, taxation offers instruments to promote fewer polluting procedures or activities. In this sense, promoting renewable energies is the ideal solution for an environmentally friendly energy transition. There is an agreement that consuming clean energy is the key to sustainable economic development and the progressive disappearance of greenhouse gases. However, the truth is that for this change process to occur, a substantial technological effort is necessary to ensure levels of energy supply that allow economic activity to continue.

The climate outlook for the planet could be more promising, and policy focus on tax measures should impact this process. Despite the progress achieved in public policies other than fiscal measures, the fact remains that environmental taxes are still the main instrument for public action, especially those levied on greenhouse gas emissions and the consumption of hydrocarbon derivatives. The link between the use of fossil energy sources and the widespread consumption of oil derivatives, and the emission of carbon into the atmosphere is a critical element that all experts have highlighted. In the above context, taxation on CO₂ emissions and fossil fuel consumption has emerged as a crucial instrument in the fight against climate change. More than a few international institutions and states have found in this type of taxation the most immediate solution to act on the consumption of the fuels that currently underpin the production processes of the world economy.

Despite the progressive introduction of this type of tax, data from the Organisation for Economic Cooperation and Development (OECD) and the European Union (EU) show a significant gap between the objectives set at successive international conferences [2] and the current reality. Therefore, it is worth considering whether the configuration of these taxes is appropriate and whether they encourage the development of technological innovations that lead to lower pollution levels. The ease of application of taxes, especially indirect taxes, is an essential incentive for their establishment, as is the revenue they bring in. Still, their pressure can be much greater than the savings expected from research, acting as a barrier to innovation. This is the central aspect of the relationship between these taxes and eco-innovation, from which the assessments and findings of this contribution will be drawn.

2. The change in energy model and technological innovation

It is almost a rhetorical exercise to highlight the importance of promoting renewable energies that allow for an effective transition towards an environmentally friendly energy model. However, many scientific, political and economic bodies have considered this process vital for decarbonising our atmosphere. Furthermore, other expected positive effects are improving the energy supply and security and the incentive of national employment [3].

According to OECD data for 2022, the world economy’s dependence on fossil fuels is still very high (78%), although it varies by region. One element to highlight is that, in areas where the volume of CO₂ emissions has been reduced, economic growth has been maintained due to technological changes that have led to the application of new energy sources and greater efficiency in using traditional ones.

Despite variations in energy intensity across countries, dependent on various factors (economic structure, level of income and public policies, for instance), the impacts of COVID-19 have been similar. Even though pandemic lockdowns have led to lower global energy consumption, renewables have continued to grow. Without research and its application to production processes, this situation is possible, which shows the positive effect of R&D in changing the energy model of the economy. However, a comprehensive analysis of public action highlights inconsistencies, such as the significant increase in government support for the production and use of fossil fuels, mainly through additional incentives that benefit the oil and gas sector, such as tax provisions that give beneficial treatment to capital expenditures for fossil fuel production.

Europe is one of the regions of the world that has made the most outstanding effort to use renewable energies and to adapt its economy to energy change. As we can see from Table 1, the average European related to renewable energies is around 20% of total energy consumption.

TIME	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
EU-27	16.0	16.7	17.4	17.8	18.0	18.4	19.1	19.9	22.0	21.8
BE	7.1	7.7	8.0	8.1	8.7	9.1	9.5	9.9	13.0	13.0
BG	15.8	18.9	18.1	18.3	18.8	18.7	20.6	21.5	23.3	17.0
CZ	12.8	13.9	15.1	15.1	14.9	14.8	15.1	16.2	17.3	17.7
DK	25.5	27.2	29.3	30.5	31.7	34.4	35.2	37.0	31.7	34.7
DE	13.5	13.8	14.4	14.9	14.9	15.5	16.7	17.3	19.1	19.2
EE	25.6	25.4	26.1	29.0	29.2	29.5	30.0	31.7	30.1	38.0
IE	7.0	7.5	8.5	9.1	9.2	10.5	10.9	12.0	16.2	12.5
EL	13.7	15.3	15.7	15.7	15.4	17.3	18.0	19.6	21.7	21.9
ES	14.2	15.1	15.9	16.2	17.0	17.1	17.0	17.9	21.2	20.7
FR	13.2	13.9	14.4	14.8	15.5	15.8	16.4	17.2	19.1	19.3
HR	26.8	28.0	27.8	29.0	28.3	27.3	28.0	28.5	31.0	31.3
IT	15.4	16.7	17.1	17.5	17.4	18.3	17.8	18.2	20.4	19.0
CY	7.1	8.4	9.1	9.9	9.8	10.5	13.9	13.8	16.9	18.4
LV	35.7	37.0	38.6	37.5	37.1	39.0	40.0	40.9	42.1	42.1
LT	21.4	22.7	23.6	25.7	25.6	26.0	24.7	25.5	26.8	28.2
LU	3.1	3.5	4.5	5.0	5.4	6.2	8.9	7.0	11.7	11.7
HU	15.5	16.2	14.6	14.5	14.4	13.6	12.5	12.6	13.9	14.1
MT	2.9	3.8	4.7	5.1	6.2	7.2	7.9	8.2	10.7	12.2
NL	4.7	4.7	5.4	5.7	5.8	6.5	7.4	8.9	14.0	12.3
AT	32.7	32.7	33.6	33.5	33.4	33.1	33.8	33.8	36.5	36.4
PL	11.0	11.5	11.6	11.9	11.4	11.1	14.9	15.4	16.1	15.6
PT	24.6	25.7	29.5	30.5	30.9	30.6	30.2	30.6	34.0	34.0
RO	22.8	23.9	24.8	24.8	25.0	24.5	23.9	24.3	24.5	23.6
SI	21.6	23.2	22.5	22.9	22.0	21.7	21.4	22.0	25.0	25.0
SK	10.5	10.1	11.7	12.9	12.0	11.5	11.9	16.9	17.3	17.4
FI	34.2	36.6	38.6	39.2	38.9	40.9	41.2	42.8	43.9	43.1
SE	49.4	50.2	51.2	52.2	52.6	53.4	53.9	55.8	60.1	62.6

Table 1.

Share of energy from renewable sources in the European Union.

Source: own elaboration based on Eurostat (2023).

As a result, Europe is in a better relative position than other areas, especially Southeast Asia, which leads to greenhouse gas emissions. According to data from the European Commission, in 2021, seven countries (China, India, Russia, Iran, Saudi Arabia, Brazil and Türkiye) are responsible for more than 1% of global CO₂ emissions. The biggest concern is that some of these countries have increased their emissions. But then, Türkiye shows an amount superior to 7% from 2019 to 2021. On the contrary, the EU27 and other countries (United States, Japan, South Korea, Indonesia, Canada, South Africa, Mexico and Australia) emitted fewer greenhouse gases in 2021 than in 2019. However, despite the progress made, there still needs to be more scope for adopting renewable energy sources in European countries [4].

With significant differences between the Nordic and Benelux states, the fact is that the average for the Union of 27 countries is just shy of 20% of total energy consumption from renewable sources. However, it needs to be closer to the Commission’s proposed target of 53% of the total energy demand supplied in the form of electricity by 2050. Moreover, according to the Commission’s forecast, 80% of this electricity will come from renewable sources derived from solar plants and onshore and offshore wind, significantly reducing energy dependence on hydrocarbon-producing countries. The Commission’s calculations foresee the release of between two and three trillion euros that could be used to modernise the EU economy. The advantages, therefore, are not only environmental, but the energy transition is a new model of economic competitiveness that will improve the relative position of the states that carry it out.

Governments may increase their spending to help private actors through discretionary stimuli. According to the classical equivalence proposition, the more debt-financed public expenditure, the greater the savings to the private sector, so the stimulus effect on aggregate demand will be neutralised. However, in the short-term, increases in public expenditure can encourage private investments, especially during recessions. Table 2 illustrates how most European countries target renewables in their public energy-related research spending.

TIME	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
EU-27	2.08	2.1	2.11	2.12	2.12	2.15	2.19	2.22	2.3	2.26
BE	2.28	2.33	2.37	2.43	2.52	2.67	2.86	3.16	3.35	3.22
BG	0.6	0.63	0.79	0.95	0.77	0.74	0.75	0.83	0.85	0.77
CZ	1.77	1.88	1.96	1.92	1.67	1.77	1.9	1.93	1.99	2.
DK	2.98	2.97	2.91	3.06	3.09	2.93	2.97	2.93	2.96	2.81
DE	2.88	2.84	2.88	2.93	2.94	3.05	3.11	3.17	3.13	3.13
EE	2.12	1.72	1.43	1.47	1.24	1.28	1.41	1.63	1.75	1.75
IE	1.56	1.57	1.52	1.18	1.18	1.25	1.17	1.23	1.23	1.06
EL	0.71	0.81	0.84	0.97	1.01	1.15	1.21	1.28	1.51	1.45
ES	1.3	1.27	1.24	1.22	1.19	1.21	1.24	1.25	1.41	1.43
FR	2.23	2.24	2.23	2.23	2.22	2.2	2.2	2.19	2.3	2.21
HR	0.74	0.8	0.77	0.83	0.85	0.85	0.95	1.08	1.24	1.24
IT	1.26	1.3	1.34	1.34	1.37	1.37	1.42	1.46	1.51	1.49
CY	0.44	0.48	0.51	0.48	0.52	0.54	0.61	0.71	0.84	0.87
LV	0.66	0.61	0.69	0.62	0.44	0.51	0.64	0.64	0.69	0.69
LT	0.89	0.95	1.03	1.04	0.84	0.9	0.94	0.99	1.14	1.11
LU	1.21	1.23	1.22	1.25	1.27	1.24	1.17	1.18	1.09	1.02
HU	1.25	1.38	1.34	1.34	1.18	1.32	1.51	1.47	1.59	1.65
MT	0.8	0.74	0.69	0.72	0.56	0.55	0.58	0.56	0.65	0.63
NL	1.92	2.16	2.17	2.15	2.15	2.18	2.14	2.18	2.31	2.25
AT	2.91	2.95	3.08	3.05	3.12	3.06	3.09	3.13	3.2	3.19
PL	0.88	0.88	0.94	1.	0.96	1.03	1.21	1.32	1.39	1.44
PT	1.38	1.32	1.29	1.24	1.28	1.32	1.35	1.4	1.61	1.66
RO	0.46	0.39	0.38	0.49	0.48	0.5	0.5	0.48	0.47	0.47
SI	2.56	2.56	2.37	2.2	2.01	1.87	1.95	2.04	2.14	2.14
SK	0.79	0.82	0.88	1.16	0.79	0.88	0.84	0.82	0.9	0.93
FI	3.4	3.27	3.15	2.87	2.72	2.73	2.76	2.8	2.91	2.98
SE	3.23	3.26	3.1	3.22	3.25	3.36	3.32	3.39	3.49	3.36

Table 2.

Gross domestic expenditure on R&D (EU-27).

Source: own elaboration based on Eurostat (2023).

Public intervention in areas such as innovation and the environment is justified by several classic economic problems that determine market failure in their production. Without going into well-known sites, incomplete information, externalities, and economies of scale are typical cases where the market cannot set a fair price for goods or services. As far as the environment is concerned, there is neither a price attached to the emission of pollution nor enforceable property rights for the damage caused; when it comes to innovation, the market can neither ensure the success of its research nor all the funding it needs nor, of course, that it can exclusively receive the benefits generated by its inventions [5]. This situation corresponds to a double scenario of underproduction [6]. Therefore, it justifies the intervention of the public sector with measures that encourage innovation and discourage pollution.

However, actions encouraging specific objectives usually channel resources towards certain economic agents’ investments, activities, or decisions. Governments must weigh the effect of diverting resources towards the proposed goals regarding other expenditure items that will reduce their funding and the degree of efficiency achieved. Economic studies on promoting innovation in improving the environment show that public action is more efficient than public spending. The OECD concludes that invention significantly impacts policies to reduce environmental damage: not only does it reduce the cost of measures, but the environmental outcome is achieved earlier. The OECD’s recommendation is to undertake solid short-term investments that encourage the introduction of new technologies to achieve significant long-term results.

Consistent with the above approach, the European Commission has promoted an action plan that seeks greater competitiveness in the European economy and is based on ensuring sustainable consumption and production patterns following the prescriptions of other international organisations [7]. The new circular economy model aims to abandon the current model (Take-Make-Waste) for a regenerative growth model based on the efficient use of natural resources, with technological progress being the ideal means to make this possible. One of the most significant interests is research into new sources of clean energy, such as that generated in the oceans or using hydrogen as a raw material in industrial processes. These alternatives, together with the maintenance of nuclear power plants and the development of new biofuels that can be used in the so-called diffuse sectors, will, according to the Commission’s estimates, make it possible to achieve the goal of zero net emissions by 2050 [8].

In any case, public sector action in environmental protection can be carried out through different means, which are not mutually exclusive, but their combination usually yields better results. The traditional way to act is by regulating the technical conditions of specific sectors, processes, or products. Regulatory regulation, per se, has determined the forced change of polluting processes or fuels, requiring the abandonment of obsolete and polluting technology to reduce the environmental impact.

In addition to the regulatory function, market-based instruments make the most polluting products more expensive. Emissions trading makes it possible to use emission allowances as a marketable commodity. In this way, an economic agent who carries out a polluting activity and holds an emission permit can trade with his allowances, buying more if he needs to emit more pollutants or selling if his need is less than the allowances recognised. In either case, a global emissions ceiling is set that cannot be exceeded. The first and most significant international carbon market is the EU Emissions Trading Scheme, created in 2005 and regulated by Directive 2003/87/EC [9]. Significantly, one of its objectives is to assist industry and the energy sector in meeting the innovation and investment challenges of transitioning to a low-carbon economy using specific funding mechanisms. The Innovation Fund is a funding instrument for low-carbon technology and processes in energy-intensive industries, environmentally safe carbon dioxide capture, utilisation and storage, and innovative renewable energy and energy storage technologies. It is programmed for 2021–2030 and endowed with 10 million. It funds up to 60% of investment and operational costs and coordinates with other European funding programs for research and innovation in low-carbon technology. Another instrument is the Modernisation Fund, which finances investments to modernise the electricity sector in carbon-dependent regions in ten low-income Member States. A tool can also be adapted at the market level to set a certain level of acceptable pollutant emissions in a sector, whereby operators exceeding this level are penalised. Those that fall below it receive discounts or subsidies—Feebates. It can be configured as a zero-sum mechanism that encourages internal competition and, ultimately, the overall reduction of recorded emissions.

Finally, states have established taxes on certain economic activities and products whose justification can be found in protecting the environment. The harmonised definition of such taxes is that environmental taxes are those whose tax base consists of a physical (or similar) unit of some material that has a proven and specific negative impact on the environment.

In recent decades, taxation has been extended to the different areas of protection of the natural environment, dealing with water consumption and purification, solid waste treatment and emissions of gases and other products that pollute the atmosphere. However, the two main categories of environmental taxation are energy taxes and transport taxes, classic forms of indirect taxation oriented towards environmental protection. The evolution of this category of taxes has reflected the progressive concern to limit the polluting impact of our productive activity, at least from the declarative point of view, although the collection object. Nevertheless, what had inspired the birth of a large part of these taxes has not been abandoned.

3. Taxation as a driver of energy transition through technological innovation

From an economic perspective, taxes levied on activities that generate pollution act as correctors of market inefficiency that does not compensate for a negative externality. Therefore, the premise that “the polluter pays” is nothing more than the recognition of the corrective action of the public sector through its taxation powers. The tax paid by those who cause environmental damage is configured as a compulsory payment to discourage their behaviour. In correspondence with the levy, the polluting agent will introduce corrective measures that allow him to reduce the fiscal cost he bears, which he will also pass on as an increase in the price of the product or service that generates the negative externality, discouraging its consumption.

We typically accept three types of environmental taxes. There are some whose goal is to cover the costs of ecological services against pollution; another kind of tax has the primary function of providing revenues, and incentive taxes are designed to modify producers’ and consumers’ behaviour. According to the Final Report of the European Commission [10], there were 142 taxes identified that target greenhouse gases emission, considering that the data excludes taxes under the Energy Tax Directive. Taxes on vehicles is also one of the most common types of taxation employed. Countries usually charge by the purchase and registration of the vehicle, as well as create a circulation tax. However, the carbon taxes, in conjunction with the emissions trading systems, are relevant instruments to reduce the impact of greenhouse gases. Carbon taxes often have significant distributional effects on their political sustainability. Because of that, carbon taxes can also be designed to be neutral, meaning that introducing or increasing the carbon tax in environmental tax reforms will lead to reductions in other taxes. Furthermore, taxes are often offset in recycling measures that return carbon tax revenues to households and businesses to mitigate the harmful effects of their distributional consequences.

It is irrelevant whether the result of this type of tax collection is linked to expenditure related to protecting the natural environment. In other words, not the earmarking of revenues for this purpose is decisive, but rather the configuration of the taxable event to penalise the polluting action. International reports suggest that revenues from this tax should not be earmarked for environmental activities but rather reducing other taxes that discourage work and investment. However, on the other hand, an incorrect configuration could lead to undesired direct effects that aggravate the problem of pollution.

The advantages of environmental taxation [4] are its efficiency in internalising costs, as well as in promoting technological innovation and changing consumption habits. The boost to technological development and innovation increases their efficiency if it occurs through a tax because the tax continues to operate, linked to the positive impact on the environment once the technological breakthrough has occurred. Moreover, suppose the product is taxed to penalise its polluting nature. In that case, it will influence the consumption decision through the price and provide an incentive to behave environmentally soundly.

Among the disadvantages of environmental taxation are the undesirable effects of its use for tax collection purposes. The financial needs of the public sector can lead to an abuse of this type of taxation, the action of which can be directed at the will of the legislator towards specific sectors to the detriment of others. Another, not minor, problem is their introduction and modification according to the economic situation and the consequent loss of legal certainty. The stability of tax regulation is essential for operators to plan their activity rationally and, above all, to make technology investments that can improve products or production processes. Overly intense taxation of a polluting sector can discourage innovative investments that can reduce its environmental impact, hence the importance of coordinating taxation to avoid this risk. On the other hand, a profusion of exemptions and deductions can undermine the tax’s natural effect on the polluting product’s price so that its introduction will serve only the environmental purpose but other economic policy objectives, such as the protection of certain activities.

Regarding the percentage of total tax revenues obtained by European States, Table 3 shows that the relative importance of environmental-related taxes is relatively low. Treasuries barely collect from 4–10% of their tax revenues, and, related to the European level, the data shows how their implementation has been moderate.

Time	2012	2013	2014	2015	2016	2017	2018	2019	2020	2021
EU-27	6.2	6.2	6.2	6.2	6.2	6.1	6.0	5.9	5.6	5.5
BE	5.6	5.5	5.6	5.7	6.0	6.0	6.0	6.1	5.8	5.7
BG	10.2	10.2	10.0	10.2	10.2	9.4	8.8	9.9	9.9	9.1
CZ	6.4	6.0	6.2	6.0	6.0	5.7	5.4	5.7	5.4	5.1
DK	8.7	9.0	8.2	8.6	8.6	8.0	8.2	7.0	6.7	6.0
DE	5.5	5.4	5.2	5.0	4.8	4.6	4.5	4.4	4.3	4.4
EE	8.6	8.1	8.3	8.2	8.9	8.7	8.3	9.6	7.2	6.8
IE	8.4	8.6	8.3	8.2	8.0	7.8	7.0	6.4	6.1	5.5
EL	9.2	10.2	10.3	10.5	9.8	10.2	9.5	9.8	9.7	10.0
ES	4.9	5.8	5.5	5.7	5.5	5.4	5.3	5.1	4.7	4.6
FR	4.4	4.5	4.5	4.7	4.9	5.0	5.1	5.1	4.8	4.8
HR	7.1	7.8	8.7	9.1	9.3	9.4	9.4	9.2	8.9	8.8
IT	8.0	7.9	8.3	7.9	8.3	8.0	7.9	7.7	7.1	6.9
CY	8.2	8.6	9.1	9.2	9.1	9.0	8.6	7.4	7.0	6.5
LV	10.3	10.8	11.3	11.8	11.7	11.2	10.9	9.6	9.8	9.0
LT	6.1	6.2	6.3	6.4	6.5	6.5	6.6	6.2	6.2	5.8
LU	6.1	5.7	5.2	5.1	4.7	4.5	4.3	4.4	3.6	3.8
HU	6.5	6.3	6.3	6.4	6.5	6.4	6.2	6.2	6.0	5.9
MT	8.9	8.2	8.7	9.1	8.6	8.4	8.2	8.3	7.7	6.5
NL	9.1	9.1	8.9	9.0	8.7	8.6	8.6	8.6	8.0	7.8
AT	5.8	5.6	5.6	5.5	5.6	5.7	5.4	5.4	5.0	5.0
PL	8.1	7.6	8.1	8.2	8.1	7.9	7.7	7.2	7.1	7.8
PT	6.9	6.5	6.7	7.0	7.6	7.6	7.4	7.3	6.7	6.6
RO	7.2	7.5	8.7	8.8	9.3	7.8	7.6	8.1	7.3	7.4
SI	10.1	10.5	10.3	10.3	10.3	9.8	9.1	8.9	7.9	7.3
SK	8.3	8.2	8.0	7.7	7.6	7.5	7.3	7.3	7.1	6.7
FI	7.0	6.7	6.6	6.7	7.1	6.9	6.9	6.6	6.5	5.8
SE	5.7	5.5	5.2	5.1	5.0	4.8	4.8	4.8	4.7	4.5

Table 3.

Share of environmental-related tax revenues (% of total tax revenues).

Source: own elaboration based on Eurostat (2023).

The setting of environmental taxes can be determined based on the amount of pollution generated, or an indirect criterion based on the consumption of the product that produces the polluting emissions can be used as a benchmark. The corrective capacity of the first tax type is higher and, therefore, preferable to eliminate or reduce environmentally harmful activity. However, indirect taxes on the consumption of specific products are easier to apply, which is why this is the predominant form of environmental taxation.

Taxes applied to discourage the consumption of polluting energies, coal, petroleum products and natural gas, have become widespread and represent an essential source of resources for the treasury. Fuel taxation is simple to implement, has low collection costs and can be passed on to final consumers so that consumption restrictions are passed on to those who ultimately spend energy. However, both indirect taxes on the consumption of these products and the higher direct taxes borne by companies dedicated to the exploitation of hydrocarbons increase the price of energy supplies to individuals and companies and, in short, generate a disincentive effect on their use.

However, it should be pointed out that, in the absence of alternative energy sources not penalised by taxation, the consumption of oil or coal derivatives is not so much an option as an obligation for their recipients. In economic terms, we are dealing with an inelastic demand, which determines a change in the price of production and consumption. Still, not a lower impact on the volume produced or consumed. In this way, rather than discouraging the production and consumption of these fuels, what is delivered are perverse effects well known in economics, particularly an increase in inflation and the relative worsening of those with less economic capacity. It is well known that indirect taxation is not adapted to the conditions of the taxpayer, which is why the portion of income spent on this type of taxation is higher for those with lower income. One of the most affected aspects of environmental fiscal policy requirements is to prevent their implementation from generating a worse income redistribution, especially in developing countries [11]. If these taxes are not designed with a broader redistributive approach, considering their coordination with other tax measures and direct aid concessions, the result is regressive. They are more detrimental to lower incomes, especially if they need transport from areas with poorer infrastructure.

Revenues from taxes aimed at penalising activities that generate climate change come mainly from specific taxes on energy products, gains from the auctioning of tradable CO₂ emission allowances and taxes on the use of roads and motor vehicles, as shown in Figure 1.

Figure 1.

Climate change-related tax revenue by taxable base (% total environmental-related tax revenue). 2020. Source: OCDE (2022).

The selection of countries presented represents the reality of European Union members. As is evident, the primary tax effort of states is focused on taxing energy, mainly motor fuels and transport. Generally, the trend is downward in the revenue volume they contribute, both in absolute terms and concerning GDP.

Although the situation cannot be generalised to all states, the causes of this reduction can be found in a combination of global factors. The most relevant, from the perspective of the structure of these taxes, is that the tax rates applied, usually defined in physical units, are set in nominal terms. As the tax cannot be adjusted for inflation, these rates decrease in real terms over time. In short, and as Gago et al. [12] state, practically all existing energy taxes in the world are below the optimal level from an environmental point of view, with one of the factors that explain this situation being the problems in the design of these taxes [13]. In the same sense, Sanz & Rodríguez [14] point out that some environmental taxes have not been designed, considering the impact of energy consumption on the environment.

Likewise, different tax sovereignties have jointly taxed certain taxable events, or else the sources of taxation have been distributed in correlation with the competencies that each one holds. In this sense, environmental tax policy can generate free-rider behaviour in tax asymmetry. As we have noted, the fiscal cost can be a barrier to innovation due to the pressure it exerts on the price of products, which can result in an advantage for those countries that do not impose this type of tax or apply relevant exemptions and deductions on them. Border tax adjustments linked to the carbon content of imported products have been suggested [15], and it has been found that, in terms of carbon dioxide emissions, countries that have made a more significant effort in environmental control have increased carbon imports more than those that have not implemented these policies [16].

The risks of increasing taxation on these energy sources are high, so alternatives are being sought to avoid their negative consequences and encourage a reduction in consumption. These objectives must be met before the fact is that most of our energy consumption in Europe comes from fossil fuels, which is why tax measures on this type of consumption are the central area of environmental action for states. It is obvious that ecological tax protection is not limited to the introduction of environmental taxes but is also expressed in the provision of incentives to promote certain activities that are beneficial to our natural environment—such as the R&D deduction in corporate taxation—or in the introduction of the ecological element in the structure of current taxes. Concerning the relationship between corporate taxation and its adequacy to promote innovation, as stated in different studies, taxation on corporate and personal income negatively affects quantity, quality, location, and innovation [17]. However, most governments introduce tax incentives in corporate income tax to promote innovation investments business. By lowering the effective tax burden, companies benefit from a tax advantage that encourages innovation investments. Countries try to address these investments to reduce the carbon footprint and focus innovation on developing environmentally friendly technologies.

Measuring the effectiveness of taxation on innovation is very complicated, which is why indirect indicators are used, such as the one shown in the following Figure 2, which shows the evolution of patents related to the environment.

Figure 2.

Evolution of environment-related patents. 2010–2018. Source: OCDE (2022).

Although some environmental innovation needs to be better reflected in the generation of new patents, the graph above shows the sensitivity of ecological innovation to economic policy measures, and Table 4 shows accurately.

Time	2019
BE	172.8
BG	9.0
CZ	53.1
DK	401.4
DE	3985.1
EE	2.3
IE	47.3
EL	13.8
ES	227.5
FR	1457.0
HR	2.1
IT	579.5
CY	3.8
LV	3.5
LT	3.5
LU	14.6
HU	21.3
MT	3.0
NL	425.5
AT	359.9
PL	61.7
PT	24.5
RO	10.2
SI	17.6
SK	13.2
FI	207.9
SE	392.7

Table 4.

Environmental-related patents by country 2019.

Source: OCDE (2023).

Data show a remarkable disparity between European countries, with Germany and France as clear leaders. If the above information is disaggregated, we can see that most patents are related to developing technologies for mitigating climate change, followed by those on producing and processing goods and those on transportation [18]. Of particular note is that patents related to capturing and storing greenhouse gases, which should be most relevant to reducing the climate change impact, are the scarcest (Figure 3).

Figure 3.

Percentage of environment-related patents on climate change mitigation. 2000–2019. Source: OCDE (2023).

Market failures concerning environmental innovation are generally addressed more efficiently by complementary technological instruments rather than by setting the ecological tax above marginal environmental damages [19]. About this type of analysis, the OECD [20] concludes that the application of more restrictive standards on pollutant gas emissions has a higher impact on patent generation than those implemented for fuel efficiency, and, with some caveats, they also see a positive effect to petrol prices and patent generation. This effect is consistent, therefore, with the pressure that higher fuel prices put on the need for innovation and provides scope for governments to take fiscal action in this area. However, although it would be possible to act by reducing the taxation of energy from renewable sources or the consumption of ecological products, its capacity to incentivise technological innovation is reduced. In other words, the optimal type and amount of innovation to help solve global environmental challenges are not likely to be achieved through environment-related taxes alone [21].

Lower innovation can be seen as an undesirable consequence of taxation, given its elasticity concerning taxes [22]. We should expect that the higher the tax burden, the less innovation will occur. Therefore, tax policy could be designed to encourage or stimulate innovation [23]. A standard measure to improve private innovation is to provide R&D tax credits for investment in a Corporate Income Tax. These credits are either volume based or only for an increment in R&D. The first option means that the tax credit is attainable over the total amount of R&D invested in a fiscal year. The advantage of this kind of incentive is that it is easier to administer, but, on the other hand, firms obtain a fiscal profit for R&D investment that could have taken place without public aid. Therefore, if the incentive is provided only in case of an increment in R&D, the companies that benefit from such a system have committed to ameliorating their rate of R&D spending over time. Even though this incentive could be considered more accurate, there are still some questions to solve. Increment-based schemes encourage enterprises to adapt their R&D investments to maximise fiscal benefits. Firms with cycling R&D behaviour increase the total amount of R&D tax credits [24]. Another problem with incremental R&D incentives is that firms may take advantage of corporative transformations like mergers.

Many countries are setting up R&D tax credits whose positive impact is less intense than we expect (OECD, 2008). According to the study, tax credits should focus on the larger industries which are structurally more R&D intensive. However, as Palazzi points out, reducing a Corporate Income Tax rate could be better for economic growth than a R&D tax credit.

4. Conclusions

Given the diversity of this topic, it is difficult to draw firm and comprehensive conclusions about the role of environmental taxes in the overall ecological policy of individual countries. Yet, ecological taxation plays a somewhat more critical role in Europe than in other areas. This leads, in part, but very imperfectly, to higher tax revenues as a percentage of the total collection. However, as well as had been shown in this chapter, it barely reaches 5%. Consequently, there is a long way to go on green taxation, especially on promoting the development of private R&D investments linked to environmental protection.

An important aspect to highlight is that different consequences can be expected depending on the type of tax. Environmental levies should be divided into energy and transportation taxes, which have great potential as a source of income and are driven at least partly by global concerns such as climate change. In this category, designing a careful incentive policy is crucial to maintain effectiveness as an instrument to achieve global climate goals. A relevant concern about energy prices due to higher tax rates on energy sources must stand. Despite significant revenues that could be obtained, the harmful impact on industrial competitiveness would explain competitive tax behaviour between countries, which, as well as settled in the literature, means lost in the global collection. Therefore, a coordinated environmental tax policy avoids the negative results of fiscal competition. Moreover, this energy and transportation taxation has an undesirable regressive effect on the lowest incomes that cannot be accepted without consideration in European democratic society.

About a carbon tax, in the same sense, that European Commission has proposed, a border adjustment mechanism is needed to tax greenhouse emissions associated with products manufactured in countries where these emissions are not charged. Moreover, taxation on some energy sources—mineral oils, coal, and electricity—should adapt their configuration considering the level of CO₂ emissions, not only modifying their tax rate but also calculating their tax base according to their environmental performance.

The main conclusion is obvious but relevant: environmental taxation and carbon pricing are two essential instruments in the fight against climate change that can be oriented towards promoting investment in R&D related to low-carbon technologies. It is, therefore, important that the necessary regulatory measures are adopted to make both objectives compatible. This goal cannot be done through a single tax figure; the tax system must be oriented to comprehensively achieve the bases for the desired change in the economic model. Not only should governments be able to allocate resources to public investments but also to improve private R&D investments.

Taxation systems must be capable of attracting capital to encourage renewable energy projects. To achieve this objective, the corporate income tax should include incentives linked to promote energy efficiency investments. Some European countries have an incentive that may eliminate, in whole or in part, the taxation on fixed assets used for renewable energy production. Energy credits can be an excellent stimulus for capital-intensive technologies such as wind power or solar energy. Examples of these technology tax credits are the Investment Tax Credit (ITC) and the Production Tax Credit (PTC). However, it may also be desirable to encourage firms to take effective environmental management measures.

Notwithstanding anything above, the influence of the tax system on innovation goes beyond the incentives that can be applied to corporate income tax. Therefore, the motivation for investment in R&D cannot be relegated to corporate taxation, ignoring the effects that other taxes can have on it. Remember that taxes are one more component of company expenses and that a relative change in the price of production factors is an incentive for innovation. A specific innovation aimed at reducing the cost of the element that has become more expensive, i.e., tax policy, can “put a price” on the environment that is consumed/polluted and direct the company’s innovative effort towards reducing its polluting activity.

In this area, taxes on the consumption of certain products alter the firm’s profit and are, per se, an incentive to introduce technological change. In particular, excise taxes on energy, especially on hydrocarbon derivatives, compel the firm to reduce its consumption or to look for new, untaxed sources. For a company to decide to invest in research and development of new technology, it must expect that future savings will allow it to make a profit. Therefore, although the excise tax makes a factor more expensive and acts as a spur to innovation, complementary mechanisms are needed to enable the company to reduce its tax bill in the research and development period, which requires coordination with the corporate tax.

From international experience, energy taxation has been directed at the fundamental objective of revenue collection and needs to consider its role as a driver of environmental and technological innovation. However, obtaining additional resources derived from these figures does not in itself lead to an improvement in environmental protection. Even if these revenues were earmarked to reverse the problems generated by pollution, they would continue being consumed, and new production processes would only be adopted if new technologies developed cost savings. When we go into the case of Europe, the environmental tax trend is stable. Although tax revenues increased, this dress was less than the increase in total revenue collected. In addition, countries such as Denmark, Germany and Portugal experienced declining environmental tax revenues in recent years.

Indeed, it is vital to care about energy taxation, avoiding problems in their structure, particularly in sectoral allowances, reductions, and nominal rates that have eroded the price signal they should have generated. The lack of a significant impact on price results in lower investment in clean and low-carbon technologies. It also presents visibility problems for the consumer, who needs to adequately value their choice to consume a polluting product instead of an environmentally sustainable one. On the other hand, the tax with the most significant potential impact, the one levied on gas emissions, needs to be better regulated. Its low rates prevent it from acting as a powerful incentive for energy innovation.

Despite the relevance of taxation, our environmental taxes are not designed to favour innovation and are, at best, only oriented towards internalising pollution’s cost.

The challenge facing public decision-makers is not an easy one: on the one hand, and they are under pressure to act to decarbonise our economy; on the other, they must ensure that their companies are not disadvantaged by the opportunistic behaviour of those who do not bear the cost of reducing the use of fossil fuels—which will necessarily require broad international agreement. Taxation can be a good solution as long as it does not lead to distortions in income redistribution and is not such as discouraging innovative efforts in search of business savings. Instead, the solution requires that direct and indirect taxation act in a coordinated manner be genuinely effective and achieve the dual objective of discouraging carbon emissions and favouring technological innovation.