Environmental tax reform and the potential implications of tax base erosions in the context of emission reduction targets and demographic change

The paper provides a political economy analysis of the potential of environmental tax reforms, focusing on the interaction of economics and political realities by considering climate and energy policies and demographic changes. It examines the future potential for environmental tax reform in view of the need to integrate the economic and environmental demands while taking into account social inclusiveness. Demographic change will have significant budgetary implications for some EU Member States, creating pressures for increased expenditure (e.g. on pensions and health care) while undermining revenues due to a reduction in the labour force. Environmental tax reform potentially offers a response to this challenge. However, there are uncertainties over whether environmental tax revenues, in particular those linked to carbon emissions, will be sufficient to meet the growing expenditures linked to population ageing. Successfully reducing greenhouse gas emissions by 80-95% by 2050 compared to 1990 will shrink the tax base for energy taxes and carbon pricing. It is therefore questionable whether increases in energy tax rates and a high carbon price would enable governments to sustain environmental tax revenues as a share of GDP, let alone increase them as proponents of environmental tax reform envisage.