OECD Briefing Reviews Taxation, Innovation and the Environment

June 2011: The Organisation for Economic Co-operation and Development (OECD) has published a briefing note titled “Taxation, Innovation and the Environment,” which illustrates how carbon and other pollution taxes, as well as similar instruments, positively affect innovation.

Based on the premise that innovation is critical to achieving environmental outcomes at a reasonable cost, the paper looks at different options to incentivize innovation away from dirty technologies. While stressing that no one instrument can be considered best to address every environmental challenge, the briefing notes a growing movement towards environmentally-related taxation and tradable permits in OECD economies. It further argues that environmentally-related taxation stimulates the diffusion of new technologies and practices.

The briefing note also reviews reasons why innovation and environmentally-related taxation may not be clearly revealed in empirical analyses, including that: use of taxation for these purposes is still relatively new; investigating the innovation effects of environmental taxation is more difficult than for other, more direct, environmental policy tools; taxes may not have been optimally designed; and many other factors affect firms' innovation efforts.

Regarding best practices, the OECD underlines that: to be most effective, environmentally-related taxes should cover all sources and all levels of pollution; governments should directly address environmental challenges; and taxes should be predicable in order to support investment and abatement decisions. [Publication: Taxation, Innovation and the Environment] [Executive Summary]