Economic Instruments - Charges and taxes

Environmental Tax Reform (Czech Republic)

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In the early 1990s, the Czech Republic successfully introduced a comprehensive system of economic instruments for environmental policy. The Environmental charges included: air emission charges, CFC product charges, water extraction and pollution charges, sewage charges, charges for waste disposal, land conversion charges, and an airport noise tax. The State Environmental Fund used the revenues collected to provide grants and soft loans for environmental investments on a co-financing basis. In 1996, economic instruments generated US$97 million for the State Environmental Fund. Czech Republic's total environmental expenditure from public and private sources reached an estimated US$1.4 billion or 2.7 percent of GDP in 1996 (Klarer et al., 1999).

The Czech Republic government's aims have been successful in achieving water effluent charges that compare well with the marginal abatement costs they are intended to trigger. Income from pollution charges increased during the early 1990s and peaked in 1994/5. This in turn led to a decrease in the taxable base even when coupled with increased economic growth, examples include dropping emission indicators from stationary air pollution sources and lower estimates of water effluent levels (Klarer et al., 1999).

In general though, charge rates were low in the Czech Republic during the 1990s, they were not adjusted for inflation and administrative costs of emission charges in the air sector are criticised for being high. It was proposed to increase air emission charge rates and decrease the number of chargeable pollutants. However, during the late 1990s charge collection efficiency was estimated to be high. The Czech Republic has had success phasing-in charge rate increases allowing enterprises to gradually adapt to new environmental policies.

In 2000 with the forthcoming accession to the European union underway the eco tax system was under review. Pricing reform in certain sectors, i.e. coal, electricity, and natural gas, remained to be completed. In 1996, revenues generated from the economic instruments was decreasing along with pollution levels, and the Czech Republic was considering other options for achieving continued pollution control and financing goals, i.e. tradable pollution permits and eco-taxation (Klarer et. al, 1999).



In 2000-2001 the first attempt to introduce Environmental Tax Reform into the Czech Republic by the Ministry of Finance and Ministry of Environment failed. Between 2002 and the end of 2004, a series of attempts to implement ETR were unsuccessful. In December 2004 an expert group were set up to inform the government of what needed to be achieved and successful implementation of ETR (Bursik, 2005).

Implementation of the 96/2004/EC directive included increases in taxes on motor fuels and oils, reform of the public finances over a transition period to the end of 2007 for coal, gas and electricity. An electronic toll system to be in place by 2007.

It is envisaged that the tax reform will gradually be implemented over 9 years between 2007 and 2015. The main areas that will face changes in the tax system, as well as those listed above include electricity energy and motor vehicle taxation, including a new tax on coal, hard coal, natural gas and electricity. The aim is to achieve fiscal neutrality such that the tax revenue is recycled and with an increase in environmental taxes there is a decrease in labour taxes but also that low-income households are not unfairly burdened. Reductions in taxation available for renewable and alternative electricity, biogas and CHPs and specified environmentally sound vehicles. A tax refund will be available for public transportation using green electricity (Bursik, 2005).


Electricity Taxation - Externalities - ExternE Methodology


Hard coal

2.8 ct/kWh

Brown coal

3.66 ct/kWh


0.67 ct/kWh

RE hydro

0.0016 ct/kWh

RE photovoltaics

0.005 ct/kWh

With the aim of internalising externalities by 2015.

Source: Bursik, 2005


Allocation of Revenues

In July 2005, the European Commission approved €8m for 2005-2008 in Czech state aid to promote energy efficiency and renewable energy in the transport sector. Measures to be financed include cleaner engines for buses and the construction of park and ride facilities and financial support for the public transport authorities to improve the energy efficiency of their buildings. The fourth measure entails financial support that the Czech Government will give to road, rail and inland waterway infrastructure managers to improve the energy efficiency of this infrastructure. The Commission's analysis has shown that most of these measures do not threaten to distort competition in the transport market or affect competition between Member States. The fifth measure is intended to finance a public awareness campaign on energy savings (ENDS 2006).



Bursik, Martin, 2005, Ecological Tax Reform in Czech Republic, Presentation at Ecotaxes in the New Member States, Green Budget Germany Conference, Berlin, 12th October 2005. Available at:

ENDS, 2006, Environmental Daily Issue 1922, Commission clears national state aid packages, , 25th July 2005. Available at:

Klarer, Jurg, Jim McNicholas, Eva-Maria Knaus, 1999, Sourcebook on Economic Instruments, for Environmental Policy in Central and Eastern Europe: A Regional Analysis, SOFIA INITIATIVE ON ECONOMIC INSTRUMENTS, Hungary. Available at:



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