ronmental problems are considered as externalities. Economic instruments promote the internalization of measurable externalities. There are two prin- cipal approaches to the control and correction of external effects: control and correction via taxes and subsidies (Pigou, 1932), and control and correc- tion via the introduction of property rights (Coase, 1960). The Pigouvian tra- dition, which is dominant in Europe, is based on the idea that externalities exist because of the difference between the private and social marginal cost. With negative externality the social marginal cost exceeds the private mar- ginal cost, suggesting a correction of the private marginal cost in the form of a tax (Boman et al., 1999). Taxation enables the internalization of the exter- nal costs of environmental damage and a mechanism for introducing price differentials to encourage more sustainable production and consumption pat- terns. The OECD countries have accepted the polluter-pays principle (PPP), where they agree to conduct their pollution-control policies so that the prop- erty rights lie with the sufferers. According to the polluter-pays principle, the polluters are taxed rather than the sufferers being subsidized. The state, in theory, uses tax revenue to benefit the citizens (Bowers, 1997). However, cur- rent prices do not reflect environmental costs and tax systems favour materi- als over labour (Van Bueren, 1999; Dorigoni and Gullí, 2002).
An examination of the national progress reports shows that the Environ- mental Tax Reform that aims at shifting taxes from labour onto the environ- ment has been implemented in most European countries, e.g. in the Nether- lands, Belgium, Denmark, Sweden, Finland, the UK, Austria, Germany and Ita- ly (Novem, 2002b). However, the European Environment Agency reports that while pollution and resource tax revenues have grown, they still contrib- ute a very small share and the impact of environmental taxes in practice is still low (EEA, 2002a). For example, despite increases in taxation from 1985 to 2001, energy prices for most fuels dropped and the overall demand for ener- gy increased (EEA, 2002b). The national progress reports show that current environmental tax measures are only indirectly related to housing in terms
of energy and CO2 costs, but they do not set targets for the construction sector in particular. A number of EU member states have introduced housing-relat- ed tax measures, e.g. Belgium on water consumption and the UK an aggre- gate levy on the extraction of virgin construction materials. The Regulatory Energy Tax (REB) was applied in 2001 to Dutch households, which had to pay a third more for their energy. Research shows, however, that only half of the population is aware of the Regulatory Energy Tax and 2% take it into account in the use of electricity (Van der Waals, 2001). Some countries offer tax relief on measures that support sustainable development e.g. a tax relief for prop- erty transfers in disadvantaged areas. In the Netherlands, the landfill tax has reduced the amount of waste going to landfill from 49.7% in 1985 to 4.6% in 2000, and increased recycling from 49.5% in 1985 to 94.3% in 2000 (Hasegawa, 2002). Since its introduction in 1996, the landfill tax has also contributed to the increase of crushing and recycling sites in the UK (Sunikka, 2001). A land- fill tax can effectively reduce the final disposal of construction and demolition waste if the tax rate is set high enough. However, households have no incen- tive to reduce the volume of waste generated as they receive no financial benefit from it. Financial savings that result from their efforts will be spread across all households, and since the number of households is very large, it is dissipated to the point of insignificance. In an incentive-compatible system households would be charged according to the volume of waste they produce for collection. On the other hand, incentive-compatible charges introduce the risk that households would resort to the illegal dumping of waste (Bowers, 1997). Other regulatory instruments, therefore, such as mandatory reporting and demolition permission, are needed to support these kinds of tax.
Most EU accession countries have introduced taxes that result from envi- ronmental damage. In the Baltic countries and Bulgaria, the tax revenue is used for Environmental Investment Funds, according to the recycled tax principle. However, in Poland and Romania, for example, environmental tax- es have not yet been introduced and in the Czech Republic taxation law is being drafted. An examination of the country reports shows that in the EU accession countries there are some housing-related environmental taxes. For example, in Bulgaria a discount in the immovable property tax is provided for basic housing with an extra discount for disabled people, whereas the tax is increased for non-built plots in urban development areas (Novem, 2002b). Governments can use Value Added Tax (VAT) to support environmental invest- ments. Some EU countries, such as the UK, France, Belgium and Luxembourg, apply a reduced VAT rate to renovations in order to encourage maintenance of the existing stock, especially in the social housing sector. In France, VAT of 5.5% is combined with the PALULOS subsidy for improvements in existing social housing. The combined overall aid package is worth 22%, or €13,000 per housing unit as a ceiling. This has enabled improvements to increase energy efficiency to take place (Sunikka, 2001). In Belgium, the federal government
grants a 6% VAT rate for housing renovations and their adaptation to the needs of the disabled. However, although the criteria for the projects quali- fying for the reduced VAT measure favour energy efficiency, the measure is currently used without specific criteria for environmental improvements. It can also be applied to products and materials. In the UK, the reduced VAT is applied to energy saving materials. The EU accession countries do not report that they would use the VAT measure for environmental improvements or renovations.
Many governments are afraid to resort to environmental taxes and oth- er stringent measures in their environmental policy because of the feared political price. Taxation can negatively affect specific sectors of the econ- omy that are relevant to the policymaker or create regional unemployment. This can conflict with the vote maximizing behaviour of the policymaker (Sie- bert, 1995). In Germany, however, the government has adapted a mandato- ry approach to sustainable housing. The position of Germany as a forerunner in energy policy is partly enabled by the eco-tax and the act on the sale of electricity from renewable energies that have created incentives for ecologi- cal modernization in energy supply (Tritten, 2002). The use of fiscal measures as an essential part of the German environmental policy may have a concrete impact on housing and housing costs in the future. In 1996, the Federal Envi- ronment Agency studied energy-induced (heat, hot water, electricity) dam- age related to habitation. According to their findings, energy-related costs amounted to €7.7 billion per year, or roughly €2.6 per square metre of the total housing stock per year. Absolute damage values came to approximately €21 billion or €7 per square metre of the total housing stock per year (Lintz, 2000). Thus, the application of the polluter-pays principle would involve pass- ing on all the energy-related costs identified in the study to housing owners and occupants.
Taxes are presumed to achieve the least-cost solution and to provide con- tinuous incentives to search for more cost-effective technologies to improve environmental quality (Siebert, 1995; Hasegawa, 2002). Taxes are effective when they are applied to products consumed in large quantities and com- bined with clear overall targets. From an economic point of view, they pro- vide a source of financial revenue that can be pointed to environmental pro- grammes. However, taxation can be problematic as a policy instrument. Ener- gy taxes are unpopular with the electorate in general and with industry in particular. A regressive tax on a household’s energy use may encourage people to save energy, but it might place an excessive burden on the poorer house- holds, especially in the social housing sector, and create resistance in the pri- vately owned housing sector. Taxation measures are more suitable for the pro- fessional construction industry than households, but even then the emission tax can be shifted to the consumer without efforts to change the current prac- tice. Furthermore, the taxation does not define the pollution level: despite the
costs to the polluters, the aggregate amount of pollution cannot be predict- ed. It depends on the forces of supply and demand and will be determined by them. The system of taxes requires supervision and can be bureaucratic, and, due to the time-consuming process of preparing and enacting the taxes, find- ing the right quality targets and identifying the polluters, prices should apply for a long time period. The allocation conflict can be an implementation bar- rier: the building owner should make the investment to reduce the operation- al load of the building, but his motivation is reduced by the fact that the ten- ant will enjoy the benefits. The use of tax measures depends on the targets: whether the charges are needed for financial purposes or whether more com- plex mechanisms are necessary to affect the behaviour. Complex systems can be more effective, but costly to apply, whereas simply measures seem prac- tical, but are not necessary effective. It is essential that the target groups accept the taxation measures that are imposed on them. The acceptabili- ty can be increased with information, clear targets and schedule of introduc- tion, consultation and progressive implementation. It can be expected that an individual who is better informed about environmental damages has a higher willingness to pay (Siebert, 1995). Also due to the acceptance issue, taxation is suitable in countries where sustainable building is already an established issue, e.g. Germany, Denmark or the Netherlands.