The last decade witnessed a large increase in the use of economic instruments to protect the environment in OECD countries, with a growing emphasis on tax instruments, in particular in the context of "green tax reforms". (Figure 1) This tendency is due to many factors such as the need to improve the effectiveness of policies based to a great extent on rigid and cumbersome regulations, the need to integrate environmental policies effectively with sectoral policies (such as energy, transport or agriculture), and, sometimes, the search for more tax revenues to finance the general government budget, as well as specific environmental funds or programmes (Barde 1992, 1997, 1999; OECD 1994, 1996a). In this context, fiscal instruments provide an ideal means of injecting appropriate signals into the market, of eliminating or reducing structural distortions (such as unsuitable energy and transport tariffs) and of internalizing externalities, while at the same time improving the efficiency of existing measures. If prope rly conceived and implemented, green tax reforms can contribute to a real structural adjustment of economies.
ENVIRONMENTAL TAXES AND GREENTAX REFORM
Most countries need to introduce more flexibility and efficiency in their economic structures. This implies, inter alia, adjusting tax systems in order to reduce distortions, increase market flexibility and making environmental policies more effective. Most OECD countries have undertaken significant tax reforms since the end of the 1980s, chiefly in two ways: first by reducing tax rates in the higher income tax brackets (which fell on average by more than ten points between 1986 and 1997) and lowering corporate tax rates (down 10 points over the same period); secondly, by broadening the tax base, and thirdly, by giving a greater weight to general consumption taxes such as VAT. These tax reforms provide an excellent opportunity to introduce an environmental dimension in taxation, i.e. a "greening" of tax systems. This greening of taxation may consist of three complementary policies: eliminating tax distortions, restructuring existing taxes, and introducing new environmental taxes.
Eliminating tax distortions
Many fiscal measures can either directly or indirectly produce adverse effects for the environment. One such measure is direct subsidies.  (See Table 1). For example, subsidies to agriculture (estimated at 362 billion dollars a year in OECD countries in 1998, or 1.4% of GDP) are one of the causes of over-farming of land, excessive use of fertilizers and pesticides, soil degradation and other problems (OECD 1996a). Similarly, irrigation water is often charged below its real price, which leads to wastage. In the area of energy, subsidies to coal production, the most polluting fuel, still came to 7.7 billion dollars in 1997 in five OECD countries, which admittedly was lower than the 13.2 billion dollars for 1987. It is estimated that subsidies to industry amounted to 43.7 billion dollars in 1993; when subsidies encourage the use of certain raw materials and greater energy consumption, there can be negative fallout in terms of recycling and waste and lock in inefficient technologies.
A second category of distortion arises from specific tax provisions (tax rates variations or exemptions). For instance, coal, the most polluting fuel, is taxed in only five OECD countries and subject to many tax rebates. The transport sector, a major source of pollution and other harmful effects, is affected by many distortions: a case in point is the widespread under-taxing of diesel oil in many countries which contributed to a constant increase in the number of diesel vehicles, which are more polluting  and noisy, and to a sharp increase of road freight transport. In OECD countries, the consumption of diesel fuel for road transport grew from 15% of total consumption in 1970 to 32% in 1997 (OECD, 1999). Other types of distortionary measures include deductibility of commuting expenses from taxable income, company cars excluded from taxable benefit, and tax free aviation fuel (kerosene). …