From value-added tax to a damage and value-added tax partially based on life cycle assessment: principles and feasibility

It is needless to say that environmental problems increasingly threaten our societies. IPCC warns in its last report that limiting warming to 2 °C above pre-industrial levels is “inconsistent with both long- and short-term trends,” “from the way that we produce and consume energy to how we use the land surface” (IPCC 2014, 418). Climate change is not the only danger. The current extinction rates of species, likely still underestimated, are about 1000 times the natural background rate of extinction and expected to increase in the future (Pimm et al. 2014). The additional amounts of nitrogen and phosphorus activated by modern agriculture already erode the resilience of important earth subsystems (Galloway et al. 2008). Ocean acidification, changes in land use, global freshwater use, stratospheric ozone depletion, chemical pollution, and atmospheric aerosol loading could also have disastrous consequences if some biophysical thresholds were crossed (Steffen et al. 2015). Steffen et al. (2015, 7–8) emphasize the “severe implementation gaps in many global environmental policies relating to planetary boundaries issues” and “the need to address multiple interacting environmental processes simultaneously.” In the fight against these problems, the polluter-pays principle plays a key role for already a long time (OECD 1972; European Union law 1992). According to this principle, the polluters should pay the costs associated with the environmental damages they create. However, the implementation of such a principle (for instance in the form of gas guzzler tax, road haulage charges, fuel excise duties, prepaid waste bags) encounters difficulties from an environmental, legal, and socio-economic point of view.

From the environmental perspective, it is difficult to find coherent and comprehensive criteria to measure different kinds of pollution and damage. As a result, taxes are often limited to specific products¹ or qualities of existing products or to one aspect of environmental issues, which favors windfall effects, emission leakages, or displacement of pollution in time and space (Fullerton 1996; Fowlie 2009; Fullerton et al. 2010; Bosco and Altomonte 2013). This problem concerns not only environmental taxes but many other environmental measures. The phenomenon is well known with regard to carbon leakage (Kuik and Hofkes 2010; Monjon and Quirion 2011). It also affects many other releases and impact categories, as the life cycle assessment experts are well aware of.

From the legal point of view, the polluter-pays principle requires to charge the actors responsible for pollution proportionally to the damage they cause (OECD 1972). Some presentations of the principle also recommend to allocate the revenue of the charge “preferably” to environmental measures and policies rather than to general State budget (Council of the European Communities 1975, 4.b). This can cause some problems. Firstly, because pollution is often a multifactorial phenomenon to which several actors can contribute. Secondly, because the costs of the damages are not always easy to determine. Thirdly, because “allocating charge revenues to a dedicated fund does not conform to the principle of universality, according to which tax revenues should not be used for specific expenditure” (De Sadeleer 2014, 61). To overcome these limitations, a broader framework allowing to “use revenues to finance reductions in incentive-distorting taxes such as income tax or corporation tax” (Pearce 1991, 940) has been developed under the name of Ecological (Budget and) Tax Reform (Von Weizsäcker et al. 1992; European Environment Agency 2000; Milne and Andersen 2012; UNEP 2015). In this framework, the environmental tax measures simply need to comply with the proportionality and non-discrimination principles. The principle of proportionality requires that each taxation measure pursues a legitimate aim (e.g., preventing harm to the environment) and uses adequate means to achieve this aim. Typically, a tax that does not prevent harm to the environment while pursuing that aim will be deemed disproportionate. The principle of non-discrimination implies that a system of differentiated taxation must be based on objective criteria, similar for all products concerned. Typically, a tax is discriminatory if it protects products not concerned by the legitimate aim of the tax (Davey 2012; De Sadeleer 2014; Rolim 2014).

From the socio-economic perspective, environmental taxes may also raise difficulties because of compliance and administration costs (Pavel and Vitek 2012), risks of eroding the taxation base (Kosonen 2010), and slump in economic growth (Barker and Köhler 1998). Other challenges include difficulty in “identifying the appropriate rate to levy” the tax (Mankiw and Taylor 2014, 249), distortions of competition (Vogelaar 1994; Bovenberg and Goulder 1996), and the apparent regressivity of the tax (Ekins and Dresner 2004; Fullerton et al. 2010; Kosonen 2012).

These difficulties naturally emerge in one way or another when a concrete proposal is put forward. For instance, in 2008, the European Commission was asked to examine the possibility of introducing differential VAT rates to promote “green products” (Oosterhuis et al. 2008, 27). This possibility was not selected for the following reasons: no consistency in the definition of the “green” criterion and of the limits of the system; risk of rebound effect; risk of public loss of revenue; products evolution; risk of distortions between States; risk of non-integration of the tax in the prices; insufficiency to change behaviors (elasticity) (Naess-Schmidt et al. 2008; Oosterhuis et al. 2008; Oosterhuis and Schaafsma 2010). We will return in our conclusion to the issues raised with regard to this concrete proposal.

The original contribution of this paper is to present a new environmental taxation scheme likely to overcome the environmental, legal, and socio-economic difficulties mentioned above and outlined below. Our leading hypothesis is that a life cycle-oriented tax properly configured is able to reduce the leakage and displacements of pollution, comply with the general taxation principles of proportionality and non-discrimination, prevent erosion of the taxation base, protect competitiveness, and meet the requirements of equity and social justice. De Camillis and Goralczyk (2013) proposed to adapt the value-added tax (VAT) rates on goods and services on the basis of their life cycle assessment (LCA). At a time when environmental problems increasingly threaten the future of our societies and when very few countries have successfully implemented a coherent and efficient system of environmental taxes, we think that the framework designed by De Camillis and Goralczyk goes into the right direction. Building upon this framework (Sect. 2), we discuss the possibility and the way how to adapt the consumption tax system by shifting to a new damage and value-added tax (DaVAT) partially based on the LCA of the goods and services (Sect. 3). The proposal is discussed both from a theoretical and practical point of view. From the theoretical perspective (Sect. 4), the question raised is how LCA can be used coherently in the framework of a consumption tax. On what principles should an LCA-based tax be founded? In particular, how can the variance of the LCA results be reduced in this context? From the practical perspective, how will the DaVAT system work in practice (Sect. 5)? What will be its implementation, maintenance, administration, and compliance costs? What about the risks of fraud associated with it? What price changes can it bring (Sect. 6)? Is it socially acceptable (Sect. 7)?

Let us start by (i) briefly recalling what LCA, VAT, and sales tax consist in; (ii) defining what we mean by damage in the expression damage and value-added tax (DaVAT); (iii) exploring the works on this topic.

LCA is a method assessing potential environmental impacts along all stages of the life cycle of, e.g., a good or service (extraction of resources, manufacturing, distribution, use, and disposal). Impacts are assessed on three areas of protection: ecosystem diversity, human health, and natural resources. These impacts may include climate change, stratospheric ozone depletion, human toxicity, ecotoxicity, ionizing radiation, photo-oxidant formation, acidification, eutrophication, land use, and fossil energy demand. The results of an LCA can be aggregated and weighted to obtain a single environmental score (not necessarily expressed in monetary terms) characterizing the all-quantified impacts of a specific good or service. De Camillis and Goralczyk (2013) have proposed to use this single score to raise or lower the VAT rates.

Value-added tax (VAT) and sales tax are the two main forms of consumption tax. Sales tax is only collected at one stage of the supply chain, i.e., at the final sale to the consumer. VAT is collected at successive stages of production and distribution, each time a product (or material) is sold. However, the burden of VAT does not rest on businesses, as producers, intermediaries, and retailers deduct the VAT they collect on their sales from the VAT they pay on their purchases. The mechanism of this deduction may vary (effective refunds or accounting transactions), but the basic principle is always the same—namely that VAT is ultimately paid by the end-consumer only. Figure 1 shows how VAT works in general. The procedure described in Fig. 1 is a simplified example of non-distortionary tax, i.e., with no imbalance between supply and demand. There can be more market participants than the four ones depicted in Fig. 1. For ease of reading, sales taxes are mentioned in this article only when the VAT and the sales tax regimes are treated differently in the DaVAT system. Apart from these cases, what is said about VAT applies to consumption taxes in general.

The term damage is used in this paper in a much broader sense than the way it is usually understood in LCA, or in law, or in economy. In LCA, the damage approach refers to the definition of endpoint category indicators, i.e., indicators close to areas of protection such as human health, ecosystem quality, and natural resources (Guinée et al. 2002, 110). In law, a distinction is commonly made between, on one hand, damage to persons and goods and, on the other hand, environmental damage, which concerns only the natural elements (Kurukulasuriya and Robinson 2006, 52). In economics, there is no universally accepted method of monetary valuation of environmental damages (Ierland et al. 2001; Kumar and Thiaw 2013). In this article, the term damage means not only a physical harm impairing a person or a thing but refers to any loss of something desirable whatever the setting, whether individual, social, economic, or otherwise.² This suggests that the damage associated with production and consumption may have an economic or social dimension that goes beyond the framework of classical LCA. We conceive the damage and value-added tax (DaVAT) as a consumption tax based only partly on LCA methods. As every tax is the result of a human decision, a damage and value-added tax cannot and should not be based on scientific grounds only. It also has to be based on decisions at the local level of each country and to take into account the aspirations of this country’s population. We will keep in mind this dimension in the construction of the DaVAT concept.

The term damage-added tax was first used in 1972 by Jürgensen who immediately ruled it out as “unworkable, owing to the insolubility of the imputation problem and in some cases lack of certainty of the fundamental relations of the damage” (Jürgensen 1972, 17). One of the challenges of the present article is to determine whether this argument still holds today. Since the advent of the polluter-pays principle, and even much earlier, many authors argued for a consumption tax levied on negative externalities (Pigou 1920; Sandmo 1975; Gorz 1988, 321; Daly and Farley 2010, 444) without specifying how the externalities would be calculated. Courchene and Allan (2009) suggest to create an “international carbon-added tax” applied to the cumulative carbon footprint of a product at the time of its implementation. Stiglitz (2013) and McAusland and Najjar (2015) propose a “carbon-added tax” levied at each stage of the production and transportation process to finally pass on to consumers. As their names imply, these taxes are based only on carbon emissions. Morrison (2007) recommends an “ecological-added tax” based on pollution, depletion, and ecological damage.³ Albrecht (2006) and Oosterhuis et al. (2008, 5) suggest recourse to LCA to differentiate the products subject to “green consumption taxes” but do not specify how that could be done. Several LCA weighting methods emphasize the need to express the results of an LCA in monetary terms (see Pizzol et al. 2015 for a recent review). In the Netherlands, Croes and Vermeulen (2015) are currently developing a valuation method inspired by Vogtländer and Bijma (2000) by which every supply chain actor collects the upstream hidden environmental and social costs of its products and adds to them its own contribution. In France, the Fondation 2019 is developing a research program on the possibility of correcting the final price of goods and services through significant variations in VAT based on a “life cycle externalities assessment” (Fondation 2019 2011; Thi et al. 2016). However, although LCA is one of the tools used for strategic environmental assessment of new tax policies (Nilsson et al. 2005; Seidel 2016), none of these weighting methods have yet resulted in the development of a new LCA-based tax. De Camillis and Goralczyk (2013) are the first, to our knowledge, to specify how the VAT could be based on LCA. Our paper primarily builds on their work that is critically reviewed, thereby identifying needs for improvement. It then suggests a new LCA-based taxation scheme likely to meet the criteria of environmental efficiency, compliance with LCA standards and general taxation principles, as well as practical and economic feasibility.

De Camillis and Goralczyk propose to adjust the current VAT rate of a product in accordance with its environmental performance⁴ compared with the annual average of its category. The new tax would be specifically calculated as follows:with:

The first difficulty concerns consistency in taxation. The relative environmental performance of different products will differ between different product categories. For example, the proposal by De Camillis and Goralczyk does not prevent a car with a lower environmental impact score than the average score of its category to be taxed less than, for instance, a dinner at a restaurant—which has, however, a lower impact than the car. This will occur if the restaurant has a higher environmental impact score than the average score of its own category (yet less polluting than that of the cars). This goes against the principle of non-discrimination, which requires to use similar and objective criteria for all products concerned by the aim of the tax (i.e., here, lowering environmental impacts). Furthermore, in this system, some products belonging to high-polluting categories will become cheaper (e.g., as in the example of the car above). This contradicts the principle of proportionality, which requires to use adequate means to achieve the aim of the measure (i.e., here, discouraging environmentally harmful consumption and production habits). De Camillis and Goralczyk are aware of this danger, as they suggest the possibility “to integrate into the equations a set of multiplicative factors to overtax environmentally damaging products” (De Camillis and Goralczyk 2013, 267). Imposing higher charges on more environmentally impacting products requires a common valuation method for all product categories. Our analysis examines the principles and the feasibility of such a method in a consumption tax framework.

The second difficulty concerns the incentive aspect of an environmental tax that continues to depend on the product’s price. In this respect, the tax is likely to be absorbed in the variations of the product’s basic price. In other terms, as the tax is a fraction of the price, reducing the basic price also reduces the amount of tax to be paid. This may encourage some producers to slightly lower their profit margin so that the price for the end-consumer remains unchanged—which makes the tax less effective. Here again, the risk of absorbing the tax in the basic price can be reduced by overtaxing the most polluting products. But this brings us back to the issue of a common valuation method for all goods and services.

The third difficulty relates to the priority of scientific approach and the expectation for transparency in LCA. The magnitude of the tax conceived by De Camillis and Goralczyk is fixed by comparison between the single environmental scores of different products. In LCA, such scores result from a weighting of the various impact categories. But the standards require that weighting is not used for comparative assertions intended to be disclosed to the public (ISO 14044 2006, 4.4.5). A first reason of this is that a single score can hide large variations of releases and resource uses in some impact categories. A second reason is that, in general, the limitations inherent to any LCA⁵ require additional information (such as sensitivity and uncertainty analysis of the results) to compare products and make informed choices. Finkbeiner (2014) has brought this point to attention in the context of a discussion on the European product environmental footprint initiative (PEF).⁶ Galatola and Pant (2014) replied that “there are numerous examples of situations where weighting is already used by policy makers and LCA practitioners in the context of comparative assertions. A public, open and transparent discussion on this issue should be held” (Galatola and Pant 2014, 1357–1358). We would like to contribute to this discussion. The recommendation of de standards is interpreted by Guinée et al. (2002) as follows: “According to ISO 14042 [revised in the meantime by ISO 14040 2006 and ISO 14044 2006], weighting is not allowed for comparative assertions disclosed to the public. One must therefore decide whether to ignore the ISO principles, keep results internal, or refrain from weighting” (Guinée et al. 2002, 93). However, the requirement of ISO 14042/14040 and ISO 14044 may be read differently. According to us, the weighting and the use of an aggregated score may be made public, provided that (i) data prior to weighting (i.e., characterized data and normalized results) remain available together with the weighting results (ISO 14044, 4.4.3.1, and 4.4.3.4.3); (ii) it is clearly communicated to the public that the single aggregated weighted score does not express the environmental performance of the product because such performance is multidimensional, i.e., must be analyzed category indicator by category indicator (ISO 14044, 4.4.5) and by using additional information such as described in sections 5.1, 5.2, 5.3 of the ISO 14044 standard (e.g., detailed sensitivity analysis and critical study). The proposal of De Camillis and Goralczyk certainly does not include the claim of the environmental superiority of a product based on its single score I_x. In that respect, it does not contradict the standards. The problem, however, is that a comparison is used to set the amount of the tax. This seems to us neither consistent (see the first difficulty mentioned) nor efficient (see the second difficulty), nor justified by an ISO standardized approach. We will return (in Sect. 4.1.3 Consistency in weighting) on the possibility of using a single aggregated weighted score to set an environmental tax. For the moment, we note that the recommendation of the standards is not only due to the limitations inherent to any LCA, but also to the requirement to lead the assessment with objective, non-discriminatory, and transparent criteria—as must be the case in a taxation context. In ISO 14040/44 standards, transparency is defined as “open, comprehensive and understandable presentation of information” (ISO 14040/44 2006, 3.7). ISO 14040 emphasizes the fact that “due to the inherent complexity in LCA, transparency is an important guiding principle in executing LCAs, in order to ensure a proper interpretation of the results” (ISO 14040 2006, 4.1.6). It seems to us that it is precisely this requirement of transparency that explains why “weighting, as described in 4.4.3.4, shall not be used in LCA studies intended to be used in comparative assertions intended to be disclosed to the public” (ISO 14044, 4.4.5). Even if international standards are not to be confused with legal principles of taxation, we believe that a tax complying with these standards is more likely to flourish. On the other hand, it is clear that the benchmarking dimension included in the proposal of De Camillis and Goralczyk (making the tax rate dependent on the relative performance of the product with respect to its category) would provide the incentives for firms with products belonging to the same category to perform better than their competitors in environmental terms. We will bear in mind this important aspect of the proposal in the subsequent part of our analysis.

To overcome the difficulties discussed in Sects. 1 and 2, we propose a new way to adjust VAT according to, inter alia, LCA. Figure 2 represents the general structure of this new taxation system.

As shown in Fig. 2, our proposal relies on three essential points:

Thus, in the expression global damage tax, the term global, meaning both comprehensive and worldwide, refers to the fact that the damage evaluated by GDT covers both all the impact categories taken into account by LCA and the entire life cycle of the product, likely to unfold anywhere in the world. In this respect, GDT is determined in a way that can be adopted by every country worldwide. In the expression specific damage tax, the term specific refers to the fact that the damage considered expresses concerns specific to one country, and that the product categories to which SDT is applicable are more restricted than those covered by GDT. We propose to refer to the sum of UVAT, GDT, and SDT as the damage and value-added tax (DaVAT). If DaVAT is implemented into a VAT system, the VAT-specific repayment mechanism of the intermediaries is maintained, as far as UVAT and GDT are concerned.⁹ UVAT and GDT are paid by intermediaries (for the goods and services they buy), then paid back to them by the State up to the amounts collected, though not to the end-user. For example, a consumer buying an ink cartridge will pay, e.g., 33 € (pre-tax price) + 1 € (3% of the pre-tax price) + 4 €s + 3 € + 2 € (=9 € per unit) if 4, 3, and 2 € correspond, respectively, to the prices of the damages associated with the production, intermediary, and use and end-of-life phases of the product, and if UVAT is set at 3%. DaVAT can also apply to the sales tax regime. In that context, the intermediaries neither pay the tax nor are reimbursed, but forward to the buyer the information on the environmental impacts of the good or service they sell. Figure 3 describes how UVAT and GDT work in the framework of a VAT system.

As a result, the DaVAT for a good or service x_i bought at one stage i of its sales path (without considering reimbursements by the State to the intermediaries) is calculated as follows:Withwhere:

The DaVAT system should not be confused with the differentiation of the rates, often criticized as not very effective in achieving its objectives (in terms of environment, human health, or the like, notably owing to the absence of objective criteria) and as opening the door to lobbying and its administrative costs (Copenhagen Economics 2007, 71). Strictly speaking, DaVAT is not a system of differentiated rates as it only involves two rates applicable to all goods and services: a single very low one (about 3%) (UVAT), and the pricing factor Fp fixing the actual amount of GDT. Such a factor applies uniformly to the environmental scores I_x of all goods and services. Fp is not negotiable by product category and therefore closes the door to lobbying in that framework, though it is always possible to differentiate certain products by adding to them a specific tax SDT. The mechanism remains relatively easy for the everyday user, as there are no more differentiated rates, neither special regimes, nor deduction coefficients. In many countries, this should simplify the existing system.

Generally, our proposal is in line with the optimal taxation theory’s recommendation that “only final goods ought to be taxed, and typically they ought to be taxed uniformly […] [with the] well-known exception [of] goods that generate externalities and that therefore justify corrective, Pigovian taxes or subsidies” (Mankiw et al. 2009, 2, 17). One may wonder why should damage be charged to consumers only. Why not levy direct taxes on producers or intermediaries? In practice, when the producers and intermediaries are taxed without being subsequently reimbursed, it is observed that they tend in one way or another to pass the cost of pollution on their products’ prices so that, in the end, the person who really pays this cost is the consumer or user (OECD 1992). The difference is that, in cases where the tax is paid by producers or intermediaries without subsequent reimbursement, the consumers usually pay without being able to identify the damage included in the price. As a result, they cannot choose accordingly: the tax has been absorbed in the product’s price. In this respect, VAT is probably the system paying the most attention to all the stages of the supply chain. In VAT, the tax collection is not concentrated on a single stage (sale to the final consumer) as it is the case in the sales tax system, but spread over all the sale transactions. This reduces risks of cheating because, as it is in the interest of all the intermediaries to be refunded of the tax they pay, they ensure that the latter is collected (Zodrow 1999). In a system where all stakeholders tend to minimize their costs and maximize their gains, any means to avoid paying negative externalities tends to be used. It is therefore coherent to tax negative externalities in a way that makes them as visible as possible at each stage of the economic chain and limits as far as possible the risk of leakage and cheating.

Is the LCA-based tax described above consistent, efficient, compliant with LCA standards and with the tax laws? The analysis of the challenges encountered in the implementation of environmental taxes in general (Sect. 1) and in the design of an LCA-based taxation framework (Sect. 2) has highlighted two elements. First, the importance of consistent criteria for taxation. Second, the fact that this consistency must be clear not only to scientists but also to the legislators and to the public in general. We suggest to address these issues by the principles of consistency and transparency. Furthermore, the theory of optimal taxation (Mirrlees 1971) generally recommends maximizing efficiency and equity of the tax. We propose to address these topics by two additional principles: evolution capacity and respect for national sovereignty.¹³ Each of these principles is necessary to guide the implementation of the tax, but none of them is overriding or decisive in itself. This means that, as principles guide but not determine the choices, there may be cases where some competition arises between the principles without compromising their validity. An illustration of this is provided in Sect. 4.4 Respect for national sovereignty.

To what extent will good and service prices change at the time of DaVAT implementation? Giving a precise answer to this question is difficult at this time. On the one hand, because there is currently no standardized DaVAT database applying the same inventory, characterization, normalization, and weighting methods to all product categories. On the other hand, because the evolution of prices depends on many factors such as supply and demand, market expectations, access to basic necessities, price-control mechanisms, etc. We limit ourselves here to a purely indicative simulation performed from six published LCA studies on six products sold in different countries. The simulation calculates the direct effect of the DaVAT implementation on the prices of these products without taking into account other indirect market effects. Our conclusion indicates the way forward for a closer examination of the effects, notably economic, of the DaVAT.

Table 1 is based on the LCAs of six products selected, respectively, by Bimpeh et al. (2006), Fantin et al. (2012), Prudêncio da Silva et al. (2014), BIO Intelligence service-Ademe (2006), Cavalett et al. (2012), and Volkswagen AG (2010). The six studies use the CML method (Guinée et al. 2002). As stated in Sect. 4.1, the DaVAT system will only be consistent if it uses common databases and applies the same inventory, characterization, normalization, and weighting methods, as well as refers to the same impact categories and the same cut-off rules. The factors that are selected here (characterization and normalization factors of the CML method [Guinée et al. 2002], weighting factors equal to 1) by no means prejudge the choice of the standardized LCA for DaVAT which, it is recalled, should be made on the widest possible scale.

All the products correspond to the stage i = f, i.e., of the final selling to the end-user. Some functional units have been adjusted as compared with the original study¹⁸ so as to better reflect the usual consumer behavior (for example, we usually buy 1 kg of chicken instead of one ton). To avoid double counting, and in accordance with the principles developed in Sect. 4.1.2, the emissions related to car and gasoline use have been halved.¹⁹ For the same reasons, the emissions related to the washing and ironing of the pair of jeans have not been taken into account (these emissions are associated with the purchase of other products subject to DaVAT, and they depend little on the characteristics of the pair of jeans²⁰). The system boundary is specified in each study. The n.a. in the table does not mean that there is no impact but that the impact category was not assessed in the study. For each product x, the environmental score I_x is simply the sum of the results of the normalized and equally weighted impact categories. In Table 1, we normalized the characterized results of the six studies listed above by relating them to the reference system average world citizen for year 1995 proposed in Guinée et al. (2002). The normalized result for each category m is given by the formula:

As the environmental single score I_x is dimensionless, the normalized results Nz_m are multiplied by a weighting factor (W_m = 1 year⁻¹ cap⁻¹) canceling the dimensions of the normalized results. So, the score I_x (dimensionless) for each product x is calculated as follows:

GDT is calculated in accordance with the formula given in Sect. 3:

The factor Fca of currency area adjustment is set equal to 1. The summation index s here equals i = f = 1, as the results of the six studies cover all the life cycle of each product until the final purchase.

The factor Fp fixing the amount of the tax is arbitrarily set at 100 in a single currency (US $), which is equivalent to setting for example the price of the tCO₂eq at 14.64 US $.²¹ It is interesting to note, looking at Table 1, that there is no need to raise the carbon price very high to obtain a rise in the price of fossil energy products. This is because the DaVAT takes into account many other impacts than climate change. Let us recall that the fixing of Fp remains a political decision which, as such, does not belong to the LCA (see Sect. 4.4). Fixing Fp means putting a generic monetary value on a (universally characterized, normalized and weighted) dimensionless environmental score. To identify the appropriate value of Fp, one can, e.g., compare the Fp value set by a country with those of other monetization methods (with respect to the prices associated with reference substances, or with respect to the costs associated with endpoint indicators). The Electronic Supplementary Material provides calculation details, and the price of the reference substances mentioned in Table 1 when Fp is set at 100 US $. They also include a comparison between these prices and those proposed by the monetization methods Stepwise 2006 (Weidema 2009) and Ecotax 2002 (Finnveden et al. 2006). Such comparisons can also be made in the context of the international discussions on the common weighting to be adopted in the DaVAT system. Expressing in monetary terms the weighted results at midpoint categories is also useful for producers and intermediaries, as it helps them identify the processes where savings (through GDT reduction) are possible. The Fp value can also be assessed with respect to the cost associated with an endpoint indicator—even if this type of assessment is much more delicate as it involves many uncertainties. For instance, using the endpoint characterization criteria of ReCiPe 2008 (Goedkoop et al. 2009), one finds that setting Fp at 100 US $ amounts to assigning to one equivalent year of healthy life lost (Disability-Adjusted Life Year, or DALY) a cost of 69,060 US $.²²

The global damage tax (GDT) (in US $) is therefore here equal to I_x multiplied by 100 US $. UVAT is arbitrarily set at 3%. The adjusted price is calculated by replacing VAT with UVAT and by adding GDT to the result:

We are aware of the arbitrary, incomplete, and unrepresentative character of Table 1. We nevertheless believe that, pending a more elaborate simulation (see points 3 and 4 of our conclusion), some observations can already be made.

In Europe, surveys on attitudes of citizens towards the environment showed that the proposal of “making everyone pay more in taxes, prices etc. to cover environmental costs” was only supported by 6% in 2002 (European commission 2002b, 32). In 2011, 68% of the European citizens agreed or tended to agree with the statement that “taxation should be based more on the way we use energy” (European Commission 2011, 30). In 2014, 40% of them considered that “introducing heavier fines for offenders” is “the most effective approach in terms of tackling environmental problems” (European Commission 2014, 80). According to a recent survey, “perceived environmental effectiveness and expectation of local co-benefits are the main drivers of acceptability” (Baranzini and Carattini 2017, 18). Several studies have also shown that perception frequently changes after the implementation of environmental prices initiatives, as people experience less negative and more positive consequences than they expected in terms of perceived effectiveness, personal outcome expectations, and fairness of the system (Schade and Schlag 2003; Schuitema et al. 2010; Jagers et al. 2017). At the present time, the question has not been asked, in Europe or elsewhere, whether citizens support a measure that will (i) reduce the price of low-polluting products previously subject to VAT; (ii) increase by about 3% the price of the products previously not subject to VAT; (iii) increase the price of the most polluting products in proportion to their degree of pollution. As a result, one cannot know, at this stage, to what extent citizens support a DaVAT system.

Consumption taxes are sometimes considered unfair or inequitable because people with the lowest incomes pay the largest share in proportion to their income. This view is, however, contested as the efficiency of the consumption taxes enables public authorities to implement compensation and redistribution schemes (Bankman and Weisbach 2005; Decoster et al. 2010; Corbacho et al. 2013). Those schemes are in particular needed in the case of the development of environmental consumption taxes (Ekins and Dresner 2004; West and Williams 2004; Büchs et al. 2011; Kosonen 2012; Dissou and Siddiqui 2014; Beck et al. 2015; Yusuf and Resosudarmo 2015). In the DaVAT framework, the important thing to keep in mind is that the increase in most polluting products’ prices is associated with a decrease in the price of the (most numerous) low-polluting products previously subject to VAT, which has redistributive properties. DaVAT is not an additional burden in general, but rather a shift of taxation, though negatively affecting some product categories. As with any tax shift, the possible increase in State revenue allows the government to reduce other levies, e.g., on income or on labor (Kosonen and Nicodème 2010). Besides, the price change can be modulated by each State according to its own specificities and should be accompanied by support measures to disadvantaged groups. Those measures should target first low-income households and should be oriented, as much as possible, to behavioral changes. For example, they can take the form of subsidies for purchasing services (home energy assessment, access to free or cheap public transport, car sharing, home delivery services…) and goods (thermal insulation system, low-energy heating system, low-environmental-impact car…). Public authorities should also provide support for strengthening the infrastructures needed for the good performance of the measures (development of public transport, availability of low-environmental-impact energy).

It should furthermore be noted that, on the one hand, a consumption tax is not the only tool, or even the best tool, for social redistribution. To achieving this goal, taxes on natural and legal persons and social expenditures programs are better suited (Atkinson and Stiglitz 1976; Decoster et al. 2010). On the other hand, the issue of equity cannot be reduced, in the DaVAT framework, to that of social redistribution. Consumption, whether by people on low or on high incomes, is not neutral. It can create (environmental, human health, and resource depletion) damages—of which the poorest populations are very often the first victims—or strengthen positive dynamics—for the existing population, but also for the future generations. From this point of view, a consumption tax is fairer if it strengthens consumer’s access to the productions less harmful to the environment, resources and human health, and if it discourages the purchase of the more harmful ones.

A damage and value-added tax (DaVAT) partially based on the LCA of goods and services is conceived and expected to contribute to reduce human health, resources and environmental damages, displacements of pollution in time, space, and to other impact categories. The DaVAT is not a system of differential rates, as it only includes two rates. The first one (UVAT) applies to the price of all goods and services. The second one (Fp) applies to their LCA score. DaVAT also provides for the possibility to introduce additional specific damage taxes (SDT). As mentioned above, the main interest of the DaVAT is to contribute to reduce the overall environmental burden and the leakage and shifting effects of environmental impacts. In the coming years, those displacements of polluting releases will tend to be increasingly important. To take just the example of the development of alternative energy sources, many possible shifts can be evoked. They include, for instance, the heavy metal releases associated with the production of some photovoltaics (Fthenakis et al. 2009), the impacts of biogas systems on acidification (Varun et al. 2009), the effects of some bioethanol cultures on acidification, eutrophication and photochemical smog (Morales et al. 2015), or the carcinogenic risks associated with the construction of certain mini hydro power plants (Hanafi and Riman 2015). The manufacturing and recycling processes of wind turbines can also be improved from a human toxicity and terrestrial ecotoxicity point of view (Martínez et al. 2009). DaVAT is thus not only a tool to reduce the environmental impacts of our production and consumption activities, it also provides a new information and guidance tool for both businesses and consumers that should help them make good investment and purchase decisions and, notably, not to miss the turn of energy transition. Even when the overall aggregated environmental score I_x is not significantly modified (weak points being compensated by strong points), it is in the interest of all intermediaries to minimize what can be minimized, in order to reduce the final price of the product and/or to increase their profit margin. Such a tool opens up another way of seeing the tax. DaVAT should be conceived not only as a burden reducing purchasing power, but as a means to guide economic activities in the right direction.

In the DaVAT system, an international agency specially created for the purpose will manage and deliver freely the LCA score of products and product categories. LCA will be mandatory for potentially high-polluting products or industries. Other businesses will have the choice, either of accepting the default LCA score provided by the agency, or commissioning a specific LCA at their own expenses. The LCA used to determine DaVAT is split as many times as there are purchases in the supply chain. In other terms, an LCA commissioned by an intermediary or an SME is limited to their own activities. The LCA for DaVAT seems to comply with the existing international standards in that matter but requires a specific standardization for this specific application (not for LCA in general). It will be consistent only if it applies everywhere the same inventory, characterization, normalization, and weighting methods, as well as the same impact categories and the same cut-off rules. To be effective and credible, the DaVAT should also be transparent, be capable of evolving, and respect the sovereignty of each State in matters of tax levying.

Some arguments in favor of the efficiency, feasibility, and acceptability of the DaVAT have been provided. Let us summarize them in the light of the concrete case mentioned in the introduction, i.e., the call upon the European Commission to explore the possibility of establishing differential VAT rates to promote “green” economy. Such differential VAT rates were not adopted for the following reasons: no consistency in the definition of the “green” criterion and of the limits of the system; risk of rebound effect; risk of public loss of revenue; products evolution; risk of distortions between States; risk of non-integration of the tax in the prices; insufficiency to change behaviors (elasticity) (Naess-Schmidt et al. 2008; Oosterhuis et al. 2008; Oosterhuis and Schaafsma 2010). Even though the DaVAT system focuses not specifically on the European Union and is not a system of differential rates, it appears capable of meeting, at least for certain points, the objections raised by the European Commission. Indeed, replacing most of the VAT or sales tax with a unitary global damage tax (GDT) based on the LCA of the goods and services gives a coherent criterion both for the identification of the taxed unit and for the method to calculate the amount of the tax. The limits of the system are set consistently since, according to the principles of LCA, it covers the major impact categories and all stages of the product life while aligning its subdivision, as the current VAT system, on the operations of selling and buying products. The risk of rebound effects is reduced, but not completely avoided, by two facts. First, the price of the products having the greatest impact on the environment, human health, and resource depletion will be increased. Second, the price of damage should rise over time if the socio-economic circumstances permit, and if scientific knowledge on the state of the environment warrants it. The risk of revenue loss for States is limited by the extension of the tax to all goods and services, the diversification and spreading of the taxable materials, and the flexibility of the levers available to the States (Fp, Fca, UVAT, SDT). The problems associated with the evolution of the products are limited by the fact that DaVAT is itself evolving, adapting to the increase of the environmental performance of the products (the factor Fp fixing the actual amount of the GDT being regularly indexed), to the evolution of our knowledge about it, and to the socioeconomic context. DaVAT respects the sovereignty of States (free to determine their own tax coefficients) while promoting convergence of policies, which limits risks of distortion. As GDT is a transparent and unitary tax (not an ad valorem tax), it cannot be smoothed and hidden by the decrease in the basic price of the product. Finally, DaVAT should encourage consumers, designers, producers, and intermediaries to change their behaviors because of its foreseeable evolution, the incentivizing of environmental benchmarking, and the possibility to introduce additional specific damage taxes (SDT). Let us add that the price decrease of the low-polluting products and the support measures to the disadvantaged groups, which can be seen as necessary companions of the DaVAT, make this tax an instrument for ensuring equity and social fairness.

DaVAT is not the only and final solution to all environmental problems, notably due to the inherent limitations of the LCA. LCA includes little or no potential misuses of a product. LCA does not provide a consensual criterion to integrate environmental impacts over very long periods (as for example with nuclear waste). LCA does not take into account the degree of risk associated with technologies, nor the economic and social situation of actors which can force some of them to use a particular pollutant (e.g., charcoal for heating or cooking). Therefore, it will always be necessary to set up more specific taxes, regulations, awareness campaigns, support, and compensation measures to disadvantaged branches of activity or persons.

The main interest of the DaVAT is to use the same valuation rules to measure environmental, human health, and resource depletion impacts into the entire economic chain, thus reducing the risks of delocalization and displacements of pollution while protecting competitiveness. DaVAT thereby brings more coherence into the current system of environmental taxation and, generally, more attention to the damages associated with products once they will be included in the price.

A closer examination of the DaVAT project and of the modalities of its implementation should be organized around four axes.

After its invention in France in 1954, VAT has been adopted by 161 countries worldwide and has become the tax accepted by the largest number of countries. Perhaps the DaVAT has the potential to spread so quickly to so many countries. The reason for the VAT’s success is the economic neutrality of the tax, i.e., the fact that there is no cascade effect: the amount of the tax remains the same whatever the number of intermediaries involved in the supply chain. The reason for the success of the DaVAT could be the refinement of this economic neutrality: the amount of the tax remains independent of the length of the buying chain (i.e., the number of intermediaries), though not of the patterns of production and consumption, in other words of their environmental impact. One of the distinctive features of the VAT is to establish a responsibility scheme where each market participant is held accountable for collecting the tax. The DaVAT will extend this responsibility by making all producers, intermediaries, and consumers more attentive to the damage associated with their activities. At a time when environmental problems are increasingly widespread and many-sided, this additional attention seems not only acceptable, but also desirable.