Change existing consumption and production patterns has been in the centre of international community for a long time. Unsustainable trends in relation to climate change and energy use, threats to public health, poverty and social exclusion, demographic pressure and ageing, management of natural resources, biodiversity loss, land use and transport still persist and arising. Since these negative trends bring about a sense of urgency, action is required to gradually change current unsustainable consumption and production patterns. The 1992 United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro, Brazil proposed a plan of implementing sustainable development through changes to consumption and production patterns. Hereafter, sustainable consumption and production is also one of the seven key themes in 2006 renewed European Union sustainable development strategy. Economic instruments (taxes, fees, subsidies) have substantial relevance to changes in consumption and production patterns. Ideally, economic instruments stimulate the innovation of production process and sound consumption, and also do not have high transactional cost.

Economic instruments are amongst the most effective instruments in achieving the targets of state environmental policy. Economic instruments for pollution control and natural resource management are thus an increasingly important part of environmental policy in European Union (EU) member states (Cornelia and Lenuta, 2012a). Using economic instruments of environmental policy also has had a long tradition in the Czech Republic. Related with effort to minimize the effect of climate change and also unsustainable consumption and production pattern within the framework of sustainable development could be achieved by implementing tax mechanism.

One  of the most significant policies promoting sustainable consumption and production in respect of market conditions involves the implementation of a revenue-neutral green tax reform or also called as environmental tax reform. Such a reform may serve as an example of how economic instrument can facilitate a reduction of pollution caused by production, at the same time improving conditions for business and motivating the modernisation of the economy. Environmental tax reform consists in progressively reducing the high tax burden on human labour and business, and introducing taxes on pollution and the exhaustion on non-renewable natural resources. Pollution charges have been gradually introduced in the Czech Republic since the 1960s (Vojacek and Klusak, 2007). During the 1990s, beginning with the Scandinavian countries, there has been a number of attempts to introduce environmental tax reform in EU member states (Abdullah and Morley, 2014).

Environmental taxes also started to be discussed in Czech Republic on midyear of the 1990s within the process of transition to a market economy, when the changes to the entire tax system provided space for introducing new taxes (Vojacek and Klusak, 2007).  The concept on the environmental tax reform was explicitly prepared by the Ministry of the Environment and the Ministry of Finance in the year 2000 (Vojacek and Klusak, 2007). The final version of the environmental tax reform was approved by the Czech government in May 2007 (Vojacek and Klusak, 2007). The use of economic tools, such as tax for the benefit of the environment has been promoted in the 6th Environment Actions Programmed (EAP), the renewed EU Sustainable Development Strategy, and the Europe 2020 strategy (Cornelia and Lenuta, 2012a). This has involved shifting the burden of taxation away from factors of production to pollution and the users of natural resources, summarised as a move from economic goods to environmental bads (Abdullah and Morley, 2014).

The imposition of taxes on polluting products  or polluting sources is also considered as a fair approach since the polluter pays for the pollution created (Rapanos and Polemis, 2005). Moreover, interactions between environmental and fiscal policies can be affecting for the prospect of double dividend (Goulder, 2013). Double dividend is condition where the application of environmental taxes can produce two main benefits that is an environmental improvement and a reduction in the costs of the tax system. This could potentially be important as it has been hoped that increases in environmental taxes would not only improve the environment but also increase economic growth, at a time when economy struggle to grow (Abdullah and Morley, 2014).

The aim of this paper is to determine the direction of causality between economic measure of sustainable development and the implementation of environmental tax reform in Czech Republic. Otherwise, this paper attempts to analyzes how the interaction between environmental and fiscal policies influence the prospects for a double dividend.  This paper organized as follows. Section II provides a foundation by describing sustainable development paradigm,  environmental tax concept, and literature review from previous research. Section III show the methodology used in this study.  Section IV provides result from data analysis and address the question whether the implementation of environmental tax reform in the Czech Republic could produce double dividend. Finally, in the section V presents conclusion and recommendation.

Economic development has been successfully increasing economic growth, but it’s failed in the social and environmental aspects (Salim, as cited in Azis et al., 2010:22). This is because of the concept in conventional economic development put economic aspect on central problems of growth and let social and environmental as less important factors (Salim, as cited in Azis et al., 2010:22). However, ideal proportions between the focus on economic development on the one hand, and the quality and sustainability of life on the other, are yet to be established. This condition indicate the need of sustainable development model that can be produce sustainability from economic, social, and environmental sides simultaneously (Salim, as cited in Azis et al., 2010:23). 

Sustainable development became an issue of widespread concern with the publication in 1987 of Our Common Future, the summary report of the World Commision on Environment and Development (the Bruntland commision) (White, as cited in Devuyst, Hens, and De Lannoy, 2001:48). There are two things implicitly became concern in concept of sustainable development which developed by World Commision on Environment and Development in 1987 (Fauzi, 2006:231). First, regarding the importance of natural resources and environmental constraints toward the patterns of development and consumption. Second, regarding welfare for the future generation.

In 2001, the European Council adopted the first European Union (EU) Sustainable Development Strategy in Gothenburg, Sweden. In 2002, the strategy was supplemented through the United Nations (UN) World Summit in the Johannesburg, South Africa. Furthermore, in 2006 it was adopted as the renewed EU Sustainable Development Strategy. The document identifies persisting unsustainable trends in relation to climate change, energy utilization, public health, poverty and social exclusion, demographic pressures and the aging society, natural resources management, biodiversity loss, transport and the use of territory. If sustainable development is to be achieved, these trends must be changed. The overall aim  of the renewed strategy is to improve the quality of life for both current and future generations through the creation of sustainable communities which is able to manage and use resources efficiently, and also able to tap the ecological and social innovation potential that is necessary for ensuring economic prosperity, environmental protection and social cohesion.

The strong deterioration of state of the environment at the end of the 1980’s, which occured in the Czech Republic as a consequence of central planning, under-estimation of scientific knowledge, ignoring of the principles of sustainability, evading democratic decision-making processes and the complete absence of a legal and institutional framework for protection of the environment, was stopped to a major degree in the 1990’s and in some respects even remedies. However, new issues are emerging with progressing economic transformation and European integration. The strategic framework  for sustainable development of the Czech Republic serves as a long-term framework for policy making in the context of international commitments that have been or will be adopted by the Czech Republic as part of its membership in the UN, OECD, and the EU, while respecting the Czech Republic’s specific conditions and needs. The Czech Republic strategy for sustainable development was adopted under Czech Government Resolution no. 1242 of 8 december 2004. The 2004 strategy defines the principal (strategic) goals, as well as partial goals and instruments, formulated so as to eliminate, to the maximum extent possible, imbalances in relations between the economic, environmental and social pillars of sustainability. They are designed to achieve the best attainable quality of life for the present generation and to create conditions for a high quality of life for future generations.

High public consciousness in the area of the environment is a basic precondition and a priority for sucessful implementation of the state environmental policy, and also of the Czech national strategy for sustainable development. An increase in public consciousness of environmental matters lead the public, not only to greater understanding of the environmental connections of the economic and social life of society, but also to an increase in the quality of consumer decision-making, to an increase in the legal awareness of citizens and, as a consequence, also to improved quality of life. In the framework of the concept of sustainable development, major groups of citizens were identified that are primarily affected by the issue of sustainable development, also by its environmental pillars. These groups are: NGO’s, women, children and youth, minorities, local and regional governments, employees and their organizations, entrepreneurs, trade and industry, the academic community and farmers.

Sustainable development is based on balanced utilisation of all resources, which are classified as natural, economic, social and human. Specifically, this means maximally prudent use of non-renewable resources, such as industrial minerals and fossil fuels, and maximally careful management of slowly renewable resources. Pressure for disproportionate exploitation of natural resources increases with global economic development as a negative consequence of globalisation.

Problems that often arise in managing natural resources are the negative impact that may result in unequal condition between benefit from extracting natural resources and the social cost that must be borne (Fauzi, 2006:19). This problema arise because of the characteristics in several natural resources and environment are classified as public goods which may lead to over-consumption and also over-exploitation. Consumption  against public goods often causing effect which called as externalities.

In linkage with natural resources and environment, externalities is important to know because that will be make alocating and managing process become inefficient. Externalities also cause a divergence between market or private  and social or society values and can prevent a decentralized competitive market from reaching the socially efficient equilibrium. Consequently, there will be distortion between price and quantity in terms of optimal equilibrium from private and social perspectives (Patunru, as cited in Azis et al., 2010:32). In other words, if the market mechanism is not exist then alocating process of natural resources and environment will not be efficient (Azis, 2004:21).

Moreover, sustainable development paradigm should be use disincentive treatment to avoid unsustainable direction by applying fiscal instrument, pricing policy, and charge fee to unsustainable behaviour (Salim, as cited in Azis et al., 2010:29). Consequently, state environmental policy in the Czech Republic must emphasise the principle of sustainable consumption and production through moral appeal for a change in consumer behaviour and through the use of economic instruments to stimulate such changes.  The economic instruments will be based on environmental tax reform, whose chief idea is transfer of the tax burden from taxation of work to taxation of forms of energy that are detrimental to the environment, while respecting the principle of tax neutrality.

The results from Granger causality tests in this study provide some evidence of an indirectional causality effect from adjusted net savings (ANS) to environmental taxes (share of environmental tax to total taxes). That result indicates the implementation of green economic in Czech Republic affecting the proportion of environmental taxes revenue which can be gained by goverment. Hence, the link between sustainable development and environmental taxes policy is important. Moreover, this result also support Abdullah and Morley (2014) found that there is little evidence that an expansion of environmentally friendly tax policies will enhance economic growth.

The result in this study also show that under relatively simple and neutral conditions, the double dividend in case of Czech Republic does not arise. That condition indicates  the revenue-recycling benefit is not enough to offset both the primary cost and the tax interaction effect or the environmental taxes is narrower than the tax it replaces. Meanwhile, the implementation of environmental taxes can reduce inefficiency in the labor market by effectively raising the tax on informal labor and thereby reducing the disparity in taxation between formal and informal labor.

The policy implication of this study suggest that environmental taxes and the increase on share of energy from renewable source will probably need to continue in linkage with green economic and sustainable development targets. The evidence in this study suggest that increasing environmental taxes does not appear to have any substantial harmful impact on the economy. Futhermore, adjusted net savings (ANS) is better than GDP per capita to use as an indicator that accounts for sustainability in economic development.

In addition, the future research will need to concentrate on measure the impact from environmental taxes to economic and social society. However, it would be interesting to use alternative quantitative methods, such as Computable General Equilibrium (CGE) to make simulation model for analyze the impact of environmental taxes on economic as a whole. (Kresna Muzzar)