Literature review – Impact of the property tax on energy efficiency and sustainable land use

Abstract

Theoretically, the property tax can be used as a policy to steer sustainable behaviour in the residential sector. Property tax reductions can incentivise investments in energy efficiency or different tax regimes can be used as levers to encourage sustainable land use. Yet, is the property taxation an effective tool to achieve environmental policy goals? This paper presents findings of a literature review of ex-post empirical studies regarding the efficacy of the property tax to encourage sustainable land use and energy efficiency in the residential sector. Findings show mixed results in the use of property tax incentives to increase the deployment of solar thermal and PV systems in the residential sector. Results differ by country and they might be explained by the difference in the design of the property tax reduction that affects its visibility, the effective size and the ease with which it can be claimed. Other studies point out that the property tax can be an effective tool for sustainable land use policies such as limiting the urban sprawl. Yet, the design of the property tax has to be carefully considered, as different tax regimes such as differential rates on land and structures can affect the construction activity in terms of location, size of housing units and density patterns. Certain studies show that the market does not always respond in the way the neoclassical economics theory predicts.