The degradation of the environment due to climate change and pollution can harm living standards and damage growth prospects. In Belgium, one of the most densely populated OECD countries, pressure on the environment is particularly strong, and is reinforced by the high energy intensity of the economy and concentrated agriculture. Environmental policy backlogs accumulated over the years highlight the challenges of reducing greenhouse gas emissions and water pollution in a cost-efficient way. To achieve environmental goals at minimum cost across the economy polluters should face the marginal costs of the externalities they impose, which should be achieved by increasing reliance on environmental taxation. Potential adverse effects on income distribution could then be addressed in the tax benefit system. Moreover, where environmental responsibilities are better dealt with at the regional level, regions should have the most efficient tools, such as taxation powers. Where, due to economies of scale and scope or important cross-regional effects, environmental issues are better dealt with at the national level (for instance in renewable energy sources and transport policies), better coordination among regions or a greater role of the federal level should be envisaged.