Environment-driven taxes: An interesting challenge for policymakers

Forest fires in Europe, melting glaciers, floods, and the use of plastic bags impacting health are issues attracting our attention regularly since they can potentially destabilise life at present and in the near future. One of the most critical challenges facing our civilisation is ensuring a sustainable environment regarding climate change, pollution control, and conservation of forests and natural resources while enhancing economic development and resource mobilisation through taxation and levies. These issues are endangering individuals and individual economies. Technology and science have been rapidly changing the nature and use of our natural resources, including air, water and other resources of our environment.

 

Development in a sustainable environment is a desirable objective but entails discipline and dynamic real-time responses to emerging technological, social and economic challenges. Sustainable development with intelligent utilisation of natural resources is a global challenge. This includes issues of carbon emissions in the atmosphere, concerns of soil erosion and deforestation, water management including rising sea levels, mining and conservation of natural resources and use of ecologically harmful products like plastics or chemicals in food. Even cryptocurrency mining has an impact on the environment through carbon emissions.

Taxes and environment

Recently, there has been growing awareness of the imposition of environmental taxes, and a very large basket has already been designed in different countries. An extract depicts the current status of their coverage globally.

According to the OECD (2006), there are about 375 environmentally related taxes in the OECD countries. The evolution of these taxes has shown that most revenue comes from energy, motor vehicle and transport taxes. In contrast, the rest constitute a small proportion of environment-related tax revenues.

The pace of economic growth, even in agricultural productivity, through chemical fertilisers impacts our ecological environment and health concerns. Overfishing and the generation of non-biodegradable waste are some other areas of concern globally.

Fiscal instruments to support ecological issues

Carbon taxes are the most contentious fiscal instruments widely discussed, which serve the dual purpose of acting as a deterrent and raising resources from activities that impact sustainable economic development.

Some of the other taxes in this area which have also been explored globally are:

(1) Taxes on plastic bags in Ireland were introduced in 2002. A levy of Euro 0.15 was introduced at the point of sale, which was revised to 0.22 euro in 2007. The use of plastic bags in the litter was reduced from 5% to 0.13% in 2015. An amount of Euro 200 million was generated over 12 years.

(2) Deposit refund packaging scheme in Finland was first introduced in 1950, where a refund was provided on the deposit of used beverage packaging. Similar schemes are also in place in the UK and the USA. Glass and plastic bottles are collected, and users are incentivised to support the environment.

(3) Landfill tax in the UK was introduced in 1996 to reduce the amount of waste sent for landfilling and boost waste recycling. The amount of waste sent to landfill decreased from 50 million tonnes in 2001 to 12 million tonnes in 2015.

(4) Tax on nitrogen emissions in Sweden was introduced in 1992 to discourage activities with nitrogen emissions. This resulted in a reduction in nitrogen emissions by 30-40%. Annual revenue rose to Euro 1 billion in 2016. 

(5) Fishing license in Ireland was introduced in 2007, primarily due to declining stocks of salmon and overfishing in the area. License fees were doubled, resulting in the stabilisation of salmon stock, generated revenues with a significant impact on the river banks and restoration of riparian zones.

The levying of property taxes at differential rates is regularly considered in policy reviews in Australia. Planting or conserving forests with natural plantations attracts lower tax rates, while in congested areas, land used for industrial use with higher carbon emissions, should be charged higher rates. The use of solar power and rainwater harvesting in properties can carry lower property taxes, with others having higher rates.

Several regions in Canada, like British Columbia, Manitoba, Quebec and Alberta, have imposed different forms of taxes on energy, which are in the form of a carbon tax. The use of fiscal instruments to provide directions for environmentally supported economic growth needs to be pushed.

Ecotax

"An ecotax is a tax whose tax base is defined so as to internalise the negative externality generated either from the production/consumption/extraction behavior in an economy". 

The basis of such taxes is aimed at capturing elements of externalities. Such taxes are intended to discourage the overuse of natural resources that damage the ecology.

Countries like China also impose various taxes like "ecotax" on land use (1984), vehicles (2001), consumption of ecologically harmful products (1994), farmland occupation tax (1987), and pollution levy system (1982).

Carbon tax remains the most important tool for checking carbon emissions and air pollution. The Kyoto protocol advocates the principle of "polluter pays", but the consensus is challenging because of conflicting interests of growth and conservation in many developing and emerging economies. The evolution of localised fiscal instruments should be explored more intensely for promoting ecologically sustainable economic growth.

India

Some examples of "ecotax" in India at a regional level are

(a) Clean energy tax by the Government of India introduced in 2010, imposed on coal, peat and lignite

(b) Gujarat Green Cess imposed on electricity, presently stayed by the courts.

(c) Vehicle entry tax introduced in Himachal Pradesh in 2004

(d)Tax on old vehicles introduced by 6 States in India for discouraging old vehicles which impact ecological balance.

(e) Cess on non-biodegradable substances, introduced by Sikkim State in 2005

(f) Goa Green Cess imposed by Goa in 2013.

In India, environmentally related tax revenue was 4th lowest amongst 34 OECD nations and five partner economies. India's energy tax was 50% of total environmentally related revenue compared to 70% for 39 countries. This indicates significant potential for designing and introducing taxation in India's sensitive areas of "Ecotax".

Policy perspective

As a fast-growing emerging economy, countries like India face challenges in imposing ecology-related taxes, particularly carbon taxes. The question of designing and imposing environmental taxes with specific objectives remains challenging due to the complexities involved. However, its potential cannot be overlooked. Introducing new fiscal instruments based on regional ecological factors can be seriously considered. It will also spread awareness regarding sensitivity to factors impacting our environment and surrounding ecological balances.

Governments at the Centre and states, think tanks, environmental scientists, and fiscal experts have an interesting challenge to consider in the near future. Perhaps there is a range of options to move ahead in this direction in many regions of India and globally.

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The author is an IRS officer, and the views are personal