 "Taxes")
The climatic menace caused by the burgeoning wastes has been well documented in the NITI Aayog report of 2021, which states that the per capita per day solid waste generation in the 28 major cities in India is in the range of 0.19–0.99 kg. With increasing population growth and urbanization rate, waste generation in India is estimated to jump to 125 million MT per year by 2031. But the policymakers have been grappling to understand the implicit micro-foundations along with the behavioral idiosyncrasies of waste regulation and designing the appropriate fiscal instruments for the same.
Economics 101 states that the division of tax burden depends on the degree of change in the behaviour of buyers or sellers in response to changes in income or prices of the product, popularly termed the elasticities of demand and supply. Ideally, necessary goods are considered price and income inelastic as they are not easily substitutable, while luxury goods are considered price and income elastic. The question arises whether waste management services like treatment and disposal are considered luxuries or necessities in a highly heterogeneous Indian society. Moreover, it is crucial to understand both from an economic and political perspective that the net benefits of such services are not biased to higher income groups compared to the lower income strata of the society. Thus, the challenge before a policymaker lies in understanding the willingness to pay for waste disposal services and how price changes, due to technological innovations, affect the demanded quantity of waste treatment services. The caveat before arriving at an optimal mix of taxes and subsidies is that because waste management is a public good, the income elasticity of demand may be high while the income elasticity of willingness to pay will be relatively low. Hence, a wedge is created between the income elasticity of demand and environmental values, resulting in negative externalities.
Choice of policy instrument
As waste taxes on output correspond to a tax on profits, they may disincentivise firms to invest more capital, leading to a drop in per-capita consumption in the economy. On the contrary, a subsidy on waste abatement has two significant effects on the economy. Firstly, reducing a firm's production costs can lead not only to an increase in installed capital and production but also to an increase in the resources that the firms devote to abatement. The net impact on waste emissions and per capita consumption would be decided on the relative strength of reduced production due to higher abatement resources vis-à-vis increased production due to capital installation.
The concern with taxes at the industrial level is that they have often been considered politically unpopular, especially when there is a time lag in the impact realization, which creates an overriding policy myopia. Further, a flat tax or subsidy rate could create biases in firms dealing with vertically differentiated products, with the more environmentally friendly producer facing the same tax rate as the less friendly producer.
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At the household level, a unit-priced tax or charging households for each container of trash has often been criticized for the risks associated with illegal dumping or burning of wastes and considerable political opposition to its regressive nature of impact. However, taxes may encourage home composting, which reduces waste at source and lowers transport, treatment, and environmental costs, even though the process might occupy substantial household space and time.
Policy implications
Country-level studies show that a combination of tax and subsidy framework is the most efficient, welfare-enhancing solution for managing waste. However, the concern remains at what level- extraction, transformation, or distribution- should it be levied? While the RBI (2022) report on municipal finances shows that property tax could be a robust source of finance for generating municipal finances that can be utilized for managing wastes, not much has been achieved on that front. In terms of subsidies, identifying the targeted population is crucial. The parameter for identification could be the amount of recycled material used in production or the firm’s cost of abatement. While the former could lead to an adverse selection problem with firms misreporting their share and non-availability of data on informal recyclers who can assist in monitoring the data, the latter leads to a regressive framework with the smaller-sized firms remaining small and the large-scale firms becoming larger with higher ability to abate. For the credibility of information, the ratio of a firm’s cost of abatement relative to their size should be considered a criterion for disbursement of subsidies. Further, the identification of the informal recyclers in the supply chain becomes pertinent. A decentralized framework, empowering the lower tiers of government, would go a long way in addressing the 5W’s and H issue of waste taxation (who, what, where, when, why and how).
Himadri Shekhar Chakrabarty is Assistant Professor, the Indian Institute of Management Lucknow
Poulomi Bhattacharya is a Fellow, Indian Council for Research on International Economic Relations
