Monday, 31 October 2011

If environmental taxes are such a good idea why have they not been implemented?

By Stephen Spratt

A couple of weeks ago I attended the 12th Annual Environmental Taxation Conference, which this year was held in Madrid. This was a fascinating event from which I learned a huge amount.

Why should countries implement environmental taxation?

This was the first time I had attended this conference, and – despite its high quality – I came away a little less optimistic about the prospects for environmental taxation than when I arrived.

This had nothing to do with the strength of the broad case in favour:
  • Taxing ‘bads’, such as pollution, so that taxes can be reduced on ‘goods’ such as employment, which is obviously a good idea
  • Broadening the tax base in ways that boost tax revenues overall, in both developed countries (under severe fiscal strain) and developing countries (with relatively low total tax takes), also makes sense. If you have to tax something – which you do – using mechanisms that also reduce environmentally damaging activity is a good place to start.
Neither was my pessimism borne of technical or ethical concerns:
  • From transport to natural resources, to energy and low carbon development, a wealth of scholarship underpins an impressive understanding of how to design and implement environmental taxes
  • Similarly, issues of equity were addressed in detail, with palpable concern that mechanisms should not adversely affect the poor informing much of this work.
It seemed to me that – in developed countries at least – environmental tax experts have a good grasp of the policy options and their broader implications, particularly where and how environmental taxes should be implemented, and the criteria we should use for assessing this.

So why the pessimism on my part?

Nobody mentioned public opinion...despite the attractiveness of green taxes, no country has implemented them to anything like the extent they could. They remain a small fraction of government revenues, even in the most enthusiastic countries.

Share of Environment Taxes in the Total Tax Revenue in 1995 and 2005
 * Source: European Environment Agency

Nobody likes taxes, but environmental taxes are particularly disliked. It is not clear why this should be, but it is a fact. This is documented well by the 2009 Green Tax Report from the Chartered Institute of Taxation’s – check out section 5.4 Public Perceptions of Environmental Taxes.

A topical example of the intense distrust of environmental taxation is this: Australian ‘Carbon Tax’ Wildly Unpopular.

What, if anything, might be done about this?
  1. Part of the problem seems to be a suspicion that environmental taxes are not really about the environment at all, but about raising revenues. There is certainly an element of truth in this, and if the goal of a tax is to raise revenue, policy makers should say so.
  2. Another option is earmarking – or ‘hypothecation’ as it is known in the trade. Tax experts are generally against the suggestions that taxes should be spent on particular things, rather than go into general coffers. While there are good reasons for this, they are not as important as the need to build and maintain public support for such measures – dedicating at least a share of revenues to complementary environmental goals might help in this respect.
Many developing countries have implemented environmental taxes, and many more are considering doing so. There are more outstanding technical and ethical issues than is the case for developed countries, but even if these are resolved the question of public opinion will remain. There is no reason to assume that environmental taxes will be any more popular in low and middle income countries than they are in high income countries. If these mechanisms are to have any chance of fulfilling their undoubted potential, this needs to be addressed directly, and not swept under the carpet as if it does not matter.

* European Environment Agency (2009), Share of Environment Taxes in the Total Tax Revenue in 1995 and 2005, http://www.eea.europa.eu/data-and-maps/figures/share-of-environmental-taxes-in-the-total-tax-revenue-in-1995-and-2005 (accessed on 31 October 2011)