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Environmental Taxation

By - Ajay Saran Chiratla


Source: European Environment Agency


[1]If morality represents how we would like the world to work, then economics represents how it actually does work. (Levitt & Dubner, 2006)


As Steven D. Levitt explains in his famous work, Freakonomics, Economics is a crucial notion behind the very functioning of the world. Whether you affirm or not, the conventional wisdom states that Human Beings are selfish. Therefore, it is one of the fundamental premises on which Economic theory is based, i.e., every player in the world is rational and strives to maximize his/her utility. One does not take any action unless there is some incentive or payoff, he gets from it. Although Environmental concern has raised many eyebrows over time, unless there is some tool or policy to incentivize people's motives, the issue will only prevail as a topic of debate and concern. The concept of taxation is one of the elementary tools that the Economic theory has used to curb people's behaviour.


So, here the question arises, what is Environmental Taxation? Environmental Taxes or Green Taxes are a class of legislative costs aimed at penalizing or incentivizing firms and individuals based on their responses towards the Environment. The chief agenda of eco-tax is to reduce the global greenhouse gas emissions, abating emissions of local air pollutants, in turn addressing the Global Warming crisis. The pandemic and uncertainty of our lives have shed light on how vulnerable we are as a human race, and the call to reform towards the issue should be accosted with a much greater provision. The stagnation of Economic activity and the Government's blowing out their fiscal deficits during the pandemic has created a sense of surge in demand for alternate sources of taxation revenue. Environmental policy for a while has been governed by "command-and-control" laws. These strategies are customary- i.e., regulating/restricting the use of a particular substance or aiming to make the firms inherit certain technologies that tend to minimize the global environmental footprint. Following the Stockholm conference in 1972 (the world's first UN (United Nations) conference that made Environment a global alarming issue), the command-and-control approach to environmental regulation progressively gave way to a mixed policy approach that included the use of incentive- and business policy tools. The issue of Environment is far from a contingency outlook; it is a matter that is consistent with our lives, and we are far from dreaming of deliverance with the current pace we are taking to monitor the problem. Therefore, the urge for the paradigm to shift towards using economic or market tools like taxation is particularly important. The key argument of the idea is to convert the Environment from an exogenous to an endogenous parameter, i.e., weaving it with the economic processes.


So, one can ponder, what is the scope of Environmental Taxation? Taxes ideally make both producers and consumers notice a low-cost method to mitigate the issue. Several environmental profitable practices can reduce the global carbon footprint. Still, most do not inaugurate these in their production or consumption habits, as these are costly exercises, and there is no incentive for a rational player to engage in these. However, as the Government intervenes through tax subsidies or penalties, people ideally explore innovating and bringing the costs down while nursing the very cause itself. While directing the Economy in a prescriptive route, the demand for low emission alternatives will escalate; for example, shifts in the field of renewable energy, public transport, etc. Well-designed Eco-taxes are regarded to be highly transparent in their very functioning. In the lens of its coverage and costs, an eco-tax is well accounted for, and it is open as to what is taxed and what is exempted.


However, the examination of the effectiveness of an Environmental Taxation Policy is not very straightforward. In general, any taxation policy is judged based on these parameters, ability to curb and gather the desired goals, incentivizing effects and of course the revenue angle. But the goals of pollution reduction, price incentives are not explicitly listed; they vary highly. And, while judging the cost covering and incentivizing effects, we need to perceive it from a broader mindset, as it should have been apparent by now the scope of an environmental policy is as wide as the scope of environmental damage. Similarly, it might be easy for us to measure the implications of the ecological effect on something that has a defined market value. Measuring the damage concerning the detrimental effects of clean air, water, soil, etc., which lack market value, will be an intricate job. Time is another critical parameter in the evaluation process; as an ecological policy takes time to reveal its results, it might be tough to contemplate the same. There is increasing uncertainty in our lives, so with the Environment; hence, an environmental policy requires constant revision and regulation. A practice in the short run to aid the go green process might be completely different in the medium or the long run. Although there are several research studies conducted from 1996, it is observed that there is a subtle understanding and innovation in study techniques to determine the effectiveness of an environmental policy.


Adhering to data availability problems, not explicitly contained effects, the time factor, etc., let us try to assemble some sense of the ability of an eco-tax. For this assessment, let us consider the case of one of the fundamental and comfortable to comprehend forms of an eco-tax, i.e., the carbon tax. The carbon tax is the price or penalty levied on the release of greenhouse gases (carbon emissions) into the environment. It has particularly gained prominence and momentum, after 2016, which has been a horror story for environmentalists and conservationists worldwide, witnessing the highest carbon emissions of all time. Sweden was the first country to levy carbon taxes in 1991, as it was recalled, the carbon tax policy in Sweden prior aim was not implemented as an environmental measure but was more of a monetary tool to raise the taxation revenue. Ever since the implementation of a carbon tax, in 30 years, it is found that the global greenhouse gas emissions in Sweden were significantly regulated and are declining, there is a drop of 27 per cent between 1991 and 2018. Although, it is complicated to reveal the exact correlation and effects of this policy on national income, in inflation-adjusted terms, the per capita income of Sweden has grown by 50%. With this decline in emission, in the last decade, the Eco-tax revenue has been dropping in Sweden, making the policymakers look for alternate taxation sources to keep the economy progressing. Following Sweden, many Economies have instituted Carbon Taxes or Environmental taxation policies in general and they proved to be promising.


Still, the life of an Economist or policymaker is not so easy, carbon taxes have been controversial in their functioning. Experts and critics believe the magnitude of current pricing is extremely low to curb the behaviour of the people. As of April 2021 reports, Sweden has the highest carbon tax rate at 135 to 137 USD per metric ton, followed by Switzerland at 101 USD. On average, the carbon tax is around 50 to 100 USD per metric ton of carbon equivalent emissions. People believe that this kind of policy will, in fact, hurt the nation’s GDP (Gross Domestic Product), as this will inflate the price of energy usage hurting common people rather than big industries, in turn, damaging the growth prospects. The effect will be much harsher on developing and manufacturing countries that heavily depend on high-emission industries. Now, there is an even-trickier part, the question of what to do with the carbon tax revenue collected, there is an ongoing debate between people demanding the money to flow back to consumers, whereas the other sector seeking to spend the same for innovations and activities for a greener environment. Capable of conceding significant outcomes, but the crude form of Environmental Policy today is not ideal. We need our best minds ranging from policymakers, Economists, industry practitioners, legal experts, etc to sit together, collaborate, countries to form coalitions and work together, by sharing wisdom, resources, knowledge, and not just pledge blind targets. Be it the Paris Agreement or the Net Zero goals, if people do not change their perspective and perceive this as a Global Phenomenon, no conference or summit will yield fertile results. As the Swedish Campaigner Greta Thunberg recently called the COP26 a failure, with pledges not good enough.


Yet I can vouch that the Paris Summit, or the COP26 UN talks, have been successful in creating a sense of inclusion, global awareness, recognition, etc, but this is just a first step and there is no right answer for the problem of Environment, it is an ever-going exploration, and we will always be in demand of modern solutions to meet modern problems. And it should well place in our heads that it is never too late or too soon to go green.


Ajay Saran Chiratla is a second-year student at JSGP.

 

References:


[1] Levitt, Steven D., and Stephen J. Dubner. Freakonomics. Penguin Books, 2006.

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