The Scope and Limitations of Environmental Taxes

Looking specifically at ‘first tier emerging markets, this paper emphasizes the necessity of mitigating the environmental damage that accompanies economic growth and industrialization. Following this, the case of India (as one of the few developing countries that has implemented environmental taxes) is analyses in detail. This paper concludes by looking at the limitations and challenges of the use of environmental taxes in developing countries; as well as possible ways forward.

In ‘Reconstructing Development Theory: International Inequality, Institutional Reform and Social Emancipation’ Brett puts forward the idea that the environment has not historically, or sufficiently, been considered in the intent of development because low income countries had not industrialists and therefore produced negligible emissions (Brett, 2008).

The environment has however increasingly become a point of contention in recent years as developing countries – particularly countries like China and India that have experienced rapid economic growth (and industrialization) – industrialist under threat of greater environmental restrictions from the international community. These restrictions were not faced by the currently developed world during their time of development (Brett, 2008).

Rising consumerism in evildoing countries, coupled With high levels of population growth has put the environment under further pressure (Buck-Hansen & Luridness, 2012). In short, the nature of development has been such that the earth’s finite resources have not been sufficiently considered, resulting In an environmental crisis. There have however, from a policy perspective, been few concrete laws to mitigate the detrimental impact of industrialization on the environment.

Industrial development policies are still largely favored in their trade-off with environmental degradation.

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Furthermore, politically, a logic that favors the environment over economic growth is a difficult sell to citizens. Organizations such as the World Bank, and many development economists, argue that the use of taxes, subsidies, and appropriate pricing to both encourage more efficient use Of natural resources, and reduce pollution from consumption and production, would go a long way in mitigating further environmental damage (Bruce & Ellis, 1993).

Furthermore, the World Bank argues that this will be at minimal cost to economic growth. In line with the view of the World Bank, Brett rightly emphasizes the need to “introduce institutions that generate the incentive and accountability mechanisms that encourage producers to shift from high impact to low impact technologies” (Brett, 2008). This view advocates a combination of market and state organization. The introduction of environmental taxes would be one such initiative – as will be further elaborated upon in the section below.

Environmental Taxes Environmental taxes fall within a set of environmental policy tools known as economic- or incentive-based instruments. Economic- or incentive-based instruments attempt to change behavior by changing incentive structures – ether than prohibitive legislation that would be costly to implement. Environmental taxes use fees as their incentive instrument (Bloodstone, 2003). Countries typically implement environmental taxes in order to raise revenues for their treasuries; or to internalize negative environmental externalities of economic activities (Bloodstone, 2003).

In ‘Environmental Taxes in Developing and Transition Economies’, Bloodstone identifies three tiers Of taxes – the Poignant Tax (as the ‘First-Best Tax); the ‘Second-Best Tax’; and the ‘Third Best Tax’ – these are briefly outlined below (Bloodstone, 2003). The Poignant Tax: The tax is targeted at companies that pollute the environment or create excess negative externalities and are implemented because the market doesn’t provide enough incentive to reduce negative externalities.

While it is the ‘best case’ for environmental taxation, the costs of implementing it are high; and the required amount of information too high – particularly relating to marginal cost and marginal benefit (Bloodstone, 2003). The Second-Best Tax: When deciding on the level of taxation for the Second-Best Tax, levels are set exogenously – typically as a result of political processes which advocate assure and goals such ‘safe minimum standard.

While Second-Best Taxes require less information to implement than Poignant Taxes, they require high levels of monitoring and enforcement. A further concern with these taxes is that goals are not specific and are therefore open to a fair amount of interpretation (Bloodstone, 2003). The Third-Best Tax: This tax applies to taxes on products of, or inputs into the economy that are deemed to produce negative externalities – for example, petroleum and sulfur. These taxes are criticizes because they do not set goals for environmental improvement.

These taxes are however, the most implemented worldwide because they do not require high levels of information, nor do they require monitoring and enforcement (Bloodstone, 2003). While most developed countries have introduced environmental taxes; with the exceptions of a few countries South Africa and India for example – these taxes have not been prevalent in the developing world (Acorn, 2012). South Africans pollution tax came into law on 1 September 2010, while Indian’s came into law on 1 July of the same year (Acorn, 2012).

In seeking to gain an understanding of the use of environmental taxes (and indeed the need for environmental taxes) in developing countries this section will begin by looking at the BRICK (Brazil, Russia, India, China and South Africa) economies. The BRICK economies are considered ‘first tier” emerging markets – the most developed of the developing world. These economies, perhaps with the exception of South Africa, have exhibited high levels of economic growth. The International Monetary Fund (MIFF) forecasts that Brazil, Russia, India, China and South Africa will grow by 3. 2%, 3. 38%, 5. 68%, 8. 04%, and . 84% – respectively (International Monetary Fund, 2013).

Of these, India and China have consistently shown the highest levels of growth. These growth levels, coupled with their high populations (in excess of 1 billion people each), increasing industrialization, and increasing consumerism will put increasing pressure on the environment. It is therefore imperative that steps such as the development and enforcement of environmental taxes are taken, in developing countries in general, but in particular in the ‘first tier’ emerging markets.

Upon analysis of the BRICK (Brazil, Russia, India, China and South Africa) economies; China, India and South Africa have implemented an environmental tax system. The world’s TOP Five CO Emitters (2008) Country Annual CO Emissions % of World Emissions China 7,031. 916 23. 5% United States of America 5,461 18. 27% India 5. 83% Russian Federation . 72% Japan 4. 04% Source: (United Nations, 201 3) Indian’s nascent environmental tax system in particular, illustrates the upside as well as the downside potential for implementing such a levy and thus showcases why a holistic approach to environmental tax policy cannot be adopted, especially in a developing countries – where growth sensitivities are often more pronounced.

The case of India is discussed in more detail below. As mentioned above, India is the third largest emitter of CO in the world. Furthermore, with a rapidly growing population and economy, emissions are keel to increase in the future. While the country was the first nation in Asia to introduce a carbon tax, environmental taxation is still being developed with an aim to target industries with negative externalities costs. The country’s energy sector was the first to be affected by an environmental tax.

In 2010, India introduced a levy of US$I per tone of on both produced and imported coal to the country (Sacristans & Bagging Raw, 2010). The commodity which through coal power stations contributes more than half of the power to the national grid – contains the highest carbon content of all the fossil fuels. The decision for the tax was premised on encouraging the use of less polluting fuels as well as growth in the alternative energy space.

However, it is important to consider the adverse effects that such taxation could place on the domestic economy – which are often more pronounced in a developing country setting. For example, a higher price of coal exacerbates inflationary pressures in an economy such as India and as such, the burden placed on the corporate sector needs to be assessed as well as the actual benefits derived from introducing such a tax. Indeed, the benefits derived from introducing an environmental tax of this nature are limited.

Firstly, the tax is unlikely to curtail the country’s reliance on fossil fuels, especially considering the levy imposed on the commodity is only US$I (International Tax Review, 201 1). To put this into context, a IIS$27 price per tone of carbon has been criticizes as being too low by economists within the European Union to meet the goal of 20% emission reduction by 2020 (International Tax Review, 2011 Secondly, sustainable economic growth in the country will only be achieved if the levies collected are directed towards protecting the environment as opposed to ending the government’s fiscal deficit. Thus, for an environmental tax to succeed in meeting its intended objectives it needs to be implemented within an economic growth model underwritten by sustainable growth.

Limitations of the Use of Environmental Taxes in Developing Countries and the Way Forward There are a number of limitations of environmental taxes that should be considered when setting environmental policy in a developing market visit-visit developed countries. These are elaborated upon individually below.

Implementation Developing countries often operate outside of a well-developed tax remark. Bloodstone (2003) notes that environmental taxes are administratively more difficult to implement than other taxes – thus the need for greater administrative capacity becomes apparent – an administrative capacity that is not always present in developing countries. Institutions in charge of administering fiscal reforms and promulgating and enforcing environmental policies are generally weaker in developing countries (Bruce & Ellis, 1993).

This affects both the ability to collect accurate data as well as monitoring capacity. Bloodstone (2003) argues that monitoring capacity is rather strained by the amount of small companies in developing countries – small companies are particularly difficult to monitor. As a result, few developing companies employ the ‘Second-Best taxes’ because of the administrative issues that accompany them, but many use Third-Best Taxes because they are easy to implement and do not require a capacity for monitoring and enforcement (Bloodstone, 2003).

Tanzania serves as an example of the use of Third-Best Taxes, where in the agricultural sector for example, a 5% excise tax is applied to fertilizer sales (Bloodstone, 2003). Revenues from Environmental Taxes Revenues generated from environmental taxes are often not ploughed back into environmental protection, but rather used to fund fiscal budgets. While the revenue base generated from environmental taxes is lower in developing countries, due to the revenue base being narrower, the demand from the public sector for the provision of public goods is greater (Bruce & Ellis, 1993).

As such, in developing countries, increasing taxes on fossil fuels, for example, has a disproportionate impact on low-income households (Organization for Economic Co-operation and Development, 2011 In instances such as these, the policy recommendation becomes that a tiered approach is used where the tax rate will depend on the level of consumption (Organization for Economic Co-operation and Development, 2011 Furthermore, in laying out a path towards the implementation of environmental taxes the COED (Organization for Economic Co-operation and Development) emphasizes the need for a government to clearly communicate the goals of its environmental policy and to clearly outline what the revenue from environmental taxes will be used for (Organization for Economic Co- operation and Development, 2011).

Transparency in environmental policy is essential in attaining public buy-in. Specificity of Goals ‘Second-Best taxes’ often revolve around ambiguous political goals, such as ‘reasonable amounts’ or ‘minimum standards’ – which is subject to interpretation by a government (Bloodstone, 2003). In China, for example, a centralized policy guides environmental taxes, but implementation and enforcement is the responsibility Of local governments (Bloodstone, 2003).

Coal governments have not interpreted their mandates uniformly and there are therefore differences in the levels of enforcement of environmental taxes cross the country. Following this, the case of India (as one of the few developing countries that has implemented environmental taxes) was expanded upon. This paper concluded by looking at the limitations and challenges of the use of environmental taxes in evildoing countries; as well as identifying possible ways forward.