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Published : January 13, 2012 | Author : mini.anshuman
Category : Tax Laws | Total Views : 3549 | Unrated

Mini Gautam, B.S.L LL.B from ILS Law College and currently pursuing LLM in International Financial Law from Kings College London. Anshuman Chanda, B.S.L LL.B from ILS Law College and currently pursuing LLM in Tax Law from Kings College London.

The Irony of Taxing the Environment to Protect It – A UK Perspective

There has been a lot of hue and cry all over the world in the recent years relating to environmental taxes. The traditionalists do not seem to fathom the idea of taxation being used as a two-pronged instrument of raising revenue and protecting the environment at the same time. However, various government all around the world have started to use tax for the dual purposes as mentioned above. The term ‘environmental taxes’ has been defined by OECD as “any compulsory payment to general government levied on tax-bases deemed to be of particular environmental relevance.” These taxes not only seek to directly target actions or products that are detrimental to the environment, they may also encompass instruments that have environmental effects that may be secondary to the original design.

Environmental Tax – What Is?
Before dwelling into whether environmental taxes are a boon or bane to the people and society at large we need to understand the various facets of environmental taxes. The primary rationale for the use of environmental taxes that if uninhibited, a polluter will not take into account the costs incurred on the society at large while generating pollution or pollutants. These taxes also conform to the so-called ‘polluter pays principle’ (PPP) whereby the costs of pollution control are paid by the polluter themselves and not by society at large. Environmental taxes provide an incentive for polluters to reduce emissions, even below the current cost-effective level, since the tax applies to each unit of residual emissions. Environmental taxes will enable the regulator to dissuade himself from negotiations/dialogues with the polluter; and won’t be required to depend on the information from each and every polluter about their abatement costs as these taxes are uniform and the authorities do not need to consider the circumstances of individual firms, and thus individual polluters have little scope to negotiate more favourable terms.

Obvious Benefits
Environmental taxes will generate revenues that can be used to fund government expenditure. Environmental taxes could be used to reduce more distortionary taxes on labour/wages/profits/salaries. Indeed, a more focused and serious approach by the states will not only allow them to increase revenue from the environmental taxes to significant amounts, but will also reduce the burden on taxation on labour etc., thus following a more equitable approach.

Latent Flip Side
On the other hand there is also a flip side to the introduction of these taxes. If pollution damage varies with the source of emissions, then a uniform pollution tax is liable to result in inefficiency, and source-by-source taxation may be needed to achieve a more efficient outcome. Also, some forms of environmental tax may have to apply at uniform rates, even where damage is known to differ between locations. Environmental taxation may also sometimes prove to be counter-productive. For example, a tax on toxic waste may provide a powerful incentive to reduce waste, but it may also induce illegal dumping or burning. It may also make the polluter believe that paying the tax legitimises their polluting behaviour. Environmental taxes may also be considered by some as regressive as their objects of taxation i.e. transport, carbon content of fuels, or energy generally, form a substantial part of income of low or middle income household. Further, environmental taxes will increase the costs of production, which will eventually lead to the increase in the costs of the output. This will not augur well for the consumers. Also, where such domestic output competes with products of foreign producers not subject to similar environmental taxes, the impact on the competitive position of domestic firms may be a cause for concern.

Hurdles En Route
Apart from the above pros and cons, we also need to be concerned about some other aspects of environmental taxation. The costs of administration and enforcement of these environmental taxes, for instance, an environmental tax may require counting tons of emissions etc. will be substantial and cannot be completely overlooked. Tax liability of the polluter cannot be accurately computed as the polluter enters into no market transaction for deforestation, dumping, or emissions. Trees can be cut without any record that they ever existed. Illegal waste can be dumped at midnight. Emissions are self-reported. Without expensive audits, they are relatively easy to hide and can also be easily inflated.

UK Case Study
We see that the even though the ambit and scope of environment taxes is immense; and every state should strive towards expanding their environmental tax base, there are a host of issues that the state needs to address to mitigate the fears of the industry and the consumers. Environmental taxes can, not only help in raising the revenues for the state, it can also curb and curtail environmental damage. Potential gains from environmental taxes do not lie in the indiscriminate introduction of taxes with no concrete environmental justification. Rather, it lies in the effective targeting of such taxes to specific environmental problems. Poorly targeted environmental taxes may increase the economic costs of taxation, while offering little in the way of environmental gains. In the UK, a number of tax measures have been implemented primarily with environmental objectives in mind. They include taxes on landfill, industrial energy use (the Climate Change levy) and the extraction of aggregates (Aggregate Duty). Then there are taxes on motor fuels and the annual vehicle excise duty. In London, the transport authority has introduced a congestion charge for vehicle use in the central area.

The UK government must endeavour to bring about a uniform and workable definition of “Environmental Taxes”. At present the Office of the National Statistics gives more importance to the effect of a tax and includes taxes like Landfill Tax, Aggregate Duty, Climate Change Duty, VAT on Fuel Duty, Vehicle Excise Duty, Air Passenger Duty, Renewable Energy Obligations, etc. within the ambit of environment taxes. However, HM treasury adopts a narrow approach by giving importance to the primary intention of any tax. According to the treasury, taxes that have been expressly introduced for achieving environmental objectives shall be construed as environment taxes. Thus, only Landfill tax, Climate Change Duty and Aggregate Duty fall under the category of Environment taxes. In my opinion, the approach of the Office of the National Statistics is more viable as covering as many taxes under the category of “Environmental taxes” will help the government to increase their share of revenue from this category of tax and will also showcase the government’s commitment and seriousness towards increasing the environmental tax base.

As mentioned earlier, any particular environmental tax should be specific targeting some environmental concern. Examples include Sweden’s tax on nitrogen oxides emissions, and emission charges for water pollution in the Netherlands. Such taxes based directly on measured emissions of particular nature would help in addressing specific environmental issues more effectively. When polluting emissions rise, the polluter’s tax base rises, and the polluter pays additional tax directly in proportion to the rise in emissions. Such an approach would also encourage the industry to adopt new technology and machinery that would enable them to maintain low level of emission, and eventually pay less tax. It is very pertinent to mention here that any tax that is introduced directly on emission should also include a comprehensive and detailed framework for allowing deductions on the expenditure incurred on the research and development (R & D), purchase, installation, etc. of any such technology, machinery or any other measure that has been taken by the polluter to decrease the level of emissions. This would act has a huge booster for industries. It would not only encourage the polluter to decrease the level of emissions, it would also keep him competitive in the market as the costs incurred in purchase and installations of such machinery can be claimed as a deduction. An example of such a deduction is the introduction of 100% first year allowance on environmentally beneficial Plant & Machinery. Recently, the UK government has introduced a 100% first-year allowance for new zero-emission goods vehicles, effective from April 2010. These measures are steps in the right direction.

Indirect taxes in the form of sales tax or excise duty can be set or modified, or an environmental tax based on the sale of polluting goods or production inputs can also be introduced where direct taxation on emissions seem to be too expensive or ineffective. Goods and services associated with environmental damage may be taxed more heavily, as with pesticides or batteries. Environmental taxes of this kind will have lower administrative costs than taxes based on measured emissions.

The revenue generated from a particular environmental tax may be used towards specific public service or towards some specific measure for protection of environment. For example, London’s congestion charge is spent on public transport for London, or a 0.3% cut in the National Insurance Contribution with the introduction of the Climate Change Levy. This would help in increasing the trust and confidence among the public in general towards and purpose of levying an environmental tax.

Therefore, it can be seen that Environmental taxes can achieve the dual objectives of raising the revenues of the government and also protect the environment. However, the states need to follow a more serious and focused approach towards levying of these taxes. It needs to thoroughly assess the implications of introduction of any such taxes on the industry and the consumers and their interests should be kept in mind.

Authors contact info - articles The  author can be reached at: mini.anshuman@legalserviceindia.com

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