Environmental Taxes Regulation - Coursework Example

Introduction Economic activities result in many negative impacts on the environment. The over-exploitation of non renewable resources such as oil, coal, natural gas is resulting in the fast depletion of these resources. Environmental loss is becoming a growing concern for the world economy. This has resulted in bringing the environmental issues to the forefront of government policies. There are several policy instruments to combat environmental degradation. One such measure is environmental taxes. Environmental taxes are intended primarily to reduce negative impact on the environment. Implications for Sustainability Principles Sustainability requires that human activity should have minimum impact on the environment. The scarce natural resources should be used wisely and in such a manner that these are replenished naturally. The current system of unconstrained economic growth is unsustainable in the long run because it is over-consuming the resources that are life support system of earth. Moreover, the burning of fossil fuels also results in pollution of the environment. The key sectors of world economy (i.e. agriculture, energy, industry and transport) have unsustainable production practices that are resulting in severe environmental loss. Incentives and prohibitions are needed to move the society towards the aim of sustainability. Sustainability can be achieved by sustainable production and consumption practices. Environmental taxes support sustainability aims. Environmental taxes provide economic incentives to promote sustainable activities. For example, burning of coal, oil for producing energy leads to emissions of green house gases. There is alarming rise in the levels of greenhouse gases (mainly carbon dioxide Co2). The concentration of these gases in the atmosphere is resulting in climate change. Climate change leads to many other environmental problems such as loss of biodiversity, natural disasters, and sea level rise. The emission of carbon dioxide in to the environment is a negative externality. To reduce the emission of carbon dioxide, carbon tax is levied by government. Carbon tax internalizes the environmental costs of carbon emissions in to the prices of goods and services (Sundqvist, 2007). Thus inclusion of social costs (of environmental pollution) will result in the increased cost of production. Due to the higher costs of production, the product will become less competitive in the market. As a result, producers will migrate to the production methods that are more environment friendly (i.e. energy produced from wind, sunlight instead of burning of fossil fuels). Thus carbon tax helps in the reduction of pollution (by reducing carbon dioxide emissions) and transition to more environment friendly technologies. Advantages of Environmental Taxes There are many tangible benefits of environmental taxes. Some of these are discussed below: Mitigate Environmental Degradation: Environmental taxes are effective in combating air, land and water pollution. These discourage over-consumption of scarce natural resources and excessive waste generation. Thus environmental taxes help to mitigate the climate change and protect the environment. Encourage Sustainable Production and Consumption: Environmental taxes encourage products that are based on more environment friendly production and consumption methods. For example, carbon tax shifts the behavior of users towards clean technologies. Internalize the External Costs: Every production and consumption process has environmental externalities. The externality may be positive or negative. When consumption and usage rates of scarce natural resources (such as fossil fuels, water) are higher than their regeneration rates, it leads to negative externalities. The negative environmental externality has social costs. Generally, social costs are not included in the prices of goods and services. Therefore, goods and services are underpriced and do not reflect the actual costs involved in the production of these goods and services. Environmental tax internalizes the external costs in to the prices of goods and services. So the goods and services with negative externalities will have a higher price. Due to higher prices, the consumer will not opt for those products and services that have negative environmental impacts. Thus one of the key advantages of environmental taxes is that it internalizes the environmental costs so that environment friendly products are not at competitive disadvantage (European Environmental Agency, 2000). Shift in the Burden of Taxes: Environmental taxes can be used to shift the burden of taxes. For example, by raising environmental taxes on unsustainable practices, government can reduce other taxes such as income taxes. In this way there is shift in the burden of taxes but the revenue of government remains unchanged. Stimulate Innovation: As environmental tax raises the cost of production, it encourages the invention of low cost and eco-friendly technologies. Disadvantages of Environmental Taxes Like any other tax, environmental tax also has adverse effects. Some of these are listed below: International Competitiveness: The environmental taxes result in increase in the costs of production. The higher cost of production leads to higher market prices. Due to the higher prices, the domestic product may be at competitive disadvantage when it competes with the international products that are not subject to environmental taxes (Ekins, 1999). Illegal Avoidance Activity: Like any other tax, environmental tax may lead to illegal evasion (Fullerton, Leicester & Smith, 2008). For example, a tax on waste (such as U.K. landfill tax) may result in producers resorting to illegal dumping of waste. This can have more adverse effects on human health. Lack of Efficient Valuation Techniques: Government imposes environmental taxes on goods and services in proportion to their negative environmental impact. Environmental taxes may lead to inefficiency because it is difficult to calculate marginal costs of negative marginal environmental impact and benefit of reduced negative impact. It is hard to decide the optimal level of tax. For example, it is difficult to know exact level of emissions and therefore pollution tax may be set too high or low. Relocation of Plants: Multinationals companies can relocate their plants to other countries where environmental taxes are not imposed. Thus the country that imposes environmental taxes will be at comparative disadvantage and may lose investments. Difficulty in Serving Two Purposes: The primary goal of environmental tax is to protect the environment. But it is also a source of revenue generation for government. Government cannot achieve both goals by one policy instrument (i.e. environmental taxes). For example, government imposes pollution tax. To avoid tax, people can resort to alternative environment friendly sources or can install pollution abatement equipment. In that case the revenue generated from pollution taxes will decline. Thus environmental taxes cannot serve two goals simultaneously (i.e. one of protecting the environment and the other of generating revenue). Potential Use in Practice There are several environmental taxes that serve different purposes. In actual practice, a combination of all these taxes is imposed so as to achieve the desired goal. Incentive Taxes: Incentive environmental taxes are aimed at changing the behavior of taxpayer. For example, waste tax encourages consumers and producers to produce and use such products that generate less waste. In U.K., landfill tax is imposed to encourage producers to produce less waste and manage waste in a more sustainable fashion such as reusing, compositing or efficient recycling (Smith, 2008). Cost Covering Charges: Cost covering charges aim to cover the costs of environmental monitoring. These are based on “polluter pays” principle. There are two types of cost covering charges: User Charges and Earmarked Charges. User Charges: In this case, user pays for the specific environmental service he/she uses. For example, users pay water treatment charges. Earmarked Charges: The revenue collected from taxpayer is spent for related environmental problem. For example, government spending on recycling services. Fiscal Environmental Taxes: Environmental taxes also generate revenue. Fiscal environmental taxes are imposed by the government with the intention of raising revenues but they also help in the protection of environment. For example, transport taxes may be treated in the category of fiscal environmental taxes. In U.K., users pay congestion charges for using vehicles in the central area of London. This tax is a source of revenue generation for the government but at the same time it also helps in reduction of pollution. Evaluating Effectiveness of Environmental Taxes The desired goal of environmental taxes is to shift the behavior of consumers and producers towards more sustainable practices and save the environment from degradation. Taxes can be called effective if they achieve the desired goal (Kathuria, n.d.).There are two decisive factors to determine the effectiveness of environmental taxation. First is environmental effect and the second is the incentive effect (Environmental Taxes Implementation, 1996). Environmental Effect: It is aimed at reduction of pollution level. As per this criterion, the environmental taxes can be called effective if these result in the reduction of pollution level. Incentive Effect: It is aimed at providing incentive to taxpayer for changing behavior towards more sustainable production and consumption practices. This criterion encourages producers to adopt abatement measures or efficient use of scarce resources. The incentive taxes are effective if the tax rate is equal to the pollution reduction costs. This method requires efficient calculation of marginal pollution abatement costs and marginal benefits from reduced pollution. The environmental tax is said to be optimal when the marginal benefit (from the reduction of pollution) is equal to marginal abatement cost (Groosman, n.d.). Conclusion Environmental taxes internalize the environmental costs that occur during the entire life cycle of a product (from production to the final disposal) and stimulate the invention of low cost and eco-friendly technologies. Thus environmental taxes offer effective ways for environmental protection and move the society towards sustainable development. References Environmental Taxes Implementation and Environmental Effectiveness (1996), Environmental Issues Series No. 1 Ekins, P. (1999) European Environmental Taxes and Charges: Recent Experience, Issues and Trends, Ecological Economics (31) 39–62 European Environmental Agency (2000) Environmental Taxes: Recent Development in Tools for Integration, Environmental Issue Series No 18 Fullerton, D., Leicester, A. & Smith, S. (2008) Environmental Taxes, NBER Working Paper Series, National Bureau of Economic Research Available at < http://papers.nber.org/papers/w14197.pdf?new_window=1> [Accessed 10th Dec, 2009]. Groosman, B. (n.d.) Pollution Tax, Center for Environmental Economics and Management, University of Ghent Available at [Accessed 10th Dec, 2009]. Kathuria, V. (n.d.) Eco-Taxes-A Note Available at [Accessed 10th Dec, 2009]. Smith, S. (2008) Environmentally Related Taxes and Tradable Permit Systems in Practice, Organisation for Economic Co-operation and Development Sundqvist, P. (2007) Do Energy Taxes Decrease Carbon Dioxide Emissions? Master Thesis, Uppsala University Available at [Accessed 10th Dec, 2009]. Read More