Greening the tax system

Green taxes, fees, and user fees are essential components of a sustainable economy. Green taxes perform three important functions, namely:

1. They generate significant revenues, which contribute to financing development, promoting equity, and maintaining macroeconomic stability.

2. They correct for the external costs of market failure.  Specifically we refer to failure to capture the costs of economic activities, including consumption that damage the environment or threaten the well-being of future generations. The taxes capture (or internalize) the full costs of the negative effects or spillovers.

3. Similarly, green taxes serve the sumptuary objective of altering people’s consumption behavior by increasing prices of goods that are environmentally harmful.

Biodiversity, environmental sustainability, and slowing down climate change are all public goods.  In fact, amidst climate change, these are all global public goods.  In order to provide public goods, government intervention is inescapable.  And it goes without saying that green taxation is one of the principal tools for collective action, be this at the national level or the supra-national level.

Green taxes do yield substantial revenues, for the goods and transactions they cover are part of the day-to-day lives of peoples. Every one has a carbon footprint; almost everyone cannot avoid using non-renewable resources.  The full costs of such consumption, ordinarily not reflected in the market price, can only be accounted for through taxation.

Thus even a modest tax rate translates into big revenue gains. In turn these additional revenues can be used not only to protect the environment in particular but likewise to finance development in general, especially in developing countries.

Take the case of the carbon tax.  Its main objective is to address the market failure (or the negative externality) that leads to environmental damage. At the same time,the potential revenues from a carbon tax are huge. A Carbon Adaptation Tax, as proposed by the Swiss Government in 2009, could generate global revenues, which are expected to be around USD 48.5 billion per annum.  These revenues could be raised according to the “polluter pays” principle through a levy of USD2 per ton of CO2 on all fossil emissions, with a tax-free emission level of 1.5 tons of CO2 per capita.

Progressive taxation is a cardinal principle.  That is to say, the rich or the better-off classes have to pay higher taxes or higher tax rates than the poor or the lower income group.

One can argue that green taxes are generally progressive.  After all, it is the rich or the upper-class people who have a much bigger carbon footprint than the poor.  They ride airplanes; they own gas-guzzling SUVs; they turn on air-conditioning units 24/7; they have all the latest entertainment gadgets that use up a lot of energy; and they wear precious metals mined from the mountains of Africa and Asia.

But of course, the poor also consume non-renewable resources and engage in activities (e.g., cutting wood for cooking or doing slash and burn for a living) that also destroy the environment.

In this context, even the poor must be subject to green taxation and regulation.  After all, such taxation and regulation will ultimately be for their benefit, since they are the most adversely affected by the problems arising from climate change and environmental destruction.

Nevertheless, policymakers can find ways to moderate the impact of the tax that affects the poor.  For example, a tax imposed on petroleum can be designed in a way that poor farmers or fishermen can purchase fuel at a lower rate through, say, a voucher system.  Further, the price increase in transportation from a tax hike in petroleum can be offset by a subsidy for energy-efficient mass transportation.

Carefully designed, a green tax system can contribute to reducing environmental degradation, raising public revenues and altering consumer’s behavior without adversely affecting the poor.

Sta. Ana is coordinator of Action for Economic Reforms (www.aer.ph).

This piece will be part of a report of the Civil Society Reflection Group on Global Development Perspectives, which will be presented at the Rio +20 United Nations Conference on Sustainable Development in June 2012. For more information about the Civil Society Reflection Group, visit: http://www.reflectiongroup.org/.

Filomeno S. Sta Ana III (20 Posts)

Sta. Ana coordinates Action for Economic Reforms (www.aer.ph)


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  • http://twitter.com/thecusponline Emmanuel Doy Santos

    Good article, Flo.

    The Philippines according to the World Development Indicators of the World Bank back in 2008 had a per capita emission of less than 1 tonne of CO-2 equivalent gases (0.92 CO-2 e). With a population of 90 million that amounts to 83 million tonnes a year. Of course with a growing population it has probably reached 90 million tonnes.

    If the government were to impose a carbon tax of $1/tonne similar to what India did in 2010, then the maximum amount of revenues it could derive is $90 million or about Php 4 billion. That to me is a rather small amount to deal with adaptation and mitigation strategies to address climate change which I have estimated to cost us about Php 50 billion a year based on the Center for Global Development’s risk assessments. Others like Ben Diokno have put the figure at a higher amount (see my previous article and method of estimation here: http://www.propinoy.net/2011/06/15/50-by-30/).

    So yes, unless we can convince richer countries to provide us with some compensation, there is very little we can do. Australia for its part is rolling out its carbon tax at $23/tonne which is imposed only on about 500 companies and will provide compensation to trade exposed industries and households as well as investments in renewables to offset its flow on effects beginning in May this year. None of it is going to AusAid to fund environmental projects overseas though. Such a proposal would have been considered unilateral and unpopular with the electorate.

    • UPnnGrd

      The United Nations or the OECD or such similar international organizations have to put imprimatur on the monetizing of carbon emissions  ACROSS countries.   This monetization has been touted as far back as 7 years ago  ( and Indonesia, for example, had thought it could save many more thousands of hectares of its rain forest by “selling” its conservations efforts into RealMoney-euros/Yen/Dollars  that it can use to fund more roads or — a favorite PresiNoynoy project — housing for its soldiers).  Hasn’t happened yet/// Pilipinas and Burma and Burundi have to team up to get “monetization” past promises into realility.

      But the underlying issue is demonstrated by Australians “No way!!”-reaction to using Australian-citizens’ tax money to fund environmental projects overseas. Or like why Pilipinas is unhappy that San Miguel or the Pilipinas SupermarketKing invest their funds in China or Thailand (or Australia!!) when those investment Pesos could be used to create jobs Mindanao or even in Tarlac or Bicol.

      • http://twitter.com/thecusponline Emmanuel Doy Santos

        The Aussie govt is going to be purchasing carbon credits from overseas using proceeds of the carbon tax and give them for free to trade exposed industries. And I didn’t say that it doesn’t fund environmental projects through AusAID. What I said was that the proceeds of the carbon tax wasn’t going into overseas aid. So if the Philippines, Indonesia or any other developing country does get to monetize the carbon in its remaining forestry and sell them to Australia, then indirectly the latter would be funding climate mitigation through its purchase of carbon credits.