Environmental Taxes Report

This report provides a comprehensive analysis of environmental taxes, examining their significance as economic instruments for addressing environmental issues. It details the advantages, including enhanced static efficiency through abatement reallocation, increased government revenue, robustness to negotiated erosion, and dynamic innovation incentives. Conversely, it highlights disadvantages such as geographically varying damage, incompatibility with firm decision-making structures, damaging avoidance activities, distributional effects, and concerns about international competitiveness. The report critically evaluates key considerations in designing suitable environmental taxes, including defining the tax base, scope, the need for broad-based consistent incentives, setting the tax rate, and ensuring policy credibility and predictability. The conclusion emphasizes the need for carefully designed policies that balance economic and environmental goals, acknowledging the complexities and potential trade-offs involved.

Environmental
taxes
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TABLE OF CONTENTS
Introduction......................................................................................................................................3
Environmental taxes and its significance.........................................................................................3
Identification of advantages and disadvantages using taxation in order to tackle environmental
issues................................................................................................................................................6
Advantages of taxation in order to tackle environmental issues..................................................6
Disadvantages of taxation in order to tackle environmental issues.............................................8
Critical evaluation of considerations involved in process of designing suitable environmental
taxes...............................................................................................................................................10
Conclusion.....................................................................................................................................12
References......................................................................................................................................13
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ILLUSTRATION INDEX
Illustration 1: Assessment of selected environmental taxes............................................................7
Illustration 2: The static efficiency achieved through the least-cost pattern of abatement by
comparison of two types of polluter who have different abatement costs.......................................9
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INTRODUCTION
Environmental taxes can be defined as the economic instruments used by government
authorities in order to provide effective solution to the environmental issues. Policies for these
taxes are designed for the purpose of internalization of environmental costs. Along with this, it
provides incentives to individuals and commercial entities in against of promotion of sustainable
ecological activities (Kallbekken and Sælen, 2011). In the recent years, UK government has
made diversification in their tax ranges for the purpose of enhancement of contribution in the
improvement of environment. Present assignment is focused on the evaluation of this legislation
for resolving environmental problems. For this purpose, advantages and disadvantages of
taxation will be described. In addition to this, critical evaluation will be done of the factors that
are considered in the process of designing suitable environmental taxes. For better
understanding, practical examples from the British economy will be considered in the description
of factors.
ENVIRONMENTAL TAXES AND ITS SIGNIFICANCE
Environmental taxes are the instruments used by government for the collection of cost
incurred to provide services in order to resolve damages of the environment. These taxes are
imposed on services, prices of goods or on activities by which environmental damage is caused.
These taxes will assist in the implementation of principal that polluter pays for the damages in
order to integrate economical and environmental policies in an effective manner. These aspects
provide incentives to both customers and the producers in order to make changes in their
behavior for making Eco-efficient use of available resources (Krass, Nedorezov and
Ovchinnikov, 2013). This aspect will also stimulate the structural changes and innovation in
order to comply with the described legislation.
Mainly, there are three types of environmental taxes in accordance with their policy
objectives. Description of these taxes is enumerated below-
1. Cost covering charges- These taxes are designed to cover the expenses of abatement
measures and environmental services. Example of these cost are water treatment or any
other ear market charges.
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2. Incentive taxes- These taxes are imposed by the government in order to influence
producers and customers to make changes in their behavior in order make effective
utilization of available resources and with making reduction on activities that have an
adverse impact on the environment (Pearce, 2013).
3. Fiscal environmental taxes- Main objectives of these taxes are to make increase in the
revenue of government.
In certain situations, hybrid form of these three functional taxes can be noticed.
Imposition of tax obligation is necessary in order to provide standard guidelines for the
commercial entities and consumers. Example of effectiveness of different environmental taxes
can be noticed through provide illustration of assessment of selected environmental taxes.
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This figure shows that in most of the cases, environmental taxes are beneficial for the
government and society as it is cost effective in nature. In addition to this, it makes reduction in
the adverse impact imposed by the commercial activities (Cherry, Kallbekken and Kroll, 2012).
Example of this aspect is effective control on water pollution in Dutch and on air pollution in
Sweden.
IDENTIFICATION OF ADVANTAGES AND DISADVANTAGES USING
TAXATION IN ORDER TO TACKLE ENVIRONMENTAL ISSUES
In the present era, there is continuous increase in the environmental issues due to which
pressure on government has been enhanced to make reduction in damages to environment
without the aspects of economic growth. For this purpose, government is making use of variety
of tools such as information programs, applicability of new regulations, environmental taxes and
environmental subsidies (Jones and Yoo, 2011). However, from all of these tools, the most
effective tool is environmental taxes. It is because; these taxes can directly address the failure of
markets to include the environmental practices in operational activities. In addition to this, these
taxes also provide flexibility in order to make reduction in their environmental footprint.
Advantages of taxation in order to tackle environmental issues
Enhancement in ‘Static’ efficiency through the reallocation of abatement
With the applicability of environmental taxes, cost of managing pollution in the society
has been reduced. With the increasing industrialization, pollution is also increasing in the
environment. It is not feasible for the government to discriminate polluters in order to charge
marginal cost for the abatement. Due to this aspect, environmental taxes are imposed on entities
in order to develop uniform policy for all business organizations in order to provide incentives to
abate pollution in the least expensive ways (O'Riordan, 2014). In addition to this, taxation
regulation provides authority to gain information regarding operational activities of business by
which necessary actions can be taken to make improvement in static efficiency for the reduction
of pollution.
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In the above image, point A* shows that the stage of least-cost regarding abatement
among two group polluters who have different abatement costs. This is represented by the
schedules of MACA and MACB (Krass, Nedorezov and Ovchinnikov, 2013). By considering
this position, it can be noticed that environmental benefits is a function by which total abatement
achieved regardless of division of sources.
Increase in government revenue
Environmental taxes make an increase in the revenue of government entities in order to
enhance the stability in economy. Generated funds from the taxes are used by government
authorities for the resolving public issues in a better manner. Further, major projects can be
funded by authorities (Kosonen, 2012). Along with this, auctioned tradable permits also raise
revenue of the government as a consequence of payments provided on each unit of residual
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emissions. However, increase in revenue is a controversial aspect because of the approach of
double dividend.
Robustness to negotiated erosion
Policy of uniform environmental taxes assists in the development of cost effective system
for the purpose of distribution of abatement. It is because; effective implementation of
regulations needs negotiation on firm to firm basis along with the suitable technological
requirements. This aspect is dependent on the provided information by organizations (Don,
2008). By considering the provided information, regulatory firms will be able to set effective rate
for the advantage of environment. With the implementation of taxation policies, there will be
same tax rate for all the firms. Due to this aspect, regulator does not require doing situation
analysis of each firm by which risk of adverse impact on environment will be substantially
reduced.
Dynamic innovation incentive
Implementation of regulatory policies ensures that commercial entities make use of
specified techniques for the maintenance of emission below the specified limit. In addition to
this, it does not encourage organizations to make further reduction as it will imply negative
aspects to the firm. In addition to this, organization will be in fear that inappropriate actions
could lead to the applicability of tougher limit in the future (Leicester, 2013). By considering this
aspect, environmental taxes provide an ongoing incentive to the firms for the reduction of
emission by developing innovative techniques for the same.
Disadvantages of taxation in order to tackle environmental issues
Various disadvantages are also associated with the environmental taxes along with the
above described advantages. Description of these disadvantages is enumerated below-
Geographically varying damage
Environmental issues vary with the geographical area by which applicability of uniform
tax rate will not provide effective outcomes. In addition to this, environmental taxes are not
needed to be constrained for the applicability of same rate to all the sources (Simser, 2008). It is
because; more effective outcomes can be achieved by the applicability of different tax rates by
considering geographical situations.
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Incompatibility with firm decision-making structures
Organization operating at multinational or national level has decentralized decision
system. Due to this aspect, responsibilities are allocated on the basis of specialized divisions that
are subjected to the guidelines provided by top management. Decentralized decision making
process is efficient for operational activities but it also implies that entire activities are
considered for the implementation of regulatory policies. With this aspect, organizations are able
to manipulate the information regarding choices of techniques and tax payments (Ritsatos, 2014).
For an effective applicability of these policies, organizations are required to make significant
changes in their decision making structure by which such decisions can be taken in a uniform
manner. Insertion of these changes is cost and time consuming process due to which
organizations are not interested in conventional regulatory measures.
Damaging avoidance activities
It is not necessary that applicability of environmental taxes provides favorable outcomes
in all situations. In some situations, these practices can lead to the more damaging consequences
to the environment (Krass, Nedorezov and Ovchinnikov, 2013). For example, a particular is
effective incentive for the reduction waste but on the other hand, it may also make increase in
unethical burning and dumping activities. In such circumstances, overall amount of dumping
may have negative impact on the environment.
Distributional effects
In accordance with the legislation of UK, environmental taxes are applicable on
organizations which are making excessive use of energy or carbon content of fuel or transport.
Even imposition of such obligation, high part of household budgets is consumed on heating fuel,
transportation and electricity. This aspect represents that environment taxes are generally
regressive in nature (Miller and Oats, 2012). Furthermore, market situation get worsen as profit
earned from environmental protection may make increase in expenditure of household of
individuals who were willing to pay the part of saved income in order to contribute in the
protection of public environment. With these policies, clean environment become luxurious good
which is not affordable for people. Due to this aspect, environmental policy reforms must be
careful regarding use of packages in order to offset such kind of distributional effects.
Concerns about international competitiveness
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With the imposition of environmental taxes, there is increase in the cost of production of
business organization. In addition to this, domestic product has to compete with products
provided foreign producers which are not subject to the similar environmental taxes
(McLaughlin, 2013). This aspect creates negative impact on the domestic firms. Due to this
aspect, firms do not support policies of environmental taxes as it makes reduction either in their
profitability or in their customer base.
CRITICAL EVALUATION OF CONSIDERATIONS INVOLVED IN
PROCESS OF DESIGNING SUITABLE ENVIRONMENTAL TAXES
Regulatory policies for environmental taxes should be formulated in a proper manner
because poorly designed taxes can make increase in economic costs and it also has
environmental effect. In order to design environmental taxes in an effective manner, government
is required to consider the following aspects-
Defining the tax base
Environmental tax should be applicable directly to the pollutant or to the action by which
damage to environment has been occurred. In addition to this, taxes should be used by
government to make increase in the market cost of polluting activity as it will assist incentivise
the option of abatement such as use of product which makes less pollution, reduction in material
which have adverse impact on environment, end of pipe abatement and cleaner production
procedures (James, 2009). With these approaches, there will be reduction in the options of
abatement because tax is imposed on proxies instead of polluting activity. For example, if
government imposes tax on coal in order to make reduction of emission of sulfur then it will not
provide any incentive for the deployment of end of pipe techniques for the adoption cleaning
procedures or making reduction in output or consumption.
The scope of an environmental tax
Policy of environment tax should be designed by considering the scope of environmental
damage that have to be addressed. This aspect will have implications on the political jurisdiction
that imposes tax. For some environmental problems such as soil contamination impacts are
restricted to the relatively small area. Due to this aspect, charge-ability of tax on harmful
chemical or on waste disposal will be an effective way in that particular area. For the
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applicability of policy for the similar issue, such green house gas emission would be ideal to
impose global tax.
Broad base, consistent incentives
Environmental taxes should be applicable on uniform basis for all the commercial
entities. However, there should be scope of exceptions by considering the possibility of
extraordinary situations. One of the major advantages of uniform environmental taxes is their
ability to provide similar abatement incentives regarding unit of pollution. In addition to this,
uniform tax policy also promotes the lowest cost source in order to assure that environmental
goals are achieved in an effective manner (Revelli, 2001). Implication of tax in a uniform
manner will also make reduction in the cost of compliance for the taxpayers and from the
government’s point of views; it will make reduction in the cost of administration and possibility
of tax evasion.
Policy makers are also obliged to consider the implication of these taxes on the group
with low income, trade exposed businesses and pollution intensive. For this kind of group,
government is required to set provision for the low tax rates. With this aspect, there will be
reduction of incentives for these individuals but others will not be affected by the policy of
exemption. However, it will make increase in the possibility of inequality and there will also be
increase in the cost to achieve the environmental target as their disproportion in abatement.
Setting the tax rate
Applicable tax rate by the policy makers is required to be commensurate with damages of
the environment. It is because; tax rate is required to be set in order to reflect the values of
society regarding environmental damages. Applicability of policy of environmental taxation in
this manner will ensure that price faced by customers and manufacturers are in accordance with
the cost of actions. This aspect will provide them financial incentive in order to consider the
activities that cause environmental damages into their actions. In this context, it can be said that
some environmental damages can easily be measured for example, increase in acid rain due to
commercial production of timber (Poutziouris and et.al., 2000). However, in some situations,
valuation process will be easy for the policy makers because some aspects such biodiversity or
clear air does not have exact market value. By considering this provision, policy makers should
impose legislation.
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