Eco-taxes

Author: Kyle Mandy - Head: National Tax Technical -PricewaterhouseCoopers

( Article Type: Explanation )

The meaning of eco taxes, or environmental taxes, varies depending on how, where and by whom it is used. For example, some would refer to an environmental tax as a tax having an environmental policy objective, while others would define it in relation to what is being taxed. However, the accepted meaning under international best practice is that an environmental tax is a tax on anything (or a proxy for anything) that has a negative impact on the environment, regardless of the policy objectives associated with the tax. Of course, that is not to say the policy objectives of an environmental tax are not important. In fact, the objectives are crucial in designing the tax and setting the rate so as to achieve the desired effect. For example, where the objective of a tax is to reduce the environmentally harmful behaviour, setting the tax rate too low or providing for numerous exemptions would likely result in the policy objective not being achieved. On the other hand, if the objective of the tax is to raise revenues for the fiscus rather than to reduce the environmentally harmful behaviour, setting the tax rate too high could result in the behaviour being reduced to such an extent that revenues collected from the tax do not meet that objective.
Examples of environmental taxes in South Africa that do not strictly have an environmental objective as their primary objective include the general fuel levy and air passenger departure tax. Environmental taxes levied in South Africa that do have primarily an environmental objective include the environmental levy on plastic bags and the levy on filament light bulbs.
Environmental taxes provide the following positive attributes:
1. Revenues raised from environmental taxes may be used to reduce other taxes that result in economic distortion, such as taxes on goods and labour. This tax shifting where negatives are taxed rather than positives gives rise to the so-called double dividend hypothesis where the taxes result in a healthier and more sustainable environment as well as improve the efficiency of the tax system by reducing undesirable distortion of economic activity.
2. Revenues raised can be used to incentivise alternatives that are less environmentally harmful through grants, subsidies or tax incentives.
3. Environmental taxes correct the inherent failure of markets to take into account the environment by putting a price on environmentally harmful practices the costs of which are not included in market prices. This serves as an incentive for polluters to reduce pollution levels to the point where the cost of reducing pollution further is equal to the environmental tax.
4. Environmental taxes theoretically result in an environmental objective being achieved at the lowest overall cost when compared to other policy options, e.g. regulation.
5. Many environmental taxes are relatively technically simple and easy to administer, e.g. they are levied on a readily identifiable tax base and are collected at source from a relatively small number of taxpayers.
6. Environmental taxes conform with the principle that the polluter should pay, at least insofar as the legal effect is concerned.