Back Matter
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Appendix I: A Survey of Environment Taxes

Tables 4 and 5 survey tax provisions of 42 countries--economies in transition, developing, and industrial countries--that may have an environmental impact. These tables briefly describe environment tax measures that have been implemented--Pigouvian taxes, indirect environment taxes, and environment-related provisions in other taxes--and provisions in other taxes that may unintentionally have adverse environmental consequences. The former information has been summarized in Table 1. There are two appendix tables: Table 4 lists Pigouvian taxes and domestic taxes on goods and services, and Table 5 lists income, profits, and property tax provisions.

Table 4.

Selected Countries: Environment-Related Aspects of Taxes Pigouvian Taxes and Taxes on Goods and Services 1/

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Sources: Coopers and Lybrand International Tax Network (1993); Foreign Tax Law Publishers (1993); Gaines and Westin (1991); Gofman and Gusev (1993); IBFD (1993a, 1993b, 1993c, 1993d, 1993e); various IMF REDs; Jenkins and Lamech (1993); Kallaste (1993); OECD (1993a); Pomazi and Zsikla (1993); and Zylicz (1993).

The table identifies tax provisions which may have direct environmental implications. The table is not comprehensive because of the numerous possible interactions between the tax system and the environment as well as data limitations relating to various tax provisions. Subject to these qualifications, the absence of a text entry in the table indicates that the tax does not have direct environmental implications.

Table 5.

Selected Countries: Environment-Related Aspects of Taxes on Income and Profits, Property, and Motor Vehicles 1/

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Sources: Clark (1992); Coopers and Lybrand International Tax Network (1993); Foreign Tax Law Publishers (1993); Gaines and Westin (1991); Gofman and Gusev (1993); IBFD (1993a, 1993b, 1993c, 1993d, 1993e); various IMF REDs; Jenkins and Lamech (1993); Kallaste (1993); OECD (1993a); Pomazi and Zsikla (1993); and Zylicz (1993).

The table identifies tax provisions which may have direct environmental implications. The table is not comprehensive because of the numerous possible interactions between the tax system and the environment as well as data limitations relating to various tax provisions. Subject to these qualifications, the absence of a text entry in the table indicates that the tax does not have direct environmental implications.

The survey cannot be comprehensive due to the multiplicity of possible interactions between taxes and the environment. In addition, environment tax provisions in the countries surveyed may have changed considerably since the publication date of the various sources for the survey. Thus, the survey provides an illustrative picture of the state of tax policy and the environment at the end of 1993.

Appendix II: Tax Incentives with Unintended Harmful Environmental Implications

The survey in Appendix I showed that many countries provide tax incentives, such as tax holidays or accelerated depreciation intended to encourage industrial development that may lead to investment in environmentally sensitive areas or activities. Such tax provisions increase the return to producers from the polluting activity. In the framework of the environmental problem shown in Chart 3 (which is similar to the earlier charts), the tax incentive leads to an increase in the marginal internal benefit schedule of the firm to MIB″. The firm now chooses to pollute to the point C compared to B in the absence of the tax incentive. However, the socially efficient level of emissions remains unchanged at point A because it depends on the opportunity cost of adjustment and marginal external cost and not on policy-induced distortions.

Chart 3.
Chart 3.

Environmentally Damaging Tax Incentives

Citation: IMF Working Papers 1994, 106; 10.5089/9781451947083.001.A999

Many countries provide rate reductions or tax holidays to the agriculture, forestry, fishing, and mining sectors. Rate reductions and tax holidays are also provided for new investments in regions that may have been undeveloped because of low carrying capacity. There are also examples of provisions in sales taxes or VATs that may encourage consumption or use of environmentally damaging goods. For example, in many European VATs, a lower or zero tax rate has applied to coal. In some developing countries, including Malaysia and Egypt, petroleum products are exempt from the VAT or general sales tax. In some countries, automobile taxes may discourage ownership of new vehicles which are likely to be more environmentally friendly than older vehicles. For example, the rate of the annual automobile levy in Madagascar decreases with the age of automobiles. Other countries, such as Colombia, apply luxury VAT rates to new automobiles. There are also examples of fuel excise taxes that may encourage greater environmental damage. The Philippines, Côte d’Ivoire, and Chile, for example, apply lower tax rates to diesel fuel than to gasoline even though diesel engines have been identified as a significant source of airborne particulate matter.

The sheer number of these potentially environmentally harmful provisions suggests that a critical step in any environment tax reform should be the modification or elimination of such provisions so that they do not contribute to environmental damage. This course of action is consistent with traditional tax reform principles of base broadening and elimination of special incentives and exemptions. These reforms would contribute to both fiscal and environmental objectives, but are in contrast with the use of several environment taxes to address a number of environment problems in a given country. This reflects two sets of circumstances. First, circumstances where the tax provision is the cause of the environmental damage--a case of tax-induced policy failure--and second, circumstances where an environment tax is employed to address market failure. In the first circumstance, tax-induced environmental damage could be eliminated by reforming broad-based taxes. Resolution of market failure requires use of special environment taxes such as Pigouvian taxes.

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*

Opinions expressed are those of the authors and do not necessarily represent those of the International Monetary Fund. We would like to thank Ved P. Gandhi and Parthasarathi Shome for their comments on an earlier draft.

1/

For the purposes of this paper, environmental damage is defined to arise when the marginal social cost of using environmental resources exceeds the marginal social benefit. The divergence between marginal social cost and benefit can arise due to: market failure--the failure of markets to equate marginal social cost and benefit or policy failure--a microeconomic policy that encourages excessive use of an environmental resource.

2/

Discussion of the extensive literature on Pigouvian taxes, not considered here, is found in a variety of sources such as Baumol and Oates (1988).

3/

Taxing inputs may, however, remove the incentive for innovation of end-of-pipe technology that could reduce emissions.

5/

For example, Bramhall and Mills (1966) illustrate this outcome with a subsidy and Baumol and Oates (1988) contrast the cases of using a subsidy with a Pigouvian tax.

6/

Assessment of these Pigouvian taxes is complicated by the observational equivalence between what some countries term taxes and others charges, penalties, or fees. A tax is an unrequited payment whereas a charge is a requited payment. For example, the government might define property rights over an environmental asset and charge for the right to use that asset for waste disposal or other uses. A possible institutional rationale for use of the term fees or charges is that, in some countries, revenues from these go directly to the ministry responsible for administering the fee whereas tax receipts go to the consolidated revenue fund.

7/

The environmental implications of varying VAT rates is limited to final consumption goods. VAT paid on productive inputs is creditable against subsequent VAT liabilities thus levying a high rate on an environmentally damaging input only calls for a higher credit. The differential rates of VAT can thus only have an environmental effect on those items which are finally consumed or are used as business inputs in sectors ineligible for credits on input tax.

8/

One conclusion that might be drawn from the survey--based on the limited use of environment taxes--is that many countries simply do not choose to pursue environmental aims by using taxes. Indeed, there may be little political motivation to actively use taxes to pursue environmental objectives. In many circumstances of industrial pollution, for example, limited sources account for the bulk of environmental damage. In these cases, there may be effective political opposition to the use of environment taxes because the polluters are small in number (and perhaps well organized) whereas the beneficiaries of pollution abatement are large in number or diffuse. As a result, regulations or marketable permits may be preferable to environment taxes for pollution abatement because they can be designed to protect the interests of established enterprises.

9/

Cropper and Oates (1992) discuss the various means of valuation that might permit the setting of an efficient Pigouvian tax rate.

12/

State-owned enterprises play a significant role in many countries although their importance varies significantly across countries (see Milanovic (1989)). In the case of Poland, for example, while over 80 percent of the retail trade had been privatized by the end of 1992, only some 12-15 percent of industrial production was accounted for by privatized industry (see Bates, Gupta, and Fiedor (1993)).

15/

See Reed (1992), p. 105.

16/

This argument is simplified by assuming that the environmental externality has no effect on productivity and output. If productivity is harmed by environmental damage, the environment tax, to the extent that it alleviates that damage, may raise productivity. Should this occur, the excess burden for taxpayers should reflect both abatement costs and improved productivity (see Nellor (1994)).

18/

There have been a number of empirical studies evaluating the implications of environment regulations on competitiveness and location of investment. These studies suggest that the concern that environment taxes harm international competitiveness is perhaps misplaced. This is because the cost-reward equation for avoiding environment taxes is not profitable in any but the most energy intensive industry. See, for example, Richardson and Mutti (1976) and (1977), Duerksen and Leonard (1980), Leonard (1988), and Knodgen (1979).

19/

The graduated tax reductions are available to firms for whom energy costs exceed 8 percent of value added.

20/

See Poterba (1989). However, European data do not unambiguously support this conclusion. See Smith (1992).

21/

The cost effectiveness of tax and other environment policy measures, evaluated on a case-by-case basis, permits the choice between alternative policy instruments to be made. Such an approach is illustrated by Eskeland (1993) who demonstrates, in a study of Mexico City air pollution, that the use of a gasoline tax--which is inefficient in addressing local air pollution problems--combined with regulatory measures requiring automobile monitoring is superior to using either instrument alone. More generally, the conclusion that can be drawn from Eskeland’s analysis is that a combination of policy instruments should be used such that the efficiency costs of each instrument are equated at the margin.

Tax Policy and the Environment: Theory and Practice
Author: Mr. David C Nellor and Mr. Ronald T. McMorran