Debate on environmental taxation yields proposed principles at UN climate conference

The official side event on this topic, which took place today, was organized by the International Chamber of Commerce (ICC) in partnership with the UN Economic Commission for Latin America and the Caribbean (ECLAC), the German government and the non-governmental organization Responding to Climate Change (RTCC).

With the objective of identifying principles for a framework for environmental taxation and environment-related tax measures that promote green, inclusive economies, the event provided a platform to introduce and examine the different economic instruments that can be employed in environmental policy-making, including fiscal and market-based mechanisms. Participants agreed that policy strategies should enable business to move forward on sustainability solutions.

“Whether taxes, subsidies or other policy instruments are employed, they need to be based on sound cost-benefit analysis, transparent and economically, environmentally and socially effective,” said Kersten-Karl Barth, Sustainability Director at Siemens AG, and Chair of the ICC Commission on Environment and Energy, setting the stage in his opening speech.

Luis Miguel Galindo, Chief of the Climate Change Unit of ECLAC, said: “For markets to work for sustainable and low-emissions development, some adjustments need to be made. Prices are misaligned and fiscal policy can help align them properly by pricing externalities. However, while the concepts may be clear and understood, the required changes in fiscal policy still need to be developed.”

Anna Theeuwes, Tax Policy Expert at Shell, commented: “The design parameters for environmental taxation should provide a framework that underpins environmental policies in the most economically efficient manner as to affect behaviour for specific environmental goals in the most economically efficient manner. Such a framework has to be designed within and be consistent with the overall context of the total fiscal framework. Otherwise, environmental taxes may increase the economic costs of taxation while providing only a limited environmental benefit.”

Participants recommended overarching principles that should be followed in designing a framework for environmental taxation and specific environment-related taxation measures. These included:

• Simplicity and cost effectiveness should be primary objectives.
• Prices imposed for environmental externalities should be economy-wide, covering all relevant sectors.
• Potential social implications of environmental taxation should be addressed through integrated policy approaches.
• In pricing externalities, there should be no overlap of different mechanisms pricing the same externality.
• New taxes, and changes to existing taxes, must be introduced with sufficient lead-in times to avoid disruption to investment plans.
• Establish stable and predictable tax laws that provide business with a foundation to design long-term economically and environmentally effective strategies.
• Ensure a predictable price for externalities and revenue neutrality.
• Assure that provisions for treatment of import and exports are consistent with existing trade agreements.
• Ensure flexibility to adjust to future developments in environmental sciences as well as evaluate the economic impacts of environmental policies over the longer term.

The panelists were able to draw from a variety of resources including the ICC policy paper Environmental taxation principles – fiscal instruments and environmental policy-making, the ICC Green Economy Roadmap – a guide for business, policy-makers and society and the ECLAC studies Economics of Climate Change in Latin America and the Caribbean Summary 2009 and Economics of Climate Change in Latin America and the Caribbean Summary 2010.

These lay the ground for a common understanding of the challenges but also the opportunities of crafting sound fiscal mechanisms, and create a set of proposals designed to spark dialogue between business, government and inter-governmental system.

Download the ICC paper Environmental taxation principles – fiscal instruments and environmental policy-making.

Download the ICC Green Economy Roadmap.