ICC environmental taxation principles (2012)
This paper represents a first comprehensive effort across the environment and taxation disciplines to help clarify and frame “environmental taxation” for non-experts on taxation.
There are many different economic instruments that can be used for environmental policymaking, including fiscal instruments and tradable permits, which aim to promote the production and use of environmentally sound products and processes within a market framework. By enabling industry and consumers to adapt to market signals, such instruments provide greater economic flexibility and efficiency over traditional command and control regulations.
This paper represents a first comprehensive ICC effort across the environment and taxation disciplines to help clarify and frame “environmental taxation” for non-experts on taxation. Whether taxes, subsidies or other policy instrument are employed, they need to be based on cost-benefit analysis, transparent and economically, environmentally, and socially effective.
Definition and terminology
Environmental externalities refers to the economic concept of uncompensated environmental effects of production and consumption that affect consumer utility and enterprise cost outside the market mechanism. Negative externalities lead to private costs of production to be lower than the “social” costs. It is the aim of the “polluter/user-pays” principle to prompt households and enterprises to internalise externalities in their plans and budgets (OECD Glossary).
While the concepts may be clear and understood, the indicators and methodologies to evaluate such externalities still need to be developed. As outlined in the ICC Green Economy Roadmap, for a “green economy” to become operational, indicators, metrics, accounting measures and better disclosure and reporting must be developed that make sense in economic terms while ultimately including the cost for externalities.
Externalities associated with long-term concerns such as climate change, resource depletion, long-term wastes, biodiversity reduction, may develop over time. It should be noted that, under the “environmental taxation” umbrella, there are different issues associated with, for example carbon emissions, use of toxic products in farming activities as well as taxes to support recycling/treatment activities. Policy approaches designed today will need to be flexible both to account for new knowledge as well as national circumstances and priorities. This should be balanced within the need for a long term stable policy framework.
Environmental taxation issues and incentives
Given its purpose to incentivise behavioural change, environmental taxation should not increase the overall tax burden. It is important to note that using taxation for pursuing environmental policies is an interference with markets and must thus be used with caution. This is even more important when taxation is levied on a country basis, and not levied on a co-ordinated and worldwide (or large regional) basis, requiring to take into account crossborder trade issues and their pricing effects caused by such domestic tax rules.
The design parameters for environmental taxation should provide a framework that underpins environmental policies in the most economically efficient manner as to affect behaviours 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.
Tax is one of a number of policy instruments (market mechanisms are another possible instrument, for example) and policy-makers should seek to utilise the most appropriate policy instrument to achieve environmental goals.
The scale of technological change and development for example needed to meet the environmental targets of governments is significant. Also, potential timescales for change could be very demanding. Together they provide a major challenge in terms of research, development and the initial deployment of commercial scale technology required to “green” economies. Policies should thus seek to deliver environmental objectives at the lowest overall cost to society. For that reason in the case of quotas mechanisms, provision should be made to allow the use of lower cost offsets with environmental integrity wherever they are located.
Differing environmental policies between nations have consequences in terms of impact leakage, which may lead to economic competitiveness distortions. For climate change, this is especially true for energy intense industries that produce globally competitive commodity goods. ICC believes that any policies aimed to redress such concerns should be consistent with existing agreements on trade and investment.