Chile’s Centro de Investigation y Plan-ification del Medio Ambiente explored options to develop a sustainability fund for the mining sector. The proposed fund would support sustainability issues, serve to diversify production, integrate mining companies into the community and help to conserve water and biodiversity. The public sector and mining companies would finance it voluntarily. However, it would be difficult to base the fund on taxes: Any change in the tax system that allocates revenues to a specific purpose requires a presidential decree or a change in the constitution because Chile’s constitution prohibits it.
Source: Schlegelmilch and Joas (2015: 55f.).
4.2. EARMARKING REVENUES FOR GREEN INVESTMENTS
One way to spend environmental revenues is to earmark them for environmental spending. This may be intuitive, as taxpayers understand that price increases resulting from environmentally harmful behaviour are financing investments in environmentally-related public goods. If the goal of an environmental fiscal reform is to reach certain environmental targets, green spending can help to accelerate the process. If funds are used in this way, tax rates to achieve a defined environmental target can be lower. The targeted
112 EU research study produced a model demonstrat-ing that emission reductions could be achieved, along with substantially lower tax rates, if 10 per cent of revenues were invested in energy effi-ciency measures alone (COMETR 2007).
Spending options can, for example, include subsi-dies for research and development on clean technological solutions. They can also include directing funds into green infrastructure like public transport, smart grids, buildings or renew-able energy systems. This way of pricing positive externalities is much in line with the spirit of industrial policies and is often much appreciated by industry since it is an incentive rather than a punishment. Nonetheless, it must be noted that connecting environmental revenues to outright subsidies for certain groups may encourage rent-seeking behaviour among the recipients (UNEP 2010). While strategic use of revenues can increase the likelihood of the fiscal reform’s continuation, without good management, recipi-ents might grow dependent on paymrecipi-ents.
4.3. ENVIRONMENTAL TAX SHIFT
Recycling revenues to lower other distorting taxes in the economy is a common use of envi-ronmental revenues. The revenues from Germa-ny’s environmental tax reform were used mostly to lower pension payments that were increasing labour costs and thus contributing to unemploy-ment. Recycling revenues to lower distorting taxes is often described as leading to one of the dividends of environmental fiscal reform, since this step creates wealth by removing existing distortions, such as tax-induced unemployment (Jaeger 2012). Using environmental revenues to
lower distortive taxes such as taxes on labour is an attractive option to maximise economic welfare, but requires the identification of the most distortive taxes. This is likely to vary according to country conditions.
One aspect to keep in mind, however, is the need to balance market efficiency with social desir-ability. For example, Takeda (2007) finds that strong double dividend effects arise when reve-nues are recycled by lowering taxes on capital but not on labour or consumption. While this may be economically correct, it could result in socially undesirable outcomes, such as more inequity and injustice within the tax system, as well as in political risks and destabilization. This might result, for instance, in a case where an environmental tax was raised from a large group of actors and the revenue used to lower taxes on capital, which would benefit only a small group that is likely well off already .
An example for tax shifting is the South African 2009 budget in which the South African Reve-nue Service proposed a tax reduction worth ZAR (South African Rand) 13,500 million to personal income taxes and another ZAR 1,000 million to business taxes (Speck 2010). Had the proposal been implemented, most of the tax cuts would have been compensated by increasing indirect taxes, mainly fuel and electricity taxes. These measures would have contributed to the progres-siveness of the tax system, thereby reducing inequity. The overall effect would have been a loss of revenues worth ZAR 4,575 million (Figure 7.1). Environmental fiscal reforms are not necessarily revenue neutral–they can also lead to a net increase or decrease of revenues.
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Pricing Environmental Resources and Pollutants and The Competitiveness of National Industries
Figure 7.1: Financing income tax cuts through environmental fiscal reform in South Africa:
The revenue effects of various reform elements
Adjust personal income structure Adjustment in monetary threshold
Industrial policy
Increase in general fuel levy
Electricity tax
Incandescent light bulb levy
Air passenger departure tax
Plastic bag levy
Diamond export levy Increase in excise duties on tobacco and alcohol Final Budget Effect
revenue effect in (in million ZAR)
-15,000 -10,000 -5,000 0 5,000 -15,000
Source: Adapted from Speck (2010).
4.4. OFFSETTING NEGATIVE IMPACTS ON COMPETITIVENESS
Some revenues could be earmarked for mitigating or reducing potentially negative effects of envi-ronmental taxes on the competitiveness of some industries, by reducing other taxes such as corpo-rate or labour taxation or by providing targeted grants to co-finance investments in energy effi-ciency. This can be a way to address competitive-ness concerns regarding firms in other countries that do not face similar taxes. Firms that have already taken steps to reduce pollution should be preferred, rather than simply returning taxes paid to polluter and pollution reducer alike (OECD 2005). Furthermore, it is also important that compensations are designed in a way that does not encourage firms to produce more emissions (World Bank 2005). Revenue recycling might be an effective way to encourage industry accept-ance of reforms. In China, for example, a combi-nation of pollution taxes and support for pollution abatement expenditures has proven to be effec-tive (Barde et al. 2009). Sweden applied a charge on nitrogen oxide emissions, but it recycled reve-nues back to the same sector, utilities, on the basis of each company’s electricity generation (OECD 2013). This way, it favoured clean and efficient companies while protecting competitiveness.
4.5. OFFSETTING NEGATIVE IMPACTS ON THE POOR
Protecting the poor is a prerequisite for any envi-ronmental fiscal reform, particularly in developing countries. At the same time, it is important not to undermine incentives to reduce energy and water consumption (OECD 2005). Differentiated pricing for different types of users can be an effective option, as targeted cash transfers can be. Since this chapter focuses on environmental fiscal reform as a green industrial policy, inclusive-ness is not discussed in much detail. Nonethe-less, a practical example of Indonesia’s Bantuan Langsung Tunai is useful to demonstrate the potential for cash transfer programmes in raising a population’s acceptance level for environmental fiscal reform (Box 7.4).
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