Green tax: stick and carrot

‘Green tax’ ­ it sounds great in theory but unpopular when it hits ordinary people. Just think of the uproar over new car tax bands. Undoubtedly, green taxes have a role but alone are not enough. They are just one weapon in a wider armoury.

The OECD has reported that environmental tax as a proportion of GDP has been falling. This could be because the policy is working as a deterrent and, therefore, consumption declines so reducing the tax take ­ but is this wishful thinking?

The reason for the reduction may be due to a fall in the effective rate of tax raised ­ as in the UK, where road fuel duties have reduced in real terms due to rising fuel prices.

Taxes are a relatively blunt instrument to tackle the sensitive issue of environmental protection.

Green taxes are often seen as a stick to punish ‘bad’ (polluting) behaviour, as opposed to a levy on income from ‘good’ behaviour such as work or saving money.

The idea that governments can protect the environment by means of a significant shift to the taxation of ‘bads’ is too simplistic.

Pollution, climate change and the consumption of scarce natural resources are not the result of deliberate attempts to harm the environment, but the side effects of modern life. The challenge must be both to tax the pollution so as to minimise the impact of the activity and to encourage the development of less damaging products.

Green taxes paid by individual consumers can present two key problems for policymakers. They tend to operate regressively ­ hitting the poor harder than the rich. And the effect can be relatively elastic ­ as the public becomes accustomed to paying the tax, it becomes less of a deterrent and so needs to be raised.

In Ireland, the introduction of a plastic bag tax in 2002 saw a dramatic overnight drop in usage but by 2006 this was creeping up prompting a increase in the levy last year.

We need a holistic approach, incorporating various ‘carrots’ such as in centives, targeted subsidies, as well as ‘sticks’ in the form of legislation, regulations and taxes, but with a clear idea of how they interact.

Many companies are talking about climate change but few have a comprehensive strategy. They are waiting for the government to convert their ambitious emission targets into a framework business can use to shape strategy.

Tax will continue to be a key part of this framework but it cannot solve a problem of this scale on its own.

Nick Goulding is president of the Chartered Institute of Taxation