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