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Taxes on Renewable Natural Capital (Water; Timber) Financing Solutions for Sustainable Development (/) Home (/content/sdfinance/en/home.html) Solutions (/content/sdfinance/en/home/solutions.html) Taxes on renewable natural capital (water; timber) Any fee, charge or tax charged on the extraction and/or use of renewable natural capital (e.g. timber or water). Following the polluter­pays principle, these levies help to internalize the true cost of ecosystem degradation by increasing the price of the natural capital “consumed”. Key words: Charge; fee; tax; renewable natural resources; water; timber; forests; How does it work? Natural capital (/content/sdfinance/en/home/glossary.html) is the sum of the world’s stocks of natural assets that include geology, soil, air, water and all living things. This stock is made of renewable (e.g. water, plants and animals) and non­renewable (e.g. minerals) resources from which people derive many different benefits or flows. These flows provide value to business and society, a value that can be monetized and taxed for different purposes. Natural capital (/content/sdfinance/en/home/glossary.html) therefore represents a store of value and is no different from other forms of capital that are in some way taxed, such as financial and human capital. Properly designed income and consumption taxes should uniformly tax different forms of capital. However, fiscal systems have in reality allowed (if not incentivized) severe depletion of natural resources due to public sector and market failures (/content/sdfinance/en/home/glossary.html). The objective of tax reforms on natural capital (/content/sdfinance/en/home/glossary.html) is therefore to provide incentives to consume natural resources and benefit from ecosystem services sustainably, while taxing undue rents. For simplicity the platform frames taxation on natural capital as different solutions: fuel taxes (http://www.undp.org/content/sdfinance/en/home/solutions/fuel­tax.html); taxes on fisheries (forthcoming); taxes on renewable natural capital and taxes; and taxes on non­renewable natural capital (/content/sdfinance/en/home/glossary.html) (forthcoming). In addition to generating new revenues—even if tax reforms might be designed to be neutral to the taxpayer—natural capital (/content/sdfinance/en/home/glossary.html) taxes, fees and levies can help resolve market failures (/content/sdfinance/en/home/glossary.html) by internalizing the true cost of depleting scarce natural resources. The idea is simple: people and firms will consume less if the price of what is consumed increases, thus allowing renewable resources to recover. If the revenue generated from these taxes is reinvested in replenishing the natural stock, it can directly or indirectly help to substitute or renew the lost capital. For example, revenues from a tax on wood in Mali are used to cover the costs of public support to maintain forests and to finance collective investments in forest communities. Similarly 60 per cent of the payments received from the Latvian Natural Resource Tax (http://www.vvc.gov.lv/export/sites/default/docs/LRTA/Likumi/Natural_Resources_Tax_Law.doc) is transferred to the local governments or environmental protection. Taxes and levies applied on natural capital include volumetric use charges (/content/sdfinance/en/home/glossary.html) (e.g. the volume of timber harvested per cubic meter; or metric water fees); resource rentals or royalties (/content/sdfinance/en/home/glossary.html); fees or charges levied at the point of issue or allocation; and/or surcharges levied at the point of transfer or trade. Another option that is comparable to taxation is the requirement for firms to bid for the right to exploit a certain stock of renewable natural resources. This fiche focuses on taxation in the water and forest sectors. Water taxation has historically been paired with the establishment of a regulatory framework that oversees the provision of access to clean water to the wider population (a basic human right). In many countries, water utilities mediate between the government and the consumer and collect mandatory taxes and levies from different users for the abstraction of water resources. These are often not charged on the full price of volumetric consumption of water, but set at a value sufficient to recover the costs of water treatment, storage, and transportation, and wastewater treatment. Water services are paid either as a set amount—lump sum—metred based on actual consumption, or a combination of the two. Access to water for irrigation, industry and energy is usually governed by different legislative frameworks to household use, with differentiated charges applied which might be subsidized either explicitly or implicitly. The category includes general (local and national) taxes and special levies charged in exchange for a service, for example water and wastewater bills, property assessments, fees/charges to improve the quality of the water and developer fees which may fund water infrastructure rehabilitation, etc. It is common for tax proceedings to be earmarked for water management services or to finance Payments for Ecosystem Services (/content/sdfinance/en/home/glossary.html) schemes such as in Mexico, where an earmarked share of water use fees goes towards the hydrological environmental services programme. The idea of water taxes to achieve sustainable consumption levels has most recently emerged in relation to scarcity and frequent droughts in the Northern hemisphere and particularly in California, USA. European countries (e.g. Denmark, France and the Netherlands) have established taxes, charges and levies to provide an incentive for efficient water use. Tax reforms can also be designed to encompass incentives for more sustainable use of water resources and stimulate the adoption of innovative water technologies. For example, in Australia the Government introduced a range of special income tax deductions to encourage irrigators to adopt more water­efficient and water­saving technologies during a recent drought. Similarly, countries tax the forest sector and particularly timber production to achieve sustainable forest management objectives and/or meet fiscal resource mobilization targets. The most used forms of taxation are stumpage fees, concessions fees, royalties (/content/sdfinance/en/home/glossary.html) based either on the volume or the value of the timber harvested and export levies (e.g. Ghana has applied rates from 1 to 2 per cent on timber exports). The fees applied to processed goods such as sawn wood or plywood, are classified as postharvest fees. In countries where a large proportion of timber is processed for export, but illegally harvested, postharvest fees can raise significant revenues. However, they may undermine the sustainability of the management of forests. Other instruments, including pre­harvesting fees and concession auctioning, are also possible. For example, the area tax (or concession fee) is a tax charged on an equal and annual basis to forest hectares given under concession. Concession fees can be determined through bidding, such as in Cameroon (http://www.cifor.org/publications/pdf_files/articles/AKarsenty1001.pdf) where the examination of a technical offer is weighted 30 per cent in the allocation formula along with the proposal for the per hectare annual area fee (weighted 70 per cent). The Government recently introduced a floor price equivalent to €1.5 per hectare and options for inflation­ linked updates. The determination of area fees through bidding—€4­6 per hectare a year on average—resulted in far higher revenues than originally calculated by the Government. Traditionally forest taxation has not been limited to a single instrument, and its structure may become over­complicated. A case in point is the complex legislation in poor countries where timber is a core source of tax revenues. For example in Liberia in the mid­2000s, a tree could have been subjected to over 20 regulatory provisions including taxes, fees, and other charges, based on its volume, species, degree of processing, and other specifications. The complexity of the taxation system has rarely been a measure of effectiveness, but is often a sign of the need for for simplification and better enforcement. In developing countries a mix of area fees set through competitive bidding and export or post­harvesting taxation has been suggested (https://www.imf.org/external/pubs/ft/wp/2005/wp05156.pdf). The taxation structure should be dynamically linked to its impact on ecosystems and biodiversity: for example, the overexploitation of some commercial high value species (logging of which is detrimental for the environment) may or may not be incentivized by taxation. Taxes can also provide incentives for more sustainable use of forest resources, for example by providing discounts and tax breaks for the companies that obtain certain certifications. While wood and timber are the main sources of taxation for forests, non­wood forest products (http://www.fao.org/forestry/nwfp/6388/en/) (e.g. nuts, seeds, berries, mushrooms, oils, foliage, medicinal plants, etc.) can also be taxed. In addition to taxation on water resources and forest products, other types of taxes and charges may also be relevant, such as raising tariffs related to sales, export, property and corporate profit taxes when related or benefiting to the forest or water sectors. The level of taxation and subsidies in sectors such as agriculture and energy can also influence the relative price of wood and non­wood products and in certain cases can exacerbate negative
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