How to make eco-tax more efficient and effective

Peter Yang

March 4, 2011

Current Status of Eco Taxes: Eco taxes are more used in EU countries. However, even in countries where eco taxes are used, the levels are still too low (1.7% of GDP in Japan and 4% of GDP in Germany compared with the GDP share of all taxes at 16% in Japan and 21% in Germany), far from being effective to address the ecological impacts of the economic growth.

Eco Tax Reform: Eco Taxes must be raised in combination of increased tax credit for renewable energy, reduced VAT, and reduced Income Tax for the poor to be more efficient and effective.

Rationales of raising eco taxes:

Why to raise eco taxes: Tax bad factors (“bads”: wasteful extraction and wasteful consumption of finite resources such as forests, fossil fuels; discharge of pollutants; and emissions of green gases) that make ecological and economic systems unsustainable.

Impacts of raising eco taxes:

Theoretical Intended results of eco taxes:

1. reducing bad factors in the economic development (“bads”) that make ecological and economic systems unsustainable 2. Impacts of raising eco taxes on government revenues a. Initially, eco taxes will increase government revenues and increase the government’s ability to decarbonize and ecologize the economic growth and make it more sustainable and equitable b. In the long run, reduced bads will lead to reduced government revenues because of reduced “bads” to be taxed

Unintended results (side effects) of eco taxes in reality

1. The higher energy price will negatively impact economy because of reduced consumption and production unless the eco tax revenue is used to increase the supply of renewable energy to gradually decarbonize the energy supply and consumption. • Policy choice implications: the eco tax must be revenue-neutral and the eco tax revenue-neutrality must be i. partly (at 50% of the tax revenue?) reflected in tax credit or negative tax for renewable energy generation and consumption ii. partly (at 40% of the tax revenue?) reflected in reduction of value added tax (VAT)  Justification: reducing VAT has two expected results a. Stabilize the overall price level; b. Neutralize the regressivity of eco-taxes because VAT is also a regressive tax, i.e. a tax that affects more the poor than the rich (Partially replacing the progressive income taxes would increase the regressivity of eco-taxes). 2. The poor will be impacted more than the rich because the eco-taxes will raise prices on essential products, such as gas and electricity, which hit the poor more than the rich. • Policy choice implication: the eco tax must be revenue-neutral and the eco tax revenue-neutrality must be partly (10% of the tax revenue?) reflected in tax credit or negative tax for the poor to compensate the increased costs of energy consumption related to eco taxes i. Justification: The poor might already be exempt from income taxes, but they still have to pay higher energy bills as a result of the eco tax. Solution to this problem: tax credit for the poor to compensate their increased living costs. Note: The percentage must be readjusted according to the increased costs of energy consumption.

Ecological tax reform: a policy analysis of the Costanza, Daly, Hawken and Woodwell package http://www.green-innovations.asn.au/anzsee.htm

Yang, Peter. “Public finance and environment: correlations of selected taxes with pollution and CO2 emissions in China between 1999 and 2006.” In: International Journal of Green Economics (2009): 3(1) 48-62.