Environmental Taxes - Types of Environment Taxes

Environmental taxes are introduced on substances, which pollute the environment, the ultimate aim being the substantial reduction of pollution.

The challenges of the environment are pressuring the government to seek ways to reduce the damage caused to the environment while keeping a check on minimizing harm to the growth of the economy. The Covid-19 pandemic has also forced a rethink on climate change and the need for environmental preservation.

Hence, in this article, we will provide the details related to environmental taxes. The topic holds relevance for the IAS exam as well as other competitive exams. 

Candidates preparing for upcoming UPSC Prelims can check the links provided below for assistance in their preparation – 

CPCB – Central Pollution Control Board Pollution measurement – Air Quality Index (AQI) Overview
IPCC Report – Global Warming – Impact, Measures Global Methane Assessment Report 2021
Paris Agreement (COP 21) Emissions Gap Report

What is Environmental Tax?

An environmental tax also known as Eco Tax is an excise duty on goods that cause environmental pollutants. Charging taxes on emissions that cause pollution will lower environmental impairment in a cost-effective manner. Thus, encouraging behavioural changes in households and firms that need to decrease their pollution.

According to the statistical framework developed jointly in 1997 by Eurostat, the European Commission, the Organisation for Economic Cooperation and Development (OECD) and the International Energy Agency (IEA), environmental taxes are “those whose tax base consists of a physical unit (or similar) of some material that has a negative, verified and specific impact on the environment”.

You can also read in detail about the International Energy Agency IEA on the linked page.

Need of Environmental Taxes

Increasing population growth in the past few decades has radically impacted the ecology. The extensive use of scarce natural resources and increasing pollution levels has led to huge greenhouse gases emissions (GHG). In addition, climatic changes, spread of chronic diseases, rising sea levels, and economic consequences are some of the major issues of ecological misuse.

This is where Environment Tax or Green Tax or Eco Tax comes in. It discourages people from damaging the environment by making them pay for natural resources.

The major need for environmental taxes is to protect the environment. However, there are some more reasons why environmental taxes are the need of the hour – 

  1. Promote energy saving and the use of renewable sources.
  2. Internalize the negative externalities.
  3. Motivate companies to innovate in sustainability.
  4. Discourage anti-ecological behavior.
  5. Generate revenue for governments, allowing other taxes to be lowered or environmental projects to be carried out.
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Aim of Environmental Taxes – 

  • The environmental tax aims at ensuring that polluters are duly punished for the activities that put off the environment by charging them a penalty for the harm caused to the environment and others. 
  • Charging direct taxes to perpetrators on emissions is an economical means to provide them with an incentive to lower their pollution to the extent where further reduction could potentially turn out to be more expensive than paying the tax itself.

Environment Tax Reforms 

Environmental tax reforms would mainly involve the following three activities:

  1. Initiating new environmental taxes.
  2. Restructuring existing taxes in an environmentally supportive manner.
  3. Eliminating existing subsidies and taxes that have a harmful impact on the environment.
  4. For example, in the energy sector, the following reforms may qualify as environmental fiscal reforms:
    • Correcting the price differential between diesel and petrol.
    • Differential taxation on vehicles in the transport sector based on fuel efficiency and GPS-based congestion charges.
    • Taxes on thermal-based powers and tax rebates for renewable energy producers.
    • Tax on high carbon footprint industries.

Types of Environmental Taxes

  1. Carbon Tax – It is a form of Pollution Tax. It levies a fee on the production, distribution, or use of fossil fuels based on how much carbon their combustion emits. It is a cost-effective tool to reduce greenhouse gas emissions in the atmosphere.
  2. Green Tax – Also known as ECC (Environmental Compensation Charge) is levied on Vehicles (Cars and Two-wheelers) in India.  It will be imposed on pollutants depending upon the vehicle’s size. It was introduced in October 2015, in Delhi. 
    • The government of Delhi is also considering the extension of Section 194 of the Motor Vehicles Act which does not permit the entry of commercial vehicles to Delhi at particular times. Read in detail the Road Safety And Motor Vehicles (Amendment) Bill 2019, on the linked page.
  3. Duties on imported goods containing significant non-ecological energy input (to a level necessary to treat fairly local manufacturers)
  4. Severance taxes on the extraction of mineral, energy, and forestry products.
  5. License fees for camping, hiking, fishing and hunting and associated equipment.
  6. Specific taxes on technologies and products which are associated with substantial negative externalities.
  7. Waste disposal taxes and refundable fees.
  8. Steering taxes on effluents, pollution and other hazardous wastes.
  9. Site value taxes on the unimproved value of land.

Also, read:

Air Pollutants – Classification, Sources and Impacts Causes of Noise Pollution [UPSC Notes]
Carbon Price – Types of Carbon Pricing Smog – Definition, Types and How to Control its Impact

Forms of Environmental Regulation

Environmental taxes will not necessarily replace traditional environmental regulation. In some instances, they may complement regulation, and in others they may provide an option when regulation is not appropriate. The environment regulation may take one of the following forms:

  • Command and Control Approach wherein the government places strict regulations on pollutant emissions and there are fines on non-compliance.
  • Cap and Trade Approach involves the government setting limits for emissions and the establishment of carbon trade markets.
  • Environmental Tax/Subsidies Approach involves either taxing the polluters to disincentivize the use of high carbon footprint processes or products and also providing subsidies to encourage the adoption of green technology.
  • Economic Planning/Urban Planning Approach involves inculcating sustainable management practices in policy making.

From the above three approaches, India currently focuses majorly on the command-and-control approach in tackling pollution.

Status of Environmental Tax in India

  • Under the Forest Conservation Act, 1980, any entity that diverts forest land for non-forest purposes is required to provide financial compensation for the purpose of afforestation in non-forest or degraded land. Candidates can read in detail about the CAMPA Law on the given link. 
    • In 2002, the Supreme Court had directed that a Compensatory Afforestation Fund (CAF) should be created to manage the funds generated.
  • Similarly, India’s Clean Environment Cess or coal cess acts as a carbon tax.
    • The coal cess is levied on coal, lignite and peat at the rate of ₹400 per tonne, and the funds raised are managed by the National Clean Environment Fund.

Benefits of Environmental Taxes

The implementation of an environmental tax in India will have the following three broad benefits.

  • Benefits related to Environment – 
      • Environmental taxes help internalise the negative environmental externalities in the overall framework and thus incentivize greener products and processes and disincentivize polluting processes and products. 
      • This will reduce environmental pollution, encourage environmental preservation and adoption of an environmentally sustainable approach.
  • Benefit in reducing Poverty –
      • The augmented revenue from environment tax can finance research and the development of new technologies thus encouraging the rise of new sunrise sectors and new jobs.
      • The augmented revenue will also help finance social sectors which will aid in the development process and help reduce poverty.
  • Associated Fiscal Benefits-
    • Tax revenues can be generated through environmental taxes by designing them as revenue augmenting. Read more on Tax and non-tax revenues on the linked page. 
    • The additional revenue generated can be used for the provision of environmental public goods or directed towards the overall revenue pool to be used in critical social sectors like health. This will help developing countries like India, constrained by limited fiscal space to address critical environmental health issues.
SAFAR or System of Air Quality and Weather Forecasting And Research Electronic Waste – E-waste Management Rules
Public Goods & Private Goods Environmental Impact Assessment – EIA 
Climate Change In India National Clean Air Programme – NCAP

Concerns Associated with Environmental Taxes

  • Inflationary effect –  Environmental regulations may have significant costs on the private sector in the form of the high cost of compliance. This could lead to a possible increase in the prices of goods and services. This may disincentivize demand and thus hamper the economic growth of the nation.
  • Diversion of Funds- A large part of taxes raised for environmental purposes are being diverted or lying unutilized.
    • Notably, there is no evidence of green taxes leading to a deceleration of the economy. Most countries’ experiences suggest a negligible impact on the GDP.
  • Affecting Competitiveness- The adding of costs to a producer within one country or region, that is not imposed on producers outside that country or region, may of course impact on the competitiveness of the local producer.

Recommendations for Environmental Taxes

  1. It is the right time for India to adopt environmental fiscal reforms as it will not only help reduce environmental pollution but also generate resources for financing the health sector.
  2. The environmental tax rate ought to be equal to the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services.
  3. The architecture of the environment tax framework should be credible, transparent and predictable.
    • The eco tax rate should be commensurate with the marginal social cost arising from the negative externalities associated with the production, consumption or disposal of goods and services. This should consider both short and long term impacts both on humans and other living beings.
  4. In India, environmental taxes can target three main areas:
    • In the energy sector by taxing fuels which feed into energy generation;
    • Differential taxation on vehicles in the transport sector purely oriented towards fuel efficiency and GPS-based congestion charges;
    • Waste generation and use of natural resources.
  5. The environmental taxes must be integrated with the Goods and Services Tax framework.
  6. In developing countries like India, the revenue can be used to a greater extent for the provision of environmental public goods and addressing environmental health issues.
National Action Plan on Climate Change (NAPCC) Environment Protection Act, 1986 Green GDP: Definition and Rationale
Congestion Tax can Reduce Pollution Special Economic Zone (SEZ) Global Environment Outlook

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