The IoD's View

Environmental taxes have their place in the tax system, but there is a real danger that because they are seen as being in a good cause, they will be set higher than they should be, or will become a way of increasing the total tax take.

Key Points

• There is increasing pressure to introduce environmental taxes. The critical thing to remember is that an environmental tax is still a tax, a burden on business and ultimately on individuals. all taxes have costs, as well as benefits. It is therefore vital both to look critically at the claims made for environmental taxes, and not to let the total tax take increase as a proportion of GDP.
  
  
• We have formulated four principles of environmental taxation, as follows.
  • Revenue neutrality. any increases in revenue raised should be matched by reductions in the revenue raised from other taxes. Environmental taxes must not become a tool to increase the size of the overall tax burden. The adverse economic effects of high overall levels of taxation are well-documented in the economic literature.
  • Equal application to business and private consumers. any taxes should apply equally to businesses and to private consumers, even if they are only collected from businesses. Where private individuals engage in activity that is sufficiently environmentally damaging for businesses to be taxed, private individuals should also be taxed. For example, whatever the case for discouraging carbon dioxide emissions may be, it applies equally to emissions by businesses and to emissions by private individuals. Furthermore, the amounts due should appear on bills or tickets sent to private consumers so as to ensure that consumers are aware of what they are paying.
  • Simplicity. Environmental taxes should be simple in design and straightforward in their application. There is some tension between simplicity and the precise achievement of policy objectives. But in the environmental field, uncertainties about what needs to be done mean that precision in policy objectives is meaningless anyway, as soon as one moves beyond high-level objectives such as target ranges for environmental variables.
  • Effective design. Environmental taxes should be designed to do their job properly. The level of a tax should match the cost of the environmental damage. The onus must be on the Government to demonstrate the amount of that cost. and there is no point in imposing a tax if the taxed behaviour will simply relocate to another country and continue to do the same damage.

Q & a

Q. Do environmental taxes deliver a double dividend, and does this make them the taxes of the future?

a. The two elements of the supposed double dividend are the economically efficient protection of the environment and the use of the revenue from environmental taxes to reduce other taxes, reducing the economic distortion that those other taxes cause. Economists debate the extent of these effects, but one thing is clear. a double dividend will only be achieved if two conditions are both satisfied. First, environmental taxes must be properly designed and proportionate to the true cost of the environmental damage that they attempt to tackle. Second, the money raised through environmental taxes must all be returned to the private sector through reductions in other taxes. Otherwise, the double dividend could all too easily turn into a double loss, when a tax did not achieve its intended goals but still imposed the burden that any tax imposes.

There are also other ways to control environmentally damaging activities, such as the issue of permits, and there is uncertainty about the extent to which human behaviour does need to be changed in response to climate change. Environmental taxes are not a panacea.