began We class concluding the e-mail discussion on the disadvantages of emission
fees. Issues raised included:
o Uncertainty
Compared to command and control, emission fees provide more
certainty on costs, but less certainty on the final level of emissions.
o Geographically-varying damage
Market-based policies guarantee an overall goal, but they don't
guarantee which firms will reduce and which firms won't. If firms
near an urban center choose to pay the fee rather than reduce
emissions, damages may remain high.
Varying the fee based on potential damages can help address
this.
o Distributional issues
Concerns about equity might make some environmental taxes
politically unpopular. For example, lower income families spend more
of their income on gasoline, making a gas tax a regressive.
While all policies raise the possibility of costs being passed on to
consumers, there are more costs to be passed on here, as firms pay
both for abatement and the fee for the remaining units of pollution.
o Monitoring costs
To charge a fee per unit of pollution, all pollution must be monitored
and measured.
o Flexibility
Compared to regulations that mandate a specific abatement
technique, fees are more flexible
In addition, if economic conditions change, fees allow responses to
adjust to new conditions.
I. Implementation Issues
We began class by discussing practical issues for implementing an environmental tax.
o Note that most U.S. taxes that affect the environment were not implemented
primarily for environmental reasons. Other concerns, such as raising revenue,
tend to be more important.
Questions for designing an environmental excise tax:
o What is to be taxed?
That is, what is the tax base.
May be direct (e.g. CFCs, emissions), or indirect (e.g. gasoline)
o Who is to be taxed?
Here were focusing on administration, not ultimate incidence.
Recall that economic incidence is independent of legal incidence.
Ideally, we would like to tax users directly. However, it can be difficult to
know the users.
For example, to prevent non-point pollution, we may tax fertilizer,
since we cant tax each farmer for his or her individual
contribution.
Also, there may be many users.
For CFCs, it was easier to tax production than tax each user.
What tax rate to impose?
This is where most of the economic analysis comes in.
Problems:
Knowing MD is difficult. Therefore it is hard to set the tax
correctly.
Uncertainty could be bad if mistakes costly.
As we'll see in a couple of weeks, in these cases (e.g.
threshold effects), regulation may be better.
Although we also might not know about MAC, taxes may help us
learn about the MAC of firms.
They will choose to pay the tax when tax < MAC.
Are their ancillary policy goals?
Taxes are not enacted in a policy vacuum.
Multiple goals often conflict.
Common conflict: revenue vs. abatement
Taxes are a source of revenue.
If an environmental tax is successful, it lowers emissions, thus
lowering the tax base.
Therefore, if revenues are important, we might adjust the rate.
What should be done with the revenue?
Economists have noted that these taxes not only help the
environment, but that they can also improve economic efficiency.
The theoretical argument is as follows:
Most taxes cause distortions in the economy. However,
environmental taxes correct a distortion.
Since the revenues from environmental taxes can be used to
lower other taxes, the economy benefits.
However, most economists find these effects to be small.
The main reason is that the tax base for
environmental taxes is much smaller than the tax
base for more general taxes, such as income taxes.
Thus, even a large environmental tax only
raises enough revenue to allow a small cut in
a more general tax.
o
o
II. Examples
Although many taxes may affect the environment, frequent use of tax policies directly
focused on environmental issues began in the 1970s (e.g energy conservation tax credits,
gas guzzler tax)
Environmental excise taxes generally fall in one of three categories:
1. User fees
These are taxes designed to raise revenue for a specific purpose.
Usually, the purpose is a public good.
Examples:
Excise taxes on sport fishing equipment and motorboat fuels fund
programs such as fish hatcheries designed to ensure the survival of
fish species.
The federal gas tax is essentially a user fee, since revenues go into
the Highway Trust Fund.
Note that reducing pollution is not a goal of the federal gas
tax.
2. Insurance premia in mandated risk pooling
Taxes collected by an industry to pay for liability against possible
damages.
Examples:
Oil Spill Liability Trust Fund tax of 5 cents per barrel of oil
Superfund tax on chemical companies.
Revenue pays for cleanup of future hazardous waste sites.
3. Pigouvian taxes
Few environmental taxes explicitly aim to internalize external damages.
Some that do include:
Tax on ozone-depleting chemicals
Passed in 1989 to help eliminate chlorofluorocarbons
(CFCs)
A result of US support of the Montreal Protocol.
Production of CFCs is taxed per pound
1990 level was $1.37 per pound
The amount has increased over time
Gas guzzler tax on vehicles below a certain MPG
Applies only to cars (not trucks)
Applies to cars below 22.5 MPG
Ranges from $1,000 to $7,700, depending on fuel efficiency
Examples of environmental taxes (source: EPA Report: The United States Experience
with Economic Incentives for Protecting the Environment, chapter 4)
1. Emission fees in the South Coast Air Quality Management District (SCAQMD) in
Southern California
Facilities exceeding their allowable emissions limits must pay fees
2. Solid waste disposal fees, such as stickers for trash
Reduce weight of trash in landfills, but can also lead to more illegal
dumping. Lesson: beware of unintended consequences.
3. Several states have taxes for hard to dispose of items (tires, oil, refrigerators)
4. In response to suburban sprawl, several New Jersey counties assess open space
taxes
1 to 5 cents per $100 assessed value of property
Money must go to trust funds to be used for purchasing open space,
developing parks, etc.
Examples of subsidies in U.S. (source: EPA Report: The United States Experience with
Economic Incentives for Protecting the Environment, chapter 7)
1. Income tax credits in Colorado for conservation easements
2. Brownfield development grants (also include changes in liability law)
For example, in New Jersey, developers get a 10 year property tax
exemption for remediating a site in accordance with state standards and
return it to industrial or commercial use.
3. Loans for pollution control expenses
The state of California issues tax-exempt bonds to provide low interest
loans to small businesses for pollution control devices & solid waste
recovery projects.
4. Farming and land preservation
The Conservation Reserve Program, part of the U.S. Food Security Act of
1985 (1985 Farm Bill) pays farmers for taking environmentally sensitive
land out of cultivation.- The Conservation Reserve Program, part of the
U.S. Food Security Act of 1985 (1985 Farm Bill) pays farmers for taking
environmentally sensitive land out of cultivation.
5. Tax credits for alternative fuels
Available for alternative fueled cars
Available for renewable energy (1.6 cents per kWh in 1995 for biomass
and wind)
Estimated cost to government $970 million
6. Income tax credits for easements in Colorado
Income tax credits are available for 50% of the fair-market value of the
easement, up to $375,000.
For those with less taxable income, such as ranchers, there are two
options:
If there is a budget surplus, the credit is refundable.
If there is no surplus, the credits can be sold to buyers who
have more taxable income.
The credits sell for 80-85 cents per dollar of credit.
There is little regulation of the valuation of easements
Some transactions have been found to be fraudulent
Colorado doesn't audit the credits. This is left to the
Internal Revenue Service.
Impact
Total acres protected:
2000: 350,000
almost 2005: 1 million
Cost to government in lost revenue:
2001: $2.3 million
2005: $85.1 million
Proponents argue that, despite lost tax revenue, the preserved open
space raises the value of neighboring land.
7. Note that all these subsidies have a cost: there is lost tax revenue.
Developing country examples
(from Randall Bluffstone, Environmental Taxes in Developing and Transitional
Economies, Public Finance and Management 2003, 3(1), 143-175).
1. China
Has used emissions fees for air and water since the early 1980s.
Uses a two-tiered system
Charge a basic fee per unit, plus a pollution levy for industrial air
or water pollution that exceeds annual limits.
Firms are only charged for emissions of their worst pollutant.
Fees are assessed at national levels, but implemented by local
environmental protection boards.
Rates vary by locality.
Highest in richer urban areas.
Uses self reporting by firms, with spot checks by local environmental
officials.
80% of air pollution revenues to go pollution reduction programs.
2. Central and Eastern Europe
Many Central and Eastern European countries, as well as the former
Soviet Union, implemented environmental taxes in the late 1970s and
early 1980s.
Goal: to give incentives for state owned enterprises to reduce
emissions.
Rates typically not market based (e.g. considering marginal abatement
costs), but rather based on complex engineering formulas.
Could lead to odd results. For example, prior to 1999, Lithuania
charged several million dollars per ton of SO2. Not surprisingly,
non-payment was an issue.
3. Malaysia
Uses a licensing fee for water pollution from palm oil production.
Uses a two-tiered system
Emissions above concentration standards are charged 10 times
more.
Firms have used a variety of techniques to reduce wastewater emissions,
suggesting that there may be differences in abatement costs across firms.
4. Columbia
Began water effluent charges in 1974
Rates increased in 1993
Prior to this, rates were low, and typically only covered
administrative costs.
The new rates vary by region, and are linked to damages.
Rates change every 6 months!
Revenues go to local environmental agencies.
Nationally, waste water emissions are estimated to have fallen by about
20-25% in response to the fees.
III. Comparison of Policies: NOX Charges in France and Sweden
The article by Millock and Sterner looks at two fee systems for NOX emissions, in
France and Sweden.
o Both build off existing command and control systems.
o Both driven by the United Nations Economic Commission for European
Convention on Long-Range Transboundary Air Pollution, which sets specific
NOX limits to be met by 2010.
Based on these goals, the EU set national emission ceilings in 2000.
France needed 54% reduction from 1990 levels
Sweden needed 56% reduction from 1990 levels
o Potential technologies:
Changes in combustion process
Fuel switching
Selective catalytic reduction for industry, catalytic converters for cars
o Measurement of emissions important to properly calculate fees.
Sweden
o Acid rain important issue, because Swedish bedrock has little calcium, and thus
does not provide buffering capacity.
Goal: reduce NOX emissions by 30% by 1995, compared to 1980 levels.
o Uses a refunded emissions payment (REP) for industrial boilers producing 25
GWh/yr
Tax of 40 SEK/kg ($4,000/ton) NOX
Rate based on engineering estimates of abatement costs, which
ranged from 3 to 84 SEK/ton.
Covers approximately 250 plants with 365 boilers
o What happens to revenues?
After administrative costs, remainder of charge is returned to plants
Returned in proportion to output of useful energy
Thus, if cleaner than average, can get back more than pay in
Note that this can avoid one political drawback of fees, in that firms avoid
needing to pay twice (for what they abate and for what they emit).
The cost is that the government can not use the revenue for other purposes.
However, the tax would be unlikely to pass without it.
o Monitoring and compliance
Units self-report annual emissions, using real-time monitoring
Main costs to firms were for monitoring and abatement
Average abatement costs between 12-25 SEK/kg
Monitoring costs about 2-3 SEK/kg (about $250/ton)
Note this is greater than the charge itself in France,
suggesting that real-time monitoring would not make sense
there.
For about of firms, there was a net loss after refund. For another , a
net gain after refund.
Administrative costs at plant about 1.2 SEK/kg
Low administrative costs for government: just 0.5% of revenues
Effect of the tax
Emissions target not met until 1998
The problem was mobile sources, where emissions only fell by
13%
Stationary sources, covered by the tax, fell by more than 50%
Comparison of plants across countries
US EPA compared similar plants (coal-fired plants with selective catalytic
reduction, or SCR) in different countries.
Swedish plants have half the emission rates of plants elsewhere
In fact, emission rates are below the Swedish standard
Note that the emissions charge gives plants incentives to do better than the
standard.
Differences across industries
Figure 5-2 shows that some industries gained, while other lost
Pulp & paper hurt the most, while energy gained the most
o
o
o
France
o
o
o
o
o
o
o
Introduction of tax closely linked to European Community policy on acid rain.
Applies to all units with 20 MW power capacity
Higher threshold than the Swedish program
Tax has consistently been lower than Sweden:
1990: 150 FF/ton NOX ($23/ton)
1995: 180 FF/ton NOX
1998: 250 FF/ton NOX ($38/ton)
What happens to revenues?
Pays for subsidies for abatement measures
Compliance
No fine for failure to pay
Government said not needed, because there was 97% compliance
Emissions data self-reported, but easily checked against fuel consumption
data
Administrative costs 6% of total tax revenue
Effect of the tax
Government reports emission reduced by 27,000 tons
Subsidies for new abatement technologies less effective
Many just accelerated what would have happened anyway
Because of low tax rate, French policy is similar to a command and
control policy
Firms need to comply with national standards, but there is
little incentive for continual improvement
Note that average abatement costs in Sweden about 1/3 to
1/2 of charge, or $1,333 - $2,000/ton. Clearly, the French
charge does not induce additional abatement at such costs.
IV. Greening the Tax Code
Note that taxes can not only correct externalities, but can also provide incentives that
exacerbate problems. Often these come from tax expenditures (e.g. deductions).
Hanson and Sandalow provide examples.
o Percent depletion allowance
Oil and gas producers can deduct a fixed percentage of gross income each
year. This was established in 19090 to stimulate domestic production.
Is it still needed?
Repealing would save $900 million over five years.
o Similarly, oil and gas companies can treat exploration and development as an
expense, rather than depreciating over a number of years.
Repealing would save $17 billion over five years.
Encourages greater extraction of virgin materials, discourages recycling.
o Sport utility vehicle deduction
Businesses can deduct $25,000 of purchase of large vehicles (> 6,000 lbs)
in the first year.
No expensing allowed for light vehicles.
Originally intended for large equipment (e.g. construction)
Repealing would save $700 million over five years.
Hanson and Sandalow also propose new green taxes. How would these work?
o Water pollution tax
Tax BOD in discharges from industry and wastewater treatment plants.
Already monitor BOD, so administrative costs would be low.
o Nitrogen fertilizer tax
Tax fertilizer that leas to nutrient overload and dead zones in water.
Currently, as much as 20% of fertilizer applied ends up in waterways.
Tax would encourage more efficient use.
o Carbon tax
Tax fuels based on their carbon content.
Encourages use of cleaner fuels (e.g. natural gas vs. coal).