A Climate of Fairness: new study analyses environmental taxes from a tax justice perspective

Guest blog by
Martina Neuwirth
Vienna Institute for International Dialogue and Cooperation (VIDC)

The Global Alliance for Tax Justice’s vision is a world where progressive tax policies support people to share in local and global prosperity, access public services and social protection, and benefit from an economy that acts in the interest of people and the environment.

But these tax justice considerations have so far not really entered the policy discourse of environmental finance. At the same time, the urgent need for climate and environmental finance has hardly been taken up in tax and tax justice debates. The Vienna Institute for International Dialogue and Cooperation (VIDC) therefore decided to commission a study that tries to bridge these two “silos”.

The timing of the report is opportune. Requirements to fulfill commitments assumed under international environmental agreements (UNFCCC, the Kyoto Protocol and the Paris Agreement) and under the Sustainable Development Goals (SDGs) create a political momentum for the advancement of environmental taxes and environmentally related policies. Environmental taxes can help all countries, but particularly developing countries, deliver on these commitments. They potentially can create a double positive, by bringing about an improved environment while mobilising domestic revenues for the achievement of the SDGs.

“A Climate of Fairness” is a study about environmental taxes and their potential in a developing country context. It is authored by Jacqueline Cottrell, environmental economist, and Tatiana Falcão, tax lawyer and member of the UN Tax Committee’s Subcommittee on environmental taxation.

The study defines an environmental tax as a tax that has both an environmental purpose and effect. Environmentally related taxes, on the other hand, are revenue raisers and only bear an indirect environmental purpose. This might seem to be more of a theoretical distinction but it becomes important when a country’s actions are monitored in connection with its Paris agreement commitments.

From a legal perspective, report gives guidance on which principles and legal designs should be used if countries want to implement environmental taxes. The report also provides an inventory of environmental and environmentally related taxes, showing what is currently in the tool box for developing countries.

The three dimensions of sustainable developments and the tradeoffs between them are analysed:

• Environmental effectiveness: analysing whether the tax is capable of leading to an overall reduction in pollution and/or result in reduced consumption of energy or other scarce resources.
• Direct and indirect social impacts, including gender impacts.
• Economic and fiscal impacts, including impacts on GDP, international competitiveness, employment, and government revenues.

Along these criteria, chapter two of the report looks into the following country cases in more depth: China, Mexico, Morocco and Vietnam. It also analyses the impact of environmental taxes in low-income countries.

Given the regressive nature of environmental taxes, the question arises whether an environmental tax reform can be implemented in a way that fosters social (and gender) equity. The answer in a nutshell is yes, it can – but in a way that is well designed and carefully implemented.

However, it has to be emphasised that the regressive nature of environmental taxes is only one aspect of inequality associated with environmental policies. There are four dimensions of inequality which are examined in the report. Inequality of (1) exposure to environmental degradation, (2) contributions to pollution, (3) outcomes resulting from environmental taxation and (4) representation in policymaking. The authors therefore highlight that inequality can also result from severe environmental degradation and climate change, both of which are significant obstacles to poverty alleviation.

With respect to environmental taxes, the authors provide evidence that there can indeed be synergies between different policy goals, but tradeoffs between the environmental effectiveness of the tax and other goals, such as fiscal goals and social protection goals, have to be accepted. Environmental taxes thus should be part of a package that mitigates possible negative equity effects by using environmental tax revenues for targeted social welfare schemes and pro-poor investments.

The report provides evidence that environmental taxes can bring about environmental improvement in developing countries, such as emission reductions, cleaner energy generation, and improved recycling rates. They have also the potential to improve fiscal capacity. Because environmental taxes are hard to evade (as they tend to be levied on immobile tax bases), the fiscal governance framework can be bettered by contributing to a framework of improved tax compliance and tax morale.

It is also important to harness popular support for environmental taxes. Publicising the data may be an important tool to do that. Earmarking of a proportion of revenues can also be an important tool to raise awareness, gain popular support, and to ring fence funds for a specific environmental cause.

Furthermore, there is an international dimension. Countries should reach out to other countries adopting similar taxes to work in a coordinated fashion. Cooperation on environmental tax policy will protect countries against loss in competitiveness and may help build a geographic region with heightened environmental protection standards. The report assesses the role of border tax adjustments as a possible measure to enable high environmental tax rates or a high carbon price in particular countries or groups of countries.

The creation of a multilateral, intergovernmental body on environmental taxation under the auspices of the United Nations to address a number of global tax justice issues is further considered by the authors. This would place environmental taxation within a framework of multilateral cooperation.

“It is imperative to get the conceptual frameworks, priorities and standards right, in order to both advise developing countries on the implementation of sound policies, and to assess the extent to which those policies are effective, both from an environmental and social justice perspective. Pollution sees no borders. Let us leave no one behind.” (Executive Summary, p. 9)

The study can be downloaded here.

You find an executive summary of the study here.