Environmental taxes are excise taxes on environmental pollutants that improve the ecosystem while reducing the negative effects that are posed to the environment, in an attempt to create an environmentally sustainable environment (Fullerton, Leicester and Smith, 2008). Their adoption and advent were stimulated by various factors; mainly to have better economic performance. The traditional and governmental systems are increasingly being realized as ineffective methods of creating a sustainable environment. Even with substantial economic costs, new regulations cannot cope up with the always arising environmental challenges hence, the adoption of environmental taxes. Even with the challenges facing the adoption of environmental taxes such as carbon tax, there have been a lot of advantages to the present generation as it is linked to increased economic performance that later contributes to adoption of externalities, environmental improvement, dynamic innovation, regulatory capture and reduced energy and resource consumption.
Various environmental taxes are being developed daily. One example of an environmental tax is the carbon tax, introduced in Australia in July 2012. Carbon tax in Australia is commonly a form of excise levy on the carbon-based content of fossil fuels including coal in an attempt to reduce harmful gases emitted to the environment, and those which lead to global warming and climate change (Pearce, 1991). The implementation of a carbon tax has seen an encouragement in the development and adoption of new ways of dealing with goods including using energy alternatives like wind and solar energy (Cornwell and Creedy, 1996). A carbon tax has also spread to other countries including India and Japan. Not only is carbon tax as an incentive to reduce pollution, but there also exist other incentives in other countries such as the USA (Pearce, 1991). Additionally, some European nations have taken such environmental taxes into account in an attempt to deal with harmful gases such as sulfur and nitrogen oxide, which are a threat to the people. On the same note, some other states in India are also implementing the 'green tax' to make sure that they are fighting pollution from automotive in the most effective manner possible while maintaining the transport the people have always seen (Harrington, and McConnell, 2003). Some other examples of effective taxes include those regarding air pollution in Sweden, water pollution in Dutch, and NOx charge schemes for the automotive in Sweden (Millock and Sterner, 2004).
Environmental taxes can also be seen as effective instruments for the adoption of externalities. The use of environmental taxes has seen an incorporation of the costs of maintenance of the environment in a direct manner into the costs of goods, services, or the activities that lead to the taxes. Through their internalization of externalities, environmental taxes have contributed to the development of various acts that challenge polluters. Ignoring such externalities may lead to major distortions to the market through the encouragement of activities that are costly to the entire society regardless of the benefits of the private. The better prices brought together by environmental tax let various markets such as transport and power production has better functionality. The internalization is most effective in that it leads to the re-allocation of economic resources in a free and fair matter through the redistribution of those costs. Additionally, environmental taxes have and will always be policy tools that deal with the present environmental priorities from the diffuse pollution sources as transport emissions, encompassing maritime and air transport (Bohm, and Russell, 1985).
As economic instruments, environmental taxes, therefore, address most challenges related to the environment at the cheapest cost through encouraging the changes in the way of conduct of many firms, institutions and housing (Fullerton and Kinnaman, 1996). Reduction of pollution is a critical change in the behavior of the many various firms. Taxes can be considered as cost-effective tools especially important for the reduction of pollution than regulations since these forms tend to pay tax for the pollution as soon as the cost-effective measures of reduction have been accounted for. Indirectly, the payments made may tend to make a continuous incentive that finds new ways of reducing pollution as compared to regulations which do not account for incentives even though their regulatory standards are met. This can be seen as a dynamic incentive of tax payment in that one can minimize the pollution and control of costs easily. Through the environmental taxes, polluters are given an incentive to reduce the emissions that pollute the environment and shift to more cleaner and sustainable alternatives to their goods (Hong and Adams, 1999). A lot of economic benefits are associated with environmental taxes. In most of the cases, these incentives are very cost-effective in regards to the evaluation of most of the implementers hence, crediting it a valid tool of economic benefit. These environmental taxes work in that they tend to sufficiently create high taxes with an aim of stimulating abatement measures that are later made transparent to the people. These taxes especially work for a short time frame that does not exceed four years. In an essence, their short time frames lend them the best comparisons for other environmental policy tools. Even though their evaluation is not an easy task, they still remain parts of the policy packages which are difficult to manage. However, various challenges exist with the implementation of environmental taxes.
The implementation of environmental taxes is a good measure to encourage innovation. Individual needs can be met as soon as various energy prices are increased through environmental taxes. With the increase in taxes, innovation can be encouraged and various new products and developments can be seen. For instance, the CFCs taxation in the US assists in the encouragement of the development of alternative chemicals that are then sold abroad. For Sweden, their taxation on Sulfur has also seen the development and acceptance of new and less polluting fuels than before. In a nutshell, changes in production and consumption and be encouraged by environmental taxes, especially where price signals are gradual over a wide range of planning. These innovations also encourage the improvement of competitiveness.
One of the greatest challenges to the implementation of these environmental taxes is political barriers (OECD, 2006). These barriers may include the unforeseen effects on competitiveness and absorption of potential employees by an environmental-related organization. Their implementation may also pose a threat to the low-income groups of people in that the poor may tend to be more criticized hence, forced to pay more than the rich. On the same note, environmental taxes may also create conflict between national taxes and the EU. However, certain measures can be taken to see the elimination or reduction of these negative effects of implementation of these incentives. These measures may include the removal of environmentally perverse subsidies, the perception of the taxes as tools for reform, having a step by step plan to the implementation of these plans, having an extensive consultation for their implementation and capturing all the information necessary to start these environmental taxes.
Many advantages accompany the implementation of environmental taxes, especially for policymakers. These may include an improvement in the tax system, the environment, innovation, and competitiveness. Along with other economic instruments, environmental taxes exhibit the quality of static efficiency gains through the reallocation of abatement (Marshall Report, 1998). The costs of pollution abatement usually vary across various organizations and individuals and there is a potential for cost minimization for some reasons. One, the other policy instruments cannot show a difference between pollutants of different marginal costs of abatement and hence, tend to require some of these to take up abatement at relatively higher costs (Ballard, Shoven, and Whalley, 1985). The aim of environmental taxes is to provide individual polluters with an inventive to abate in the cheapest ways with an aim of indirectly achieving a certain level of abatement at lower costs. Again, these economic instruments can also sidestep the requirement of having a regulatory authority that gains deep data regarding the costs associated with abatement.
Environmental taxes are also significant for their dynamic innovation incentive. Various regulatory policies tend to assume that polluters of the environment should integrate certain technologies into their emissions so that as soon they go below a certain limited level, they may not cause harm to the environment (Bovenberg and Goulder, 2002). Some of these regulatory policies can be accepted even though these pollutants cannot make various other reductions below that specified limit at present and even in the future. The environmental taxes tend to provide the people with an instant incentive for which they can seek to reduce the emissions regardless of the costs to be incurred since it is the tax that is applied to an individual person hence, issuing a lot of pressure to come up with new technologies that have a marginal cost that is below the rates of taxation.
Environmental taxes also provide a people with regulatory capture. Through the incentives, firms can negotiate effectively for new technology and the most effective technologies for their emissions. In an attempt to minimize abatement costs, the set of regulatory policies can ensure the need to have distinct amounts of pollution abatement from distinct organizations or companies. The regulator, in this case, depends on these regulated organizations for data that can assist them to come up with abatement costs. These organizations, in turn, tend to control the most critical process in which their emission policies are laid and they can then get the prices they require from the regulator of that organization (Dinan, 1993). However, with environmental taxes, their uniformity is important to achieving the best distribution of abatement while taking into account the various costs involved in every firm. Even though this is true for various firms, some could face different pollution tax rates. A lot of risks are reduced to the advantage of the polluters and the negotiation can hence; erode the effectiveness of the environmental policy.
Environmental taxes alongside some other auctioned tradable permits are also a source of revenue. These revenues arise from the payments that are made to each unit of personal emissions and the extent covered by these revenues can be extremely controversial. Environmental tax revenues are also difficult to measure in regards to stabilization and predictability of the same and more specifically, their erosion that results from the changes anticipated by polluters. Changes in behavior especially for the pollutants affect the revenue from all taxes. Some other factors that also affect environmental taxes include the inelasticity demanded items including energy which can also be affected by the individual stimuli.
The Organization for Economic Co-operation and Development (OECD) (2006) has intervened in the monitoring of environmental taxes and mostly considers six aspects including environmental effectiveness, sectoral competitiveness, and administrative costs, among others. Most of the implementing countries monitor the consumption of fuels and natural resources including the unforeseen pollution as a way of making environmental taxes efficient....
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