The Eighth Annual Global Conference on Environmental Taxation
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Environmental Fiscal Reform – differences and similarities between developed and developing countries based on a case study of the current situation in Sri Lanka

Dr. Stefan Speck, Anjan Datta (UNEP/GPA)

The concept of an environmental fiscal / tax reform (EFR/ETR) is on the political agenda for more than 15 years in Europe and several European countries have implemented such reforms. However, these reform proposals are not limited to European countries but may also be implemented in transition or developing countries as stated in recent reports published by international organisations, such as the OECD (2005) and the World Bank (2005). Although the concept behind may show some similarities when implemented in developed and developing countries the actual reasons for implementing may differ. This concept is reflected in the so-called ‘tax shifting programmes’ in developed countries (EEA, 2005) as compared to the situation in developing countries where the key underlying reason is to raise revenues which can then be used for infrastructure investment in water and sanitation as well as to support poverty reduction programmes.
This paper will discuss the concept of EFR in the context of the developed and developing countries. However, the main focus of the paper will be dedicated to discuss the current situation regarding the use of market based instrument for environmental policy in Sri Lanka.
A range of environmental taxes and charges, in particular in the energy and the transport sector, are in operation in Sri Lanka. The revenue generating effect of the taxes implemented in the energy field is rather limited, as they have not been increased during recent years mainly as a consequence of the increase in international oil prices. Instead the Sri Lankan Government provided huge domestic subsidies so that consumers do not face the full increase in energy prices.  Information generated through a series of country case studies makes it abundantly clear that there is an urgent need for undertaking a subsidy reform in the field of fuel, i.e. electricity tariffs and kerosene prices. Such reform measures are particularly warranted due to the fact that subsidies which were designed to provide some benefits to the poorer segment of the society, are in reality not reaching them. An IMF study shows that currently in Sri Lanka the kerosene subsidies are of regressive meaning because a large amount of subsidies leak to non-poor households (Lueth et al., 2006 and Coady et al., 2006).
In this paper, it is therefore argued that a revision of the subsidy scheme and current environmental taxation scheme could provide revenues that could be used for financing poverty reduction and healthcare measures, as well as environmental infrastructure projects.

The paper is based on the findings of the research project ‘Market Based Instruments for the Implementation of the Sri Lanka National Program of Action (MBI/NPA’ funded by UNEP/GPA Coordination Office in The Hague/the Netherlands.


 Application of Environmental Fiscal Reforms and Other Market-Based Instruments For Environmental Management in Uganda

Alice Ruhweza, National Environment Management Authority-Uganda / East and Southern Africa Katoomba Group

Uganda’s National Environment Act (Cap 153, 1995) empowers the National Environment Management Authority in consultation with the Minister of Finance, Planning and Economic Development to recommend;

  • Tax incentives to encourage good environmental behaviour
  • User fees to ensure that those who use environmental resources pay the proper value for the utilization of the resource, and
  • Tax disincentives to deter bad environmental behaviour.

Despite the existence of these provisions, environmental management in Uganda has largely relied on the use of the traditional command and control instruments such as regulations, inspections and Environmental Impact Assessment (EIAs).  Though quite successful, the costs of obtaining further or additional improvements are high. For instance the courts of law are slow to deal with offenders, fines are too low to deter violations and costs of enforcement are high. There is little or no incentive for firms to improve their performance over and above the standard required by law.

Uganda has so far instituted a fisheries environmental levy, and environmental tax on polyethylene bags and a tax on older imported cars which have potential of emitting ozone depleting substances. There is also, mostly on an adhoc basis,  payments/incentives for environmental services such as payments for practices that result in water catchment protection and reduction of green house gases/ climate change mitigation. Examples include tree planting and methane reduction through waste detoxification. People living near protected areas such as forest reserves, national parks, are also compensated for non-encroachment and for practices that improve the overall well-being of the protected areas.

Key Challenges

  • The conflicting need for incentives for FDI versus the need to protect the environment: (Do taxes erode preferences?)
  • Lack of research and supporting data for the use of the instruments
  • Lack of awareness about environmental fiscal instruments
  • Earmarking the revenue resulting from the taxes

This paper will look at the above issues in detail and propose recommendations to address the challenges such as: research on the wider impacts of the application of economic instruments on FDI, equity, competitiveness other variables.; development of a databank on polluters to guide the development of appropriate fiscal measures and consensus building and coordination across sectors especially Finance, Planning and Local Governments in order to ensure that the revenue from such taxes is earmarked and allocated in a way that leads to achieving other development goals (such as MDGs) while also furthering environmental goals.


Building Coalitions for Change to Implement Pro-Poor EFR in Pakistan

Saima Baig, Alamgir Khan Gandapur, IUCN Pakistan Country Office

Although the strong linkages between poverty and environment are widely recognized, only limited work has been done in the context of developing countries to implement pro-poor environmental fiscal reforms.  This is mostly due to the prevailing long standing contextual issues that will have to be resolved before progress can be made in designing and implementing meaningful environmental fiscal reforms (EFR) initiatives.  Pakistan has shown its initial resolve to implement various pro-poor and pro-environment fiscal reforms.  However, a number of fiscal, political, institutional and administrative and governance issues still remain and need to be resolved before an effective and concrete fiscal reform process can be initiated.

Major fiscal issues in the country are low and narrow revenue base, low tax to GDP ratio, predominance of indirect and regressive taxes, a culture of tax evasion, and fiscal imprudence.  Prominent political issues pertain to the politics of environmental decision making and include such factors as overcoming political constraints that resist change and favor maintaining the status quo because it suits the political elites and other interest groups—landlords, industrialists, government line agencies.  Institutional constraints in Pakistan operate at three levels—the constraints of informal institutions such as norms, values, etc; the constraints of formal institutions such as weak, inefficient and unaccountable government organizations; and institutional constraints of the third level, i.e., how the rules of the game are made.  Administrative problems among others include lack of capacity at the district government level to assess, collect and administer revenue generation and implement public expenditure programs with fiscal discipline, allocative efficiency and cost effectiveness.  Lack of and inadequate access to information, transparency, accountability and lack of public participation in the budget making process are some of the governance issues.

The EFR project in Pakistan has been designed to address these contextual issues through identifying institutional, legal and policy mechanisms and arrangements for effective and sustained fiscal decentralization; promoting district level implementation; and building capacity and support among government and civil society for EFR options that reduce poverty and improve the environment. The project thus aims to enhance national capacity to research, formulate, review and implement comprehensive EFR initiatives in Pakistan.  The project works at all three levels of the Government—federal, provincial and district.  At the federal and provincial levels the project aims to build support for EFR and address challenges over fiscal powers and create enabling conditions for fiscal decentralization.  The district level work focuses on the selection, pilot testing and implementation of EFR instruments.  The project relies on a strong action research component to establish poverty and environment baselines and identifying key fiscal instruments and estimating their fiscal, poverty reduction and environmental improvement benefits through willingness to pay and other estimation methods.    Capacity building efforts of the project are focusing on two key aspects.  Firstly, to provide capacity support to local administration in such areas as the creation of systems of tax base measurement, assessment techniques and collection methods through coaching, mentoring and learning by doing.  Secondly, to build capacity of the local governments, to set in place an enabling framework for the implementation of EFR.  Activities being implemented under building the enabling institutional, legal and policy framework include promoting such initiatives through coalition and constituency building for broad-based acceptance of and interest in EFR.   The project includes pilot implementation of select EFR options at the district or lower levels so as to demonstrate the approach, tackle the challenges of governance structures and the political economy of environmental related taxes, subsidies and enhancing allocations for pro-poor and pro-environment activities.  The district of Abbottabad in the North West Frontier Province has been chosen to implement the select pilot options.  Documenting EFR lessons on processes and options play an instrumental role in building wider support for replication.  For this purpose, the project is producing a number of advocacy and communication material in the form of fact sheets, policy briefs, synthesis reports, etc. and organizing events to disseminate project experiences.


Environmental Fiscal Reform for Sustainable Mining in India

Divya Datt, Ligia Noronha, Sridharan P. V. The Energy and Resources Institute (TERI)

Even as fiscal policy has found an important place in environment and natural resource management, it has become increasingly necessary for it to be politically engaged with the interests of different stakeholders. And, arguably nowhere is this more evident than the extractive industry. The recent surge in global demand and prices of minerals has reopened the debate on social and environmental sustainability of mining. In the mineral-rich states of India like Chhattisgarh, Jharkhand and Orissa, mining and quarrying constitute over 10% of State Domestic Product and the largest source of non-tax revenue through royalty. Despite the abundance of natural wealth, these states are amongst the poorest in the country both in terms of per capita income and population below the poverty line. As these states seek to attract investors to their minerals sector, the tension amongst varying stakeholder objectives has become palpable- the central government wants to regulate the sector in the larger national and strategic interest, state governments want greater autonomy in determining and maximizing revenue from exploitation of natural resources, while the local community is worried about the environmental and social impacts of mining, already a big concern in the country. These impacts extend well beyond project life and lease area and are thus, more difficult to tackle than in other sectors.  A key inter-generational issue in the case of mineral resources is that local benefits could dry out once the resource is exhausted, unless measures are taken to create a sustainable stream of income for the community beyond the life of the mine.
It is against this backdrop that the proposed paper will examine the role of environmental fiscal reform (EFR) in India’s mining sector. It will lay out the broad objectives of sustainable mining including economic prosperity, human well-being and social justice, ecosystem health and accountable decision-making, and will draw on international experience to assess the role of EFR in meeting and balancing these objectives. It will critically analyze the effectiveness of fiscal instruments in India’s mining sector in this regard, examining the demands and concerns of various stakeholders. Finally, it will suggest how instruments (like royalties, environmental charges/fees, and land reclamation bonds) can be better designed and used, as well as the governance initiatives required given India’s federal structure, to ensure that EFR in the mining sector contributes to sustainable improvement in the quality of life of the community and overall development in the region.


Potentials for raising revenues via Environmental Fiscal Reforms in Tanzania and Kenya? - emerging practice and some suggestions for EFR-reviews in low income countries

Moses Ikiara, Kenya Institute for Public Policy Research and Analysis (KIPPRA)
Adolf Mkenda, Department of Economics, University of Dar es Salaam
Daniel Slunge, Environmental Economics Unit Department of Economics, Göteborg University

In most countries increased efforts are needed in order to reach the Millennium Development Goal of ensuring environmental sustainability. However, national environmental agencies which are supposed to promote and coordinate these efforts generally have very weak capacity to do so and tend to be heavily dependant on development assistance (UN, 2005).  Following the adoption of the Paris Agenda, budget support to governments pursuing credible growth and poverty reduction strategies is increasingly becoming a preferred aid-modality. For some countries this can have environmental implications since budget demands for environmental investments and expenditures will not be met by development aid. Instead these environmental demands will have to compete with many other demands on the scarce budget resources in most developing countries.

According to the OECD Development Assistance Committee (2005), Environmental Fiscal Reforms have the potential to help countries to raise revenue, create incentives that generate environmental improvements and support poverty reduction. However, implementation at the national level often encounters political opposition. Improved information and awareness on the specific potentials and limitations of EFR on the national level is a first basic step in a process of EFR-implementation. Surprisingly, this information is not readily available in many countries. In a few low income countries, for example Tanzania and Madagascar, Public Environmental Expenditure Reviews have been undertaken which incorporate elements linked to environmental fiscal reforms. It is claimed that these reviews have made an important contribution to the policy making process through pointing to the potential for increased revenue generation from natural resources as well as to financing needs for reaching environmental objectives.

In this article the methodologies used in the Public Environmental Expenditure Reviews for Tanzania (2004) and Madagascar (2004) are discussed and a suggested methodology for national EFR-reviews is developed. A special emphasis is put on how to assess the current and potential revenue generated from policy instruments related to environment and natural resources. This methodology is then applied in case studies for Kenya and Tanzania with a focus on selected sectors. The focus of the study is on the revenue side of the budget which has the potential of complementing the more common analyses of public environmental expenditures (Swanson and Lunde, 2003)


South Africa’s path towards an Environmental Fiscal Reform Agenda

Cecil Morden, Sharlin Hemraj, M. Leghote, National Treasury South Africa

This paper is an overview of the development of a policy framework that would underpin Environmental Fiscal Reform in South Africa.  It is based on a draft policy paper entitled “A Framework for Considering Market-Based Instruments to Support Environmental Fiscal Reform in South Africa”.  Conceptually the draft policy paper attempts to develop a guiding framework for considering the use of market-based instruments and outlines a set of criteria for evaluating environmentally-related tax proposals.  

The way in which taxes potentially impact on the prices of goods and services is considered an important mechanism to help internalise externalities.   Thus, the tax system can be used to support or complement regulatory efforts to achieve certain environmental objectives.  In the past, in most cases, this happened by default, an unintended consequence of the current tax system (in some instances the tax system unintentionally undermines the achievement of environmental objectives).   On a going forward basis the intent of an environmental tax instrument or other market based interventions will hopefully be spelled out more explicitly.  However, to take account of historical interventions and their unintended consequences environmental taxes are defined not by their intent but by the base.  This has generated quite considerable debate among economists and between economists and other professions.  A case in point is the excise duty on petrol and diesel in South Africa.  Although it is probably the most significant environmentally related tax instrument in terms of both its environmental impact and revenue generated, it was not initially introduced with the explicit intent to address environmental concerns.

On the other hand the income tax system provides certain incentives that unintentionally, either encourage or discourage the preservation of the environment. Where the income tax system encourages positive behaviour it should be retained and probably reinforced, however, where the income tax system unintentionally encourages behaviour that impacts negatively on the environment it should be corrected.   An example where the income tax system might discourage pro-environment behaviour is the non-deductibility of expenses to construct waste dams by chemical and other manufacturers because it is viewed as expenses not incurred in the production of income (one of the so-called “black hole” expenses).
It is also clear that it is not simply the introduction of a tax or other market based instruments that will make a difference but careful consideration should be given to the design of such an instrument or instruments.  An example in this regard is regulations and the levy relating to “shopping” plastic bags.  The combination of regulation that prescribe minimum thickness, a nominal levy imposed at the production or import stage and an agreement by major retailers to charge for the plastic bags seems to have had the desirable effect.  Although not the most elegant conceptually the indications are that it is working.

There is room for other interventions that might deliver the elusive double dividend. It is hoped that the proposed framework and guidelines will steer the discussions in the right direction.  This paper will briefly discuss a number of such interventions that are under consideration.   It is important to note that neither this paper nor the draft policy paper deals with tradable permits.


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