Environmentally related taxation has many positive
features, and its use is widening. Taxes on pollution provide clear incentives
to polluters to reduce emissions and seek out cleaner alternatives.
Organization for Economic Cooperation and Development recently issued a study
analyzing the impact of environmentally related taxes (“Taxation, Innovation and
the Environment”). When Israel joined the OECD in 2010 it was told to clean up
its environmental act.
The world is facing a host of environmental
challenges. Some are confined to local areas and may be the result of a
few polluters, such as mercury emissions to air or sewage discharges in
watercourses. Others occur at the global level and are brought about by millions
of different actors, such as with the emissions of greenhouse
While these environmental issues can be thought of as negative
side effects of countries’ economic development, it is important to consider
that as countries grow richer, more dense and more technically advanced, the
desire and ability to confront these challenges grows as well. The OECD believes
innovation is critical to achieving environmental improvements at a reasonable
This is of importance to governments because market forces alone do
not properly address the environment and related innovation. There is no price
on polluting, and therefore firms and consumers pollute too much.
of environmentally related taxation and emission-trading systems is widening in
However, the amount of revenues from environmentally
related taxation has been gradually decreasing over the past decade relative to
both GDP and total tax revenues. This trend partly reflects price increases,
which have stemmed demand for motor fuels in OECD countries, and partly a
decline in real rates of excise taxes.
In fact, most environmentally
related taxes generate very little revenue, and tax bases are often quite
small.What needs to be done, according to the OECD?
• Over the medium
term, additional revenues from carbon taxes and from the auctioning of tradeable
permits may increase the role of environmentally related taxation in government
• The adoption of pollution-abatement measures should be
• Environmentally related taxes can provide significant
incentives for innovation as firms and consumers seek new, cleaner solutions in
response to the price put on pollution.
• These tax incentives also make
it commercially attractive to invest in R&D activities to develop
technologies and consumer products with a lighter environmental footprint,
either by the polluter or by a third-party innovator.Case studies
case studies undertaken by the OECD shed light on how environmentally related
taxation can induce innovation.
They examined the UK’s climate-change
levy on fossil fuels and electricity. The UK levy is charged on taxable supplies
to industry, commerce, agriculture, public administration and other services. It
is imposed on supplies of electricity, natural gas as supplied by a gas utility,
petroleum and hydrocarbon gas in a liquid state, coal and lignite, coke, and
semi-coke of coal or lignite and petroleum coke. The levy is applied as a
specific rate per nominal unit of energy. There is a separate rate for
each category of taxable commodity.
The OECD found that firms subject to
the full rate of the levy had patented more than firms subject to a reduced rate
only one-fifth of the full rate.Innovation ingredients and Israel
gives taxation an advantage over more prescriptive environmental policy
instruments, which tend to encourage a focus on end-of-pipe innovation (i.e.,
innovations reducing the emission of pollution but not the creation of
The wider context plays a significant role in shaping the innovation
outcomes of environmentally related taxation: A country’s intellectual-property
rights regime, the system of higher education and cultural norms toward
innovation all contribute to a country’s innovation capacity.
Israeli case study, innovations observed by the OECD in the water sector may
result from an innovative culture spanning several decades, in addition to the
presence of high water prices and taxes.Making pollution costly
countries have sought to use the tax system for environmental policy in a number
of alternate ways, such as through accelerated depreciation allowances and
reduced rates of taxation on environmentally friendly goods. These measures
attempt to reduce the cost of “good” actions instead of penalizing “bad”
actions, and they can act similar to subsidies.
As a drawback, however,
they also tend to favor capital- intensive approaches over simpler
Moreover, these are not cost-free initiatives; they
necessitate that governments find other sources of funds. Moreover, a
firm is unlikely to make an investment with any level of tax credit toward a
technology that solely reduces carbon emissions if there is no cost at the
outset to emit carbon. Where the technology may also save their firm money (that
is, reduce carbon emissions because it increases energy efficiency), only then
may an R&D tax credit provide an additional boost and help mitigate the
environmental problem.Concluding remarks
One country that seems to have
taken the OECD’s remarks to heart is Australia. On November 9, the Australian
Senate approved a carbon tax on Australia’s 500 or so largest polluters.
Commencing next July, Australian companies with emissions exceeding 25,000
metric tons of carbon per year apparently will pay a new charge of A$23 per
metric ton of carbon emissions. The tax will rise by 2.5 percent per year until
2015, when it gives way to an emissions trading scheme.
Let’s hope other
countries follow suit.As always, consult experienced tax advisers in
each country at an early stage in specific email@example.com Leon
Harris is an Israeli certified public accountant at Harris Consulting & Tax