The green currency : DNA 15th December 2007

Protecting the environment the fiscal way will reap benefits for consumers

The present concern about the environment is significant for three reasons. The first is that we are all progressively getting aware of the seriousness of the problem and accept that we need to do everything possible to control this degradation, as it is going to affect our future — and this may be just 20 to 30 years away. The second is that after the Kyoto Protocol took shape, it became possible to identify these polluters and companies are taking countervailing measures.
The third is that we have also made a neat business of this, wherein carbon credits are actually traded — the preservers of nature earn credits which can be traded with those who pollute the environment, thus making it a zero sum game. The game also mandates that those who do not stop their pollution must pay for it by purchasing these credits. This means that we are able to value these pollutants on a commercial scale.
If all this is true, the government can actively play a part in environment control through a system of taxes and incentives. The carbon credit system enables one to identify the level of pollution caused by an activity. If I am able to reduce the pollution caused by this activity and am able to prove it, then I earn some credits which can be traded with those who emit high pollutants. This means that all organised activity can actually be linked with emission levels, which can then be ‘capped and traded’ or, rather, taxed.
This tax would do two things. The first is that it will ensure that there is revenue for the government which will rise as long as society is willing to pay for it. The other is that any shortfall would automatically mean that pollution is under control as the polluting activity has been checked.

There are essentially two major sources of pollution. The first is the industry where manufacturing causes emission of noxious substances which damages the environment. Prima facie, these activities can be identified and the tax rate can be fixed proportional to the emissions on a progressive scale. Production of fertilisers, plastics, cement, glass, oil and so on can be ranked and taxed accordingly. Power companies could also be forced to move over to more environment friendly fuels that can be used to lower pollution levels. Non-adherence would mean a tax, which may or may not be passed on to the consumer. Considering that the tariff rates for power are partly administered, these companies may choose safer environmental friendly fuels, as carrying the costs would mean losses.

The tax can also cover individuals. At a micro level, individuals are responsible for pollution by activities performed either directly or indirectly. Vehicular pollution is high and would attract a differential tax on the fuel used be it petrol or diesel or CNG. This, by itself, may encourage drivers to shift over to a medium which lets out the least pollution like CNG over petrol and diesel. In fact, subsidies could be given on use of pollution reducing kits.

Another big indirect pollutant is air travel. The aviation industry has been identified as being one of the biggest destroyers of the ozone layer. To discourage such travel or make people more aware of this effect, a flat surcharge on every ticket can be levied by the government which will ensure that all those who contribute to the pollution also pay for it. Government action will actually penalise the polluters while adding to its own revenue.

There will still be a large unorganised set of polluters which will be difficult to track, but models can be built on reducing this by providing incentives instead for doing something that lowers environmental degradation. Simple rules like construction of public amenities and provision of dustbins can be linked with tax benefits for a community in the form of, say, a cheaper water supply.

Today environment control norms are harsher on developed countries, most of which have agreed to adhere to the Kyoto norms. It has been accepted that these countries, in their processes of industrialisation, have added substantially to environmental degradation levels and hence need to atone for it. But developing countries, which are getting increasingly more industrialised, also need to shoulder this burden and need to use a blend of taxation and subsidies to address the problem, and thereby probably earn net revenue.