Why not adopt a green tax framework in budget?
Pollution ignored.
GIVEN the physical and socio-economic parameters, Bangladesh can be regarded as a test case of sustainable development (SD). Our per capita cultivable land and forest are among the lowests in the world. About one-third of our population still lives below poverty line. On the other hand, a consistent economic growth of 5-6% a year during the last two decades and the potential for double-digit growth in near future had and will have gigantic impact on the limited natural resources, such as land, water, forest and fisheries. The challenge of increasing food supply is degrading the soil quality. An increasing number of industries is polluting our water in extreme ways, endangering the public health in the most serious manner. Climate change impacts are likely to pull us back. Thus, both poverty reduction and economic growth will reinforce pressures on efforts towards achieving SD. So, the challenge is huge -- ensuring growth, poverty reduction and environmental sustainability at the same time. Is there any feasible way to achieve these multi-faceted, often conflicting, objectives at the same time? Perhaps there is and a framework is suggested at the end. Pollution managementPollution is the externality that results from both market and policy failures. There are two basic approaches to dealing with pollution: prevent it from reaching the environment or clean it up if it does. Pollution prevention, or input pollution control, is a solution at source. It slows or eliminates the production of pollutants, often by switching to less harmful chemicals, or processes. Natural processes cannot break down non-degradable pollutants. Examples include the toxic elements, such as lead and mercury. The best ways to deal with non-degradable/slowly degradable pollutants are to avoid releasing them into the environment, or at least reduce, by the five Rs of resource use: refuse (don't use), reduce, reuse, recycle and redesign. Pollution cleanup, or output pollution control, involves cleaning up pollutants after they have been produced. However, there are three major problems with relying primarily on pollution cleanup. First, it is often only a temporary bandage as long as population and consumption levels continue to grow without corresponding improvements in pollution control technology. For example, adding catalytic converters to cars reduces air pollution, but increases in the number of cars and the total distance traveled reduce the effectiveness of this cleanup approach. Second, pollution cleanup often removes a pollutant from one part of the environment only to cause pollution in another. We can collect garbage, but it is then either burned (causing air pollution and leaving toxic ash that must be put somewhere), or dumped into streams, lakes, and oceans (causing soil and groundwater pollution). Third, once pollutants enter and become dispersed in the air and water (and in some cases, the soil) at harmful levels, it usually costs too much to reduce them to acceptable concentrations. Both pollution prevention and pollution cleanup are needed, but environmentalists and some economists emphasise on prevention because it works better and is cheaper than cleanup. For widely dispersed and difficult-to-identify non-point pollution, hazardous wastes, and slowly degradable and non-degradable pollutants, pollution prevention is the most effective (perhaps the only) approach. As Benjamin Franklin reminded us long ago, “An ounce of prevention is worth a pound of cure.” Both pollution prevention and pollution cleanup can be encouraged either by the carrot approach of using incentives, such as various subsidies and tax write-offs or by the stick approach of regulations and taxes (based on polluter pays principle). Most analysts believe that a combination of both approaches is probably best, because excessive regulation and too much taxation can incite resistance and cause political backlash. Achieving the right balance is difficult, but such efforts dominate the global debate over environmental policy-making and management. Industrial countries experience
Governments in the industrial countries have applied a number of regulatory, economic and social instruments to influence behaviour of polluting agents, either at production or consumption level. These can generally be categorised as: a) Laws & Regulations, b) Taxes, b) Charges/Fees for use of a specific resource or service, c) Incentives/Subsidy, d) Pollution Trading, and e) Voluntary Agreements. However, majority of governments in the industrial countries levy green taxes that fit into the following categories: a) tax on energy or electricity, b) tax on disposal of waste (Trash tax) and c) tax on transportation. An increasing number of businesses have found that pollution prevention pays. But about 99% of environmental spending in the industrial countries is devoted to pollution cleanup and about 1% only to pollution prevention, a situation that environmental scientists and some economists believe must be reversed at the earliest. Among the developing countries, China is a pioneer in taxing energy and she offers corporate income tax allowance for reducing energy consumption. China also imposes tax on disposal of household and commercial wastes. Experiences of development in the industrial countries have corroborated what is now called the Environmental Kuznet's Curve: an inverted U-shaped curve showing that at the initial stage of economic growth, environmental degradation and pollution levels go up; then after a certain level of income is achieved, say $4000-5000 per capita, it goes down, thanks to investments in natural resource sector and cleanup or cleaner technology. This might have happened at a time, when those countries could freely exploit their former colonies or import materials from them at cut-rate prices. The result obviously is the overuse of the limited global ecological space by one-fifth of the world population. When most of the developing world still depends on natural resources for their economic growth, can they afford to have a policy of growth first and then environmental cleanup? Perhaps not, and a simultaneous achievement of both the goals by the countries of the world is the global challenge today. Suggestion for greening the tax framework
Experience in Bangladesh shows regulatory instruments are not functioning as expected, because of lack of effective enforcement, for many different reasons. But economic instruments -- fiscal or financial -- are more effective, as is evident in other countries. So, Bangladesh may initiate a package of tax reform, to internalise green taxing. The slogan of greening the tax framework should be: “tax bads, not goods.” The idea is to shift the tax burden from value added by labour and capital (something we want more of, i.e., income/profit) to “that to which value is added” -- namely the input/raw materials and its associated depletion and pollution (something we want less of). So, imposing on businesses, what is sometimes called `sin' tax, on environment-harming activities, and promoting environment-friendly behavior through subsidy or tax write-offs may be more effective ways to ensure environmental sustainability and equity. Similar approach may be taken towards consumers/citizens as well. However, this approach should be revenue-neutral, in the sense that those who already pay tax based on slabs set by the government should not be further burdened. This will allow government's revenue generation, without added cost to citizens and businesses, and this approach will promote environmental sustainability as well, direly needed in Bangladesh. On the other hand, the government must pursue a strong drive to bring the large segment of non-tax payers within the system, as is known that only about 11% of our budget comes from the tax revenue. This is way below, compared even to many other developing countries. So, a culture of tax payment by the larger society should be instilled in every tax payable agent. In like manner, to meet the criteria of sustainability, depletion of non-renewable resources, such as natural gas should require comparable development of renewable substitutes for those resources. Economist Hicks or Nobel laureate Solow has emphasised the importance of replacing depleted natural capital by an amount of human-made capital, sufficient to maintain the aggregate social capital non-declining for ensuring sustainability and inter-generational equity. Therefore, a natural capital depletion tax in the form of user-fee (advocated by J.M. Keynes too) would be an efficient instrument to compensate for the depletion of natural gas. This revenue can be put into a newly-established Renewable Energy Fund (REF), aimed at promoting different renewable energy technologies and also human resource development for the purpose. Some time ago, this writer, together with Dr. Mostain Billah, have done a calculation that around $200 million can be generated a year through imposing a user fee (through the application of Hotelling rent) on extraction of our limited natural gas reserves. The proposed REF out of revenues from gas will promote both intra-and-inter-generational equity, as about two-thirds of our population does not have access to electricity, generated mostly by a rapidly depleting resource -- natural gas. But the limited, rapidly depleting gas reserves belong to each and every citizen of Bangladesh. The creation of a new green tax framework is challenging. Realistic environmental objectives in Bangladesh context must be weighed against economic and social considerations. Also, a differential approach of taxing to types of pollutants and production may be taken. For biodegradable pollutants, less tax, but for persistent, non-degradable pollutants, tax rate should be higher. For export-oriented production, too much taxing may lower competitiveness. So, this needs to be taken into consideration. Several organizations including the CPD have already put forward concrete, itemized proposal for tax or incentives for pollution management. It is argued that looking through the lens of this suggested framework will make it easy for application of fiscal and financial instruments to specific activities, inputs and products.
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