Can Central Asian governments do well by doing good?
The only certainties in life are debt and taxes – and the fact that abusing one will enable the government to avoid the other. Even if they don’t particularly want to protect the environment, governments in Central Asia may take an interest in pollution taxes because they raise funds disproportionally from foreign investors and consumers. In the past, Kyrgyzstan and Tajikistan have assumed large public debts as a share of gross domestic product -- 80% in Tajikistan and 99% in Kyrgyzstan in 2001, according to the most recent data available from the World Bank. Both countries have also run public deficits, again expressed as a share of gross domestic product -- 1% in Kyrgyzstan in 2001, and a phenomenal 7% in Tajikistan, in 2004, which was whittled to zero by 2008, according to the World Bank. Such governments may leap at an easy opportunity to reduce their obligations.
Might green taxes provide that opportunity? That remains to be seen. True, green taxes differ from the government’s normal means of raising money – taxing income, savings and consumption – that discourage some economic activity. A payroll tax lowers after-tax returns to the worker of another hour of labor, so it may dissuade him from offering that hour. Substituting pollution taxes for income taxes may raise as much money for the government and encourage work. Pollution taxes may yield a “double dividend.”
Some economists have speculated that tax revenues might increase. People might work more hours, generating output, sales and income – all of them taxable.
Green taxes are slow to catch on. Europe is relaxing its embrace of the double dividend. Its tax revenues from environmental taxes fell from 6.9% in 1995 to 6.4% in 2005, according to the European Environment Agency. However, to control carbon emissions that contribute to global warming, the European Union has adopted a scheme much like the green tax.
Blowing the whistle on penalties
A glance at figures for Central Asia suggests that some countries in the region may also profit by switching to green taxes. Kazakhstan relies heavily on taxing income, profits and capital gains. These sources accounted for nearly half of all its tax revenues, compared to 9 percent in Russia and 4 percent in Tajikistan, in 2004, according to data from the World Bank. Kazakhstan’s taxes may severely penalize work, production and saving.
Uzbekistan may also penalize savings severely. Like Kazakhstan, it taxed individuals in the top income bracket at 20% in 2004, substantially higher than Russia’s top marginal tax rate of 13%, according to the most recent data available from the World Bank. Taxing the top bracket may affect savings disproportionately: The rich save a larger share of their incomes than do the poor, since they can more easily afford material needs. (If subsistence requires $500 a year, then a household earning $500 a year can save nothing; but the household earning $50,000 a year is in happier straits.) Indeed, the top tax rate in Uzbekistan applied to an unusually large share of Uzbeks. The top tax in Kazakhstan fell on individuals earning more than $47,600 a year; in Uzbekistan, the minimum top income was $666, about a third of average income. These burdens may induce savings to flow out of Central Asia and into Russia. And the failure of three countries in Central Asia to provide recent basic data about their top tax rates is not encouraging.
I do not want to exaggerate the benefits to the region of adopting green taxes. With the possible exception of Kyrgyzstan, governments in Central Asia are relatively small to begin with. Their spending shares of the national economy range from 9% in Tajikistan in 2004 to 18% in Kyrgyzstan in 2005, according to World Bank data. (The statistic for Kyrgyzstan reflects ironically on the nation; in the early Nineties, it was supposedly the poster child in Central Asia for market reform.) By comparison, the public share of the economy in the United States – which has had one of the leanest governments in the West – was 16% in 2003. It is unlikely that additional reductions of the government’s role in the economy – by cutting taxes on income, profits and capital gains – can produce benefits comparable to those that arose from the region’s initial transition to market economies.
(Due to self-reporting, the statistics may understate a government’s actual expenditures on goods and services. On the other hand, the estimates of gross domestic product (the size of the economy) ignore the underground economy, which is probably substantial in Central Asia. The overall effect of the two understatements on a government’s share of GDP is uncertain.)
Another factor suggests that the region can gain only modestly from green taxes – the moderate impact of factor taxes on economic growth in other nations. (“Factors” are inputs used in production: Labor, capital, and natural resources.) For tax revenues, the United States relies almost entirely on income, profits and capital gains. Yet this did not prevent an economic expansion that lasted (save for brief recessions in 1991 and 2001) for more than two decades until the financial crisis of 2008.
All this notwithstanding, it may make sense to tax bads rather than goods, particularly when foreigners will pay the bill. -- Leon Taylor, tayloralmaty@gmail.com
Notes
1. The deficit expresses the government’s spending in the current year that it can’t cover with current revenues. The debt expresses the full amount owed; it sums all unpaid deficits to date. The deficit is like the spending that you charge this month to your credit card; the debt is like your total balance remaining to be paid.
2. The measure of government spending includes purchases of goods and services but not capital purchases for defense.
3. Parts of this post draw upon a newspaper article of mine written for the Caspian Digest in 2006.
References
European Environment Agency. EN 32. http://www.eea.europa.eu/data-and-maps/indicators/en32-energy-taxes-1/en32
World Bank. World development indicators. Various years. Online at www.worldbank.org
Saturday, April 9, 2011
Monday, April 4, 2011
The tax is always greener on the other side of the fence
Should Central Asia tax pollution or prohibit it?
You would not have expected economists to enthuse about taxes. But they prefer levies to fines when it comes to protecting the environment.
At present, most countries try to protect their environments by telling polluters to cut back emissions by the same percentage. Suppose that a government targets a 50% reduction in tons of sulfur dioxide (a by-product of generating electricity) released into the atmosphere. This, in fact, was the aim of the 1990 Clean Air Act in the United States.
The typical government would require each power plant to halve emissions by 50%. This strategy, “command-and-control,” ignores variations across firms in the cost of controlling pollution. Some firms can reduce pollution more cheaply than others, and so they should abate more: That way, we can cut emissions by a given amount at a lower cost. The saved money may be spent to create factories and jobs.
A tax on pollution (for example, $2,000 per ton of sulfur dioxide released into the air) would cut the total costs of controlling pollution, because it confronts each polluter with the same cost for emitting another ton. Firms that find pollution control expensive will prefer to pay the tax. Firms that find pollution control cheap will prefer to abate. Thus firms that can abate cheaply will abate the most. If the government wants more cleanup, then it can always raise the tax.
The government can tax pollution – or sell permits to potential polluters that can resell them if they wish. Both policies encourage abatement by the firms that can abate most cheaply. The abater avoids taxes – or resells its permits at profit to polluters that can’t afford to abate.
Defenders of command-and-control often claim that this strategy is simpler and fairer than the “green tax.” Simpler for whom? Certainly not for the managers of a power plant that must install an expensive electrostatic precipitator in order to halve emissions of sulfur dioxide. They may find it simpler just to pay the tax. If command-and-control is simpler for anyone, then it is for the post-Soviet regulator who is accustomed to direct controls.
Is command-and-control fairer than the green tax? It would seem fair to reward the firm that abates more than others -- or that abates more cheaply, since this releases resources for purposes that may benefit society. On both counts, the tax provides greater rewards than command-and-control, because it lets the firm decide how much pollution to eliminate -- thus encouraging abatement by firms that can abate most efficiently.
The most common argument against green taxes roots in a misunderstanding. Command-and-control is said to “prevent” pollution while the tax “permits” it. But a command to each firm to halve emissions of sulfur dioxide is also an implicit permission to pollute half as much as before. In principle, either the tax or command-and-control can achieve a feasible cut in pollution. The choice between the strategies should depend on how each would reach the targeted reduction, not on the target itself.
Our experience with green taxes
By cutting the cost of controlling pollution, green taxes can increase the size of the economy, by freeing up resources for new production. This alone may justify the taxes.
In fact, few governments impose pure green taxes. Gasoline taxes are common; in Europe, they have accounted for up to three-fourths of the price of gasoline, according to CNN/Money. But governments rarely design a gasoline tax simply to reduce air pollution from vehicles. Indeed, it would poorly suit that purpose, since each vehicle typically pays the same tax per gallon regardless of the amount of pollution that it emits. A more typical purpose of the tax is to raise road funds.
Successful green taxes are few and far between. In Japan, a tax on sulfur dioxide pays for a program that compensates victims of pollution, notes Tom Tietenberg. Since its purpose is to raise money rather than to control emissions, the tax is not necessarily set at a rate that would reduce pollution to the optimal level (i.e., the level at which the benefit of abating each ton of sulfur dioxide exceeds the cost of abating that ton). The Swedes have better luck with taxes on another air pollutant, nitrogen oxide. Since they want firms to abate, they set the tax high, Tietenberg writes. They also return the money to the polluters on the basis of their energy production. In effect, a firm is rewarded for polluting little per unit of energy. Swedish emissions of nitrogen oxide have fallen sharply. The Germans also tax pollution (in waste water) sensibly; the tax varies with the amount and toxicity of the pollution, according to Tietenberg.
Successful green taxes in developing countries are harder to identify. South Africa introduced a carbon tax last year, in part to try to limit emissions of greenhouse gases, according to People’s Daily Online. Indonesia and the Philippines have taxed the use of resources and the discharge of wastes. But developing nations competing for foreign investors may step away from green taxes. In 2005, Georgia’s parliament canceled taxes on air and water pollution that had taken effect in 1993. On the other hand, neighboring Armenia has introduced pollution taxes, according to Wikipedia.
Will poor countries adopt green taxes?
Conventional wisdom holds that developing nations are more likely to trade off environmental quality for economic growth than is the West, out of their greater relative difficulty in providing food and shelter. Thus developing nations are less likely than the West to adopt green taxes. They would rather have pollution than starvation. Statistics don’t always bear out this argument: The share of per capita income that is devoted to national government spending on environmental protection is higher in Kazakhstan than in the United States. Nevertheless, economists have amassed statistical evidence for a decade that jibes with the conventional wisdom, for the least developed countries. (Prominent among these studies is a 1995 paper by Grossman and Krueger.)
Studies of many nations at a given time find that, as one shifts attention from a very poor nation to a slightly richer one, pollution levels initially rise. They peak for a low-middle-income nation with an average annual income of $8,000 in the mid-Nineties – which was roughly true of Mexico. Then pollution levels fall for richer nations.
Here is a common explanation: Very poor nations will suffer increasing pollution levels as they industrialize; and, in rich nations, educated voters will increasingly compel the government to control pollution.
This economic “law” has been observed only for some air pollutants. And it has been observed mainly in studies in which one takes a statistical snapshot of many nations at a particular time; little evidence suggests that it holds true for any particular nation over time. Nevertheless, since the nations of Central Asia (except, possibly, for Kazakhstan) are unusually poor, they may tolerate rising levels of pollution for now, in exchange for higher incomes, rather than reduce pollution with green taxes. – Leon Taylor, tayloralmaty@gmail.com
Good reading
Gene M. Grossman and Alan B. Krueger. Economic growth and the environment. Quarterly Journal of Economics 110: 353-77. 1995.
Tom H. Tietenberg. Economic instruments for environmental regulation. Oxford Review of Economic Policy 6: 17-33. Reprinted in Robert N. Stavins, Economics of the environment: Selected readings, New York: W. W. Norton. Fifth edition. 2005.
Tom Tietenberg. Environmental and natural resource economics. Boston: Pearson. Seventh edition. 2006.
References
John Beghin, David Roland-Holst, and Domingo van der Mensbrugge. Trade and the environment in general equilibrium: Evidence from developing countries. Dordrecht, Netherlands: Kluwer Academic. 2002. A chapter discusses Indonesian taxes.
CNN/Money. Gas prices around the world. http://money.cnn.com/pf/features/lists/global_gasprices/
Alan Krupnick, Richard Morgenstern, Carolyn Fischer, Kevin Rolfe, Jose Logarta, and Bing Rufo. Air pollution control policy options for metro Manila. Washington, D.C.: Resources for the Future Discussion Paper 3-30. December 2003. http://www.rff.org/documents/RFF-DP-03-30.pdf
You would not have expected economists to enthuse about taxes. But they prefer levies to fines when it comes to protecting the environment.
At present, most countries try to protect their environments by telling polluters to cut back emissions by the same percentage. Suppose that a government targets a 50% reduction in tons of sulfur dioxide (a by-product of generating electricity) released into the atmosphere. This, in fact, was the aim of the 1990 Clean Air Act in the United States.
The typical government would require each power plant to halve emissions by 50%. This strategy, “command-and-control,” ignores variations across firms in the cost of controlling pollution. Some firms can reduce pollution more cheaply than others, and so they should abate more: That way, we can cut emissions by a given amount at a lower cost. The saved money may be spent to create factories and jobs.
A tax on pollution (for example, $2,000 per ton of sulfur dioxide released into the air) would cut the total costs of controlling pollution, because it confronts each polluter with the same cost for emitting another ton. Firms that find pollution control expensive will prefer to pay the tax. Firms that find pollution control cheap will prefer to abate. Thus firms that can abate cheaply will abate the most. If the government wants more cleanup, then it can always raise the tax.
The government can tax pollution – or sell permits to potential polluters that can resell them if they wish. Both policies encourage abatement by the firms that can abate most cheaply. The abater avoids taxes – or resells its permits at profit to polluters that can’t afford to abate.
Defenders of command-and-control often claim that this strategy is simpler and fairer than the “green tax.” Simpler for whom? Certainly not for the managers of a power plant that must install an expensive electrostatic precipitator in order to halve emissions of sulfur dioxide. They may find it simpler just to pay the tax. If command-and-control is simpler for anyone, then it is for the post-Soviet regulator who is accustomed to direct controls.
Is command-and-control fairer than the green tax? It would seem fair to reward the firm that abates more than others -- or that abates more cheaply, since this releases resources for purposes that may benefit society. On both counts, the tax provides greater rewards than command-and-control, because it lets the firm decide how much pollution to eliminate -- thus encouraging abatement by firms that can abate most efficiently.
The most common argument against green taxes roots in a misunderstanding. Command-and-control is said to “prevent” pollution while the tax “permits” it. But a command to each firm to halve emissions of sulfur dioxide is also an implicit permission to pollute half as much as before. In principle, either the tax or command-and-control can achieve a feasible cut in pollution. The choice between the strategies should depend on how each would reach the targeted reduction, not on the target itself.
Our experience with green taxes
By cutting the cost of controlling pollution, green taxes can increase the size of the economy, by freeing up resources for new production. This alone may justify the taxes.
In fact, few governments impose pure green taxes. Gasoline taxes are common; in Europe, they have accounted for up to three-fourths of the price of gasoline, according to CNN/Money. But governments rarely design a gasoline tax simply to reduce air pollution from vehicles. Indeed, it would poorly suit that purpose, since each vehicle typically pays the same tax per gallon regardless of the amount of pollution that it emits. A more typical purpose of the tax is to raise road funds.
Successful green taxes are few and far between. In Japan, a tax on sulfur dioxide pays for a program that compensates victims of pollution, notes Tom Tietenberg. Since its purpose is to raise money rather than to control emissions, the tax is not necessarily set at a rate that would reduce pollution to the optimal level (i.e., the level at which the benefit of abating each ton of sulfur dioxide exceeds the cost of abating that ton). The Swedes have better luck with taxes on another air pollutant, nitrogen oxide. Since they want firms to abate, they set the tax high, Tietenberg writes. They also return the money to the polluters on the basis of their energy production. In effect, a firm is rewarded for polluting little per unit of energy. Swedish emissions of nitrogen oxide have fallen sharply. The Germans also tax pollution (in waste water) sensibly; the tax varies with the amount and toxicity of the pollution, according to Tietenberg.
Successful green taxes in developing countries are harder to identify. South Africa introduced a carbon tax last year, in part to try to limit emissions of greenhouse gases, according to People’s Daily Online. Indonesia and the Philippines have taxed the use of resources and the discharge of wastes. But developing nations competing for foreign investors may step away from green taxes. In 2005, Georgia’s parliament canceled taxes on air and water pollution that had taken effect in 1993. On the other hand, neighboring Armenia has introduced pollution taxes, according to Wikipedia.
Will poor countries adopt green taxes?
Conventional wisdom holds that developing nations are more likely to trade off environmental quality for economic growth than is the West, out of their greater relative difficulty in providing food and shelter. Thus developing nations are less likely than the West to adopt green taxes. They would rather have pollution than starvation. Statistics don’t always bear out this argument: The share of per capita income that is devoted to national government spending on environmental protection is higher in Kazakhstan than in the United States. Nevertheless, economists have amassed statistical evidence for a decade that jibes with the conventional wisdom, for the least developed countries. (Prominent among these studies is a 1995 paper by Grossman and Krueger.)
Studies of many nations at a given time find that, as one shifts attention from a very poor nation to a slightly richer one, pollution levels initially rise. They peak for a low-middle-income nation with an average annual income of $8,000 in the mid-Nineties – which was roughly true of Mexico. Then pollution levels fall for richer nations.
Here is a common explanation: Very poor nations will suffer increasing pollution levels as they industrialize; and, in rich nations, educated voters will increasingly compel the government to control pollution.
This economic “law” has been observed only for some air pollutants. And it has been observed mainly in studies in which one takes a statistical snapshot of many nations at a particular time; little evidence suggests that it holds true for any particular nation over time. Nevertheless, since the nations of Central Asia (except, possibly, for Kazakhstan) are unusually poor, they may tolerate rising levels of pollution for now, in exchange for higher incomes, rather than reduce pollution with green taxes. – Leon Taylor, tayloralmaty@gmail.com
Good reading
Gene M. Grossman and Alan B. Krueger. Economic growth and the environment. Quarterly Journal of Economics 110: 353-77. 1995.
Tom H. Tietenberg. Economic instruments for environmental regulation. Oxford Review of Economic Policy 6: 17-33. Reprinted in Robert N. Stavins, Economics of the environment: Selected readings, New York: W. W. Norton. Fifth edition. 2005.
Tom Tietenberg. Environmental and natural resource economics. Boston: Pearson. Seventh edition. 2006.
References
John Beghin, David Roland-Holst, and Domingo van der Mensbrugge. Trade and the environment in general equilibrium: Evidence from developing countries. Dordrecht, Netherlands: Kluwer Academic. 2002. A chapter discusses Indonesian taxes.
CNN/Money. Gas prices around the world. http://money.cnn.com/pf/features/lists/global_gasprices/
Alan Krupnick, Richard Morgenstern, Carolyn Fischer, Kevin Rolfe, Jose Logarta, and Bing Rufo. Air pollution control policy options for metro Manila. Washington, D.C.: Resources for the Future Discussion Paper 3-30. December 2003. http://www.rff.org/documents/RFF-DP-03-30.pdf
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