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
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