TAXATION FOR ENVIRONMENTAL PROTECTION ppt

Introduction and Overview 1 Fiscal Measures as a Policy Alternative 2 Strengths and Weaknesses of the Direct Regulation Strategy 3 The Marketable Pollution Rights Alternative 5 The R

TAXATION FOR ENVIRONMENTAL PROTECTION

TAXATION FOR ENVIRONMENTAL PROTECTION

A Multinational

Legal Study

Sanford E- Gaines Richard A Westin

EDITORS Asbjorn Eriksson Robert Hertzog John Tiley David Williams Friedrich von Zezschwitz

CO-AUTHORS

Q

Quorum Books NEW YORK • WESTPORT, CONNECTICUT • LONDON

Taxation for environmental protection : a multinational study /

Sanford E Gaines [et al.]

p cm

Includes index

ISBN 0-89930-575-X (alk paper)

1 Environmental impact charges—Law and legislation

2 Taxation—Law and legislation I Gaines, Sanford E

K3585.T38 1991

343.04—dc20

[342.34] 91-10310

British Library Cataloguing in Publication Data is available

Copyright © 1991 by Sanford E Gaines and Richard A Westin

All rights reserved No portion of this book may be

reproduced, by any process or technique, without the

express written consent of the publisher

Library of Congress Catalog Card Number: 91-10310

ISBN: 0-89930-575-X

First published in 1991

Quorum Books, 88 Post Road West, Westport, CT 06881

An imprint of Greenwood Publishing Group, Inc

Printed in the United States of America

©r

The paper used in this book complies with the

Permanent Paper Standard issued by the National

Information Standards Organization (Z39.48-1984)

10 9 8 7 6 5 4 3 2

In order to keep this title in print and available to the academic community, this edition was produced using digital reprint technology in a relatively short print run This would not have been attainable using traditional methods Although the cover has been changed from its original appearance, the text remains the same and all materials and methods used still conform to the highest book-making standards

Contents

PREFACE Vll

1 Introduction and Overview 1

Fiscal Measures as a Policy Alternative 2

Strengths and Weaknesses of the Direct Regulation

Strategy 3 The Marketable Pollution Rights Alternative 5

The Role of Fiscal Measures 6

Terminology 7 Types of Environmental Fiscal Measures 8

Important Considerations in Environmental Tax Policy 10

Regressivity of Environmental Taxes 11

Need for Coherency in Tax Policy 11

Organization of the Studies 12

2 Environmental Fiscal Policy in France 15

Public Funds and the Environment: An Attempted

Definition of an Environmental Fiscal Policy 16

The Diversity of the Public Funds Allocated for

General Considerations Affecting Taxes and

Environmental Protection in German Law and Policy 66

The Existing Tax Law 81

Environmentally Directive Special Taxes and Fees

Environmental Policy and Income Tax Rules 122

Income Tax Rules 126

Fiscal Initiatives 139

5 Environmental Taxes in the United Kingdom 159

The Legislative Authorities 161

General Principles of the Income Tax System and

How They Affect the Environment 167

Provisions that Provide a Tax Benefit, but that Are

Not Slanted to Favor Environmental Issues 172

Preface

This unusual book is the work of academic experts in tax law and environmental law from five industrial countries: France, Germany, Sweden, the United King-dom, and the United States As far as we know, it is the first book in English

on the subject of environmental tax law—and the first book in any language to look at this issue comparatively

The topic may seem esoteric at first blush, but in fact there has been an upsurge

of interest throughout the world in the use of economic and fiscal incentives to reinforce environmental protection policy The authors believe that a comparative perspective on the successes and failures of environmental taxes will be especially valuable as the search expands for new strategies to protect a world environment increasingly perceived to be at risk

The idea for the book originated with an article by the editors in the Boston

College Environmental Affairs Law Review on the subject of the compatibility

of U.S income tax law and U.S environmental policies The article was noted

by the publisher, who invited the preparation of a book on the same general subject The editors and the publisher agreed that a comparative study of the subject would be especially useful to a wide audience

With the exception of an opening chapter on the general theory of using fiscal measures as instruments of environmental policy, the book is organized as a series of country studies Each chapter begins with a description of the particular country's legislative and administrative systems as they relate to tax and envi-ronmental matters and then surveys tax laws and other fiscal measures that may influence environmental control Although we deliberately kept the format of the chapters loose in recognition of the wide variation among the countries, each chapter discusses the compatibility of the country's general tax system with its environmental policies and, most interestingly, describes each country's initia-tives in advancing environmental values by means of the tax system

No author of this book says that modifications of national tax systems (or even international taxes) should be the sole mechanism for the collective control

of national, much less global, environmental problems, but they agree that taxes can operate as powerful mechanisms all the same and will become an enduring device for environmental control Ultimately, worldwide cooperation is likely

to depend on non-tax strategies, such as a multilateral treaty to restrict greenhouse gas emissions Taxes can supplement such treaties, but are no substitute for agreement on environmental objectives and specific rules of conduct to achieve those objectives

Readers ought to know that this book was prepared with very modest financial support In particular, we owe it to our contributing authors to explain our role

as editors Each non-English-speaking author was responsible for translation and participated directly in that process None of them had sophisticated resources available to assist in that demanding task As editors, we reviewed the English versions of the chapters and sought clarifications by telephone or telefax, but

we did not send chapter manuscripts back and forth Consequently, we made a number of editorial changes entirely on our own Moreover, we often modified footnotes to bring them into greater harmony with U.S citation style In this process, our editing no doubt occasionally misconstrued the nuances of the nation's laws; for this we apologize to our authors and solicit the indulgence of our readers for minor misconstructions and departures from stylistic norms

As always, many debts are due for the publication of this book First, we must thank the universities and institutes that provided support for this project The Environmental Liability Law Program at the University of Houston Law Center supported the initial reasearch and provided travel funds for the editors

to meet with the authors in Germany The Environmental Institute at the Liebig University of Giessen, Germany, provided the facilities and meals for the authors' meeting We all owe particular thanks to our collaborator Professor Friedrich von Zezschwitz for arranging the use of Giessen's facilities and for acting as a most gracious host during the three days of our meeting In connection with that meeting, we should also note the unique contribution to our discussions

Justus-of PrJustus-ofessor Oskar Schutzenmeister Justus-of the University Justus-of Jena, although the speed

of German unification rendered moot any consideration of the tax law system

of the former German Democratic Republic Finally, the home universities of our other authors deserve recognition: Cambridge University, the University of London, the University of Umea (Sweden), and the Robert Schuman University

in Strasbourg

We also owe special thanks to our two editors and their staff at Quorum Books for seeing this ungainly project through to completion Finally, the editors would like to recognize the assistance of the Environmental Liability Law Program staff at the University of Houston Diana Huezo at the university has earned a special tip of the hat for her good cheer and diligence

Richard A Westin Sanford E Gaines

TAXATION FOR ENVIRONMENTAL PROTECTION

Chapter I

Introduction and Overview

The nations of the world face a daunting task to slow, and ultimately reverse, the deterioration of the planet's environment Recent scientific assessments of the condition of our air, water, lands, and oceans have laid to rest any reasonable doubt that human activities are causing severe environmental damage Through-out the world, environmental issues are moving to the top of national and in-ternational political agendas As Mexican President Salinas expressed it on World Environment Day, 1990: "If we don't address the issue of global ecology, we won't have to worry about the other issues."

The question remains: Which actions will work best? The search for solutions

is exasperatingly difficult As the World Commission on Environment and velopment concluded: 'The rate of [environmental] change is outstripping the ability of scientific disciplines and our current capabilities to assess and advise

De-It is frustrating the attempts of political and economic institutions, which evolved

in a different, more fragmented world, to adapt and cope."1

Policymakers face a dilemma On the one hand, the gradual deterioration of the global environment is palpable, but scientists remain unsure of the nature or extent of the change or its consequences for humanity On the other hand, people are familiar with their current circumstances, and standards of living for much

of the world's population are better than ever Apprehending environmental danger, but not wanting to disrupt existing social systems, politicians seek legal and administrative strategies that can cause significant changes in behavior with-out unduly impairing economic activity

Several strategies are available.2 Conventional administrative regulation of economic activity through standards based on the best scientific assessments or the best available control technologies has been widely used and refined during the past twenty-five years With considerably less success, legal rules have been

applied to hold enterprises responsible for the damage they have caused to neighboring properties or residents, or even to the environment in general In some circumstances, substantial changes have been brought about by the simple process of collecting information on environmental hazards and making it public Finally, there are numerous economic strategies designed to induce, rather than

to compel, private entities to protect the environment As governments reach the limits of what is achievable through direct regulation and legal sanction, non-legal strategies will assume greater and greater significance

This book is about one class of economic measures that is beginning to receive focused attention as an instrument of environmental policy: fiscal measures such

as taxes, fees, and other government charges or benefits All governments pend, of course, on taxes to finance their national policies As environmental management occupies more of the government's attention and places greater demands on the public treasury, tax policy will inevitably become a factor to consider in the formulation of government environmental policy In our view, there are even more compelling reasons to consider tax and environmental policy together Government tax collections and expenses for environmental protection are both significant cost factors for businesses and individuals Governments will want, at the very least, to be sure that the tax system works in harmony with environmental policy Better yet, if they can harness taxation directly and wisely to promote important environmental objectives, governments can gain even greater economic efficiencies and accelerate the achievement of environ-mental quality improvements

de-Although the use of fiscal measures to promote environmental protection has not yet received the political attention it deserves,3 countries around the world have experimented with some tax and fee systems To draw on this base of experience, this book brings together, for the first time, studies of fiscal measures for environmental protection in five industrial countries: France, Germany, Swe-den, the United Kingdom, and the United States

The remainder of this introductory chapter will present the theoretical dation for using fiscal instruments to promote environmental policy, provide a classification of the major types of instruments, and explore some of the limi-tations and difficulties that may arise in any country in formulating specific environmental tax measures It will conclude with a brief description of the analytical approach to each of the five studies of national fiscal policy

foun-FISCAL MEASURES AS A POLICY ALTERNATIVE

When environmental protection emerged as a significant policy concern in the 1970s, the first response was to try to apply existing laws and systems to en-vironmental problems In the United States and Japan, among others, this meant that lawyers tried to use civil code or common law principles to prevent envi-ronmental damage in specific instances or to force companies to pay money damages for injuries to personal health or property Although many of these

lawsuits were successful and established legal rules that continue to be applied

in cases of clear threat or tangible injury to the environment, policymakers understood that national programs for protection of the environment could not depend on the outcome of individual lawsuits about specific instances of pollution

or other harmful activities New approaches were needed that dealt with ronmental problems more comprehensively

envi-Supporters of the environmental protection movement proposed two basic strategies One strategy, starting with a concept of pollution as releases into the environment beyond the remedial capacity of the natural environment, posits a set of objective environmental quality standards to be achieved through direct controls on polluting sources, such as limits on the amount of sulfur dioxide that

a factory could emit into the atmosphere The system of direct control" regulation followed the familiar pattern of government regulation of other economic activities and was therefore rather easily accepted by politicians, civil servants, and even the regulated industries

"command-and-The second fundamental strategy, articulated by a number of environmental economists, viewed pollution and other damage to the environment as external costs of economic activities that were not properly accounted for in free market decisions and therefore resulted in ''market failures."4 From this economic viewpoint, the preferred solution is to devise various legal and institutional mechanisms to correct the failures of the market so as to force private parties

in the market to internalize into their prices all of the environmental costs of their products Once environmental costs are internalized, free market compe-tition will assure protection of the environment most efficiently A baffling question is whether it is enough to merely price an environmentally destructive product more accurately, or whether the revenues ought to be used to remedy the damage As astute readers of this book will notice, there is no consensus on this issue among the authors

In recent years, fiscal measures have been recognized as one of the primary tools in this economic strategy Because most countries at first heavily relied on direct regulation and only recently have begun to adopt economic measures on

a broad scale, it will be useful to recapitulate the strengths and weaknesses of direct regulation as background for our consideration of fiscal measures for environmental policy

STRENGTHS AND WEAKNESSES OF THE DIRECT

REGULATION STRATEGY

Command-and-control approaches have accomplished major reductions of dustrial pollution and continue to be the central feature of environmental pro-tection programs in free market as well as state-managed economic systems Direct regulation has important strengths that should not be forgotten It estab-lishes an objective standard of environmental quality or pollution-control per-formance that must be achieved in all locations and applies equally to all polluting

in-sources It allows the government to establish general rules, rather than ing to evaluate the individual circumstances of thousands of different cases It tends to insulate the bureaucracy from corruption by severely restricting the scope of administrative discretion From the viewpoint of private firms, direct regulation helps with business planning because it sets fixed rules that do not change frequently, are not subject to local adjustment, and apply equally to all competitors

attempt-Nevertheless, direct regulation has serious limitations It is an inflexible system that generally achieves its results only at the cost of significant economic inef- ficiencies, inequitable competitive effects, and the inhibition of technological development Moreover, direct regulation can be costly to administer and enforce

if there are many polluters Consequently, direct regulation often falls far short

of its intended environmental objective During the last twenty years, for ample, the air quality in the United States has improved in terms of sulfur dioxide and particulate matter, which come primarily from a few thousand industrial facilities, but it has not improved at all in terms of nitrogen oxides and photo- chemical oxidants, which come from countless different sources, including over

ex-100 million automobiles

Command-and-control regulation can distort market competition both within and between market sectors In one respect, direct regulation favors small busi- nesses With a large population of polluters and a small staff of administrators,

it is difficult to force compliance There is a tendency to concentrate enforcement efforts on large polluters and to let the smaller ones go uninspected Voluntary compliance by small polluters is unlikely if they think that non-complying com- petitors will gain an advantage In another respect, however, direct regulation can be exploited by large firms for competitive advantage They can support strict regulations that are more easily achieved by large-scale operations This strategy not only squeezes out smaller companies, but also creates barriers to entry of new, and perhaps innovative, competitors Large companies can also delay investments in pollution control by using their resources to pursue legal rights of adjudication and appeal to resist the regulators 5

Suppression of new pollution control technology is another drawback of direct regulation systems The simplest case occurs when the regulation dictates the kind of equipment the polluter must use Even when the regulation specifies a standard of performance, rather than a particular piece of equipment, the technical complexity of the performance standards and the sanctions for failure to meet them favor the application of known technologies over experimentation with new ones Worse yet, direct regulation cannot easily accommodate radical new technologies, such as the use of alternatives to the gasoline-fueled internal com- bustion engine for automobiles

Perhaps the most serious criticism of command-and-control regulation, ever, is its economic inefficiency Direct regulation reduces the amount of a harmful substance in the environment by forcing each polluter to meet the same standard (e.g., not over 50 milligrams of particulate matter per dry standard

how-cubic meter of exhaust gases) The cost for polluting sources to comply with this standard will typically vary from producer to producer Economic savings result if the producers that can reduce their emissions most cheaply control pollution more than those who can reduce their emissions only at great cost But

it would be extremely expensive to administer such a system of variable emission rates through direct regulation This is where economic strategies come into play One option would be for the government to create a ' 'market" in pollution rights.6 Another option is for the government to apply fiscal measures designed

to act as incentives for environmentally correct behavior This book will focus

on fiscal measures, but the marketable pollution rights approach deserves some consideration as an alternative

THE MARKETABLE POLLUTION RIGHTS ALTERNATIVE

Using the marketable rights strategy for pollution reduction, the government fixes an annual limitation on the amount of a particular pollutant that a group

of sources can produce in a particular region The region can be small (e.g., a portion of a river basin) or large (e.g., the eastern United States), depending on the type of pollutant and the harmful effect to be prevented Once the overall level of pollution has been fixed, the government distributes "rights" to a share

of that pollution on some legal basis, such as current levels of pollution discharge Then the government steps back, and the individual pollution sources are allowed

to buy or sell units of these pollution rights among themselves

To illustrate, a marketable rights system has been enacted to reduce sulfur dioxide (SO2) emissions from electricity generating stations in the eastern United States in order to reduce acid deposition in the United States and Canada The target is to steadily reduce SO2 emissions by 10 million tons per year within ten years Current emissions are about 20 million tons, so the goal is to reduce emissions by 50 percent The marketable rights system begins by granting each source a right to pollute that requires a 50 percent reduction within ten years

If a factory plans to close, it can sell its rights to another source More commonly, sources for which pollution control is expensive will be induced to pay other sources to reduce their pollution by more than 50 percent

If the law allows the sources to trade or sell their permit rights, a market for the rights should develop immediately The sellers will be enterprises that can reduce pollution at a low cost The buyers will be polluters that find buying the right to pollute cheaper than abating the pollution Over the region as a whole, emissions will be reduced by 1 million tons, the legislated annual target The legislature or government administrator cannot, and need not, know in advance what the price of the rights will be The price will depend on the financial and operational circumstances of the existing sources

The results are desirable in a number of respects First, the administrator can force a specific level of pollution abatement that is based on a scientific consensus Second, there is a minimum of government interference with daily business

operations Third, the system is efficient The total cost of abatement is mized; those who find it cheapest to abate will do so first

mini-Several terms are used to describe the various emissions trading systems If the trading of emissions occurs entirely within a large facility, such as a steel

mill or a chemical plant, this is known as a bubble concept That is, all the

emissions from the many different source points at the plant are put inside an imaginary bubble, and the government controls only the total level of emissions from the bubble If two independent sources agree to a trade that allows one to

increase emissions when the other reduces emissions, this is called an emissions

offset The ratio of the offset can vary according to the overall level of desired

pollution reduction; in Los Angeles, the reduction must exceed the increase 2:1

If a source wants to reduce emissions (e.g., by closing part of the facility) and

save its emissions rights, those rights can be put in an emissions bank for its

own use or for sale to others in future years

In spite of its benefits, a marketable pollution rights system is not always the best approach Because pollution control entails long-term capital investment, the market will work well only when the total amount of rights can be held stable for many years If new scientific data require the government to reduce the number of rights unexpectedly, confidence in the market will be undermined There is also some reason to fear that wealthy firms will attempt to manipulate the market or purchase pollution rights simply to prevent competitors from operating Thus, if the amount of acceptable pollution is subject to rapid change,

or if regulation of the market becomes necessary to prevent abuses, public policy would favor a tax, rather than a laissez-faire approach.7

THE ROLE OF FISCAL MEASURES

As we have noted, microeconomists view pollution as a market failure arising out of the tendency of market prices to undervalue the environmental costs associated with producing the good because the producer does not usually pay for polluting the air or water The economists' solution is to increase the price

of the product so that its true costs of production, including costs borne by society

as a whole, are reflected in the price Fiscal measures are the most direct and manageable method of price correction

In theory, fiscal measures should be calibrated to assure that the marginal cost

of pollution control (the capital and operating expenses plus the tax or fee) equals the value of the marginal harm imposed by the last unit of pollution In practice,

of course, this theoretical price cannot be determined because we do not fully understand the degree of environmental harm or its full social costs.8 Economists therefore resort to the next best strategy, which is to fix the tax or fee at a level sufficient to drive the overall level of pollution down to a desired level, below which the polluter would find it more profitable to include the fiscal burden in its cost structure than to not produce the item In many cases, however, the level

of tax or fee that would result from this approach is so high that it is politically

unacceptable To take a current example, most politicians are avoiding a full carbon tax to prevent global warming because such a tax would impose billions

of dollars in price increases on their economies Thus, most countries that use taxes or fees follow a ' 'third best" approach, setting the level of the fiscal price

to assure that there is at least some pollution abatement and coupling fiscal measures with direct regulation and even pollution control subsidies.9 Legisla-tures can enhance this relatively weak approach by assuring that the revenues are used for pollution abatement

Fiscal measures fit the microeconomic model by occupying the gap between the producer's direct costs and the "true" price that includes the full measure

of external costs How the proceeds are spent is irrelevant in the underlying theory of market failure Certainly, however, anyone who functions in the real political world will not be satisfied merely to enjoy the sterile truth that pollution

is occurring at the right price, but will argue that the revenues should be used

to repair or prevent the environmental damage that continues to be tolerated

In short, microeconomic solutions are conceptually appealing, but offer no magic answers because of the difficulty of applying them Nonetheless, their models are important for at least two reasons: (1) they provide a conceptual expression of the problem of environmental hazards, and, (2) the strong con-sensus among economists on the validity of their analyses must be anticipated

in any discussion of environmental policy, especially fiscal measures

TERMINOLOGY

We have used the term fiscal measures thus far as a general term to embrace

a variety of taxes, fees, and other financial measures imposed through government legislation or order and collected by public authorities for public use Before we proceed any further, we need to define fiscal measures more precisely and classify some of the more common varieties that will be mentioned in the chapters on national systems

When we use the term fiscal measure, we mean to include almost every method

by which the government—be it local, regional, or national—establishes the legal requirement of individuals or enterprises to pay a sum of money that ultimately goes to the government or to some public or quasi-public entity We also mean to include those elements of any fiscal measure, such as credits or subsidies, that reduce or rebate the amount of money owed if the paying party takes certain defined actions

The most common fiscal measure is a tax Although there are many different

bases for taxes, such as property, gross income, profit, or value, all taxes are similar in that they are payments made to the government by all persons or businesses that have taxable possessions or transactions Other fiscal measures are similar to taxes, but are legally distinct under various national laws and constitutions For example, a "fee" can be thought of as a payment to the government in return for permission to act in a certain way, such as a fee for

discharging waste water or a fee for putting out garbage for collection Many

other terms are also used; in English, they include charges, levies, duties, and

imposts By whatever name, they nevertheless fit our general definition of fiscal

measures because they are payments to the government for certain actions, transactions, or property ownership

We exclude from the fiscal measures covered in this book only two types of payments to the government One type is the deposit-refund system, in which the government collects a charge on a certain product or material, but refunds that payment once the product is returned or properly disposed of Deposit-refund systems are a powerful tool, particularly to encourage proper recycling

or disposal of consumer products They are sufficiently distinct from taxes or fees, however, that we decided not to cover them in this study The other type

of payment to the government that we will not discuss is the penalty or fine for violation of a legal limit In spite of the obvious intent for penalties to create a economic incentive to comply with the law, we consider them predominantly legal, punitive tools, rather than fiscal measures Similarly, any liability owed

by particular private parties to the government to compensate for environmental damage falls outside our definition of fiscal measures

Although we have given a general definition of fiscal measures here, this book does not follow a standard terminology for the specific measures discussed As noted above, most legal systems employ a variety of common terms, such as

tax, fee, or charge, but these terms have very precise legal meanings within

each legal system and thus differ from one country to the next The separate chapters describe the general institutional and legal structure of fiscal measures

in each country and_define.the terminology used within that country

TYPES OF ENVIRONMENTAL FISCAL MEASURES

Even if terminology is not standardized among the different countries, almost every country uses several basic strategies in designing its fiscal system To help set a general theoretical framework for the five country studies, we describe these basic strategies here in universal terms

Consumption Taxes

Fiscal systems traditionally employ a variety of taxes on forms of consumption for mixed purposes of raising revenue (e.g., motor fuel taxes), adjusting tax equity (e.g., special taxes on large automobiles), or increasing the cost of a particular product in order to reduce consumption (e.g., cigarette taxes) In the name of environmental taxation, many consumption taxes have been proposed, and a few have been adopted Some such taxes are essentially new taxes, such

as taxes on packaging materials In other cases, such as proposed increases in motor fuel taxes, the recent initiatives represent the transformation of the tax

from one designed primarily to raise revenue into one designed in large part to reduce consumer demand for the product in the name of environmental policy

Payments into Trust Funds

A trust fund system imposes a tax or fee on some particular activity, such as the shipment of crude oil in an ocean-going tanker, in order to create a fund dedicated to a related environmental undertaking, such as paying for all cleanup costs and damage from an oil spill The funds go into a separate account that defrays or substitutes for the individual legal liability of one or more taxpayers Trust fund taxes are politically palatable because they are focused on specific environmental risks and do not put the legislature in the position of voting for

a general revenue tax Nevertheless, difficult questions arise in establishing such taxes Which transactions and taxpayers should pay the tax? For example, should shipping companies or cargo owners pay into an oil spill fund? Equally difficult questions concern the appropriate rate of tax to assure that the fund is adequate, but not excessive, and that the sources of risk are appropriately motivated to minimize the damage the fund covers

Pollution Taxes or Fees

This fiscal measure requires payment for the release of pollutants into the environment, usually based on the type of substance and the quantity released The German waste water discharge fee system is one of the oldest and best known examples of this device The Swedish tax on carbon dioxide emissions reflects recent public pressure for such taxes to reduce global climate change

In spite of their theoretical elegance, pollution taxes have not been widely adopted Some of the resistance to them has a legalistic or moral basis, summed

up in the description of such taxes as "licenses to pollute." They also suffer from ambiguity about their purposes and their consequences Are they designed primarily to raise revenue, to encourage polluters to reduce their emissions, or

to "compensate" for the environmental damage caused by the pollution? In the real world, pollution taxes seem to encompass all three objectives The result is that the factors of most interest to potential taxpayers—what pollution will be taxed and what the rate will be—are decided somewhat arbitrarily and tend to express social values, rather than careful economic analysis

Windfall Profit Taxes

These taxes are typically supposed to appropriate profits that a taxpayer earns

as a result of some external factor, such as a sharp increase in the price of the taxpayer's output due to a foreign cartel or legal restrictions on output of the prod-uct The U.S tax on chlorofluorocarbons (CFCs) serves as an example, although

in fact the legislative history of the act does not speak of it in these terms The tax

is based on the expectation that increasingly stringent limits on the amounts duced will increase the price of CFCs because CFC consumers will pay a major premium to buy the remaining stock of CFCs until substitute materials become available The effect of the tax is that the manufacturers who created the environ-mental risk of stratospheric ozone depletion will not profit from the very measures intended to reduce that risk

pro-Income Taxes (and Credits)

In most countries, the income tax on individuals and businesses is the backbone

of public revenues At the same time, most income tax systems are substantially affected by a variety of credits or allowed deductions from taxable income that have been introduced to help shape economic investment and individual behavior Common examples include personal income tax adjustments for the cost of purchasing residential property and business tax adjustments for the extraction

or use of natural resources Even now, most adjustments to the income tax laws have not been written with environmental policies in mind Nevertheless, they should not be neglected in our brief synopsis of the major fiscal measures available

IMPORTANT CONSIDERATIONS IN ENVIRONMENTAL

TAX POLICY

Tax Incentives and the "Polluter Pays" Principle

Fiscal measures can be used to modify behavior through either the "stick"

of taxing undesirable activities more heavily or the "carrot" of tax savings for desirable activities Legislators are understandably more comfortable granting tax subsidies than imposing tax increases Such subsidies may conflict, however, with the "polluter pays" principle

The "polluter pays" principle, first enunciated by the Organization for nomic Cooperation and Development (OECD) and later adopted as official policy

Eco-by the European Community (EC), expresses the central notion of environmental economics that the cost of pollution should be internalized and added to the price

of goods A corollary to the principle is that the public sector should, in most cases, not grant subsidies to polluters because the subsidies defeat the cost-internalization goal All five countries studied in this book are OECD members Their governments must therefore be cautious and meticulous in their use of tax subsidies in order to avoid the charge that their policies violate the "polluter pays" principle.10 It is not always easy to determine just what fiscal measure may be found unacceptable as a subsidy At one extreme, a tax credit has the flavor of a direct subsidy; at the opposite extreme, a grant of exceptionally rapid depreciation for pollution abatement equipment can well be argued to involve

merely the timing of a deduction, as opposed to a grant of permanent tax relief

An even more perplexing question is whether a tax rate reduction should be deemed a subsidy if it reduces the overall tax payment to a level significantly below the normal range for EC or OECD members

REGRESSIVITY OF ENVIRONMENTAL TAXES

A major policy question in any tax system is this: Who ultimately bears the burden of the taxes? To put it simply, does the tax fall disproportionately on the rich or the poor? Most proposals for environmental taxes involve either taxes

on environmentally harmful consumption (e.g., gasoline taxes) or taxes paid by industrial polluters that may be passed on to consumers via higher prices The regressive effect of consumption-based taxes is well known Because poor people spend a higher proportion of their income on consumption of goods than do the wealthy (who usually devote some of their income to savings or non-consumptive expenditures), consumption-based taxes affect the poor disproportionately This will be true of carbon taxes, packaging taxes, and a variety of other "eco-tax" proposals

The distributive effect of taxes paid by polluters is less simple, but is also likely to be somewhat regressive The key variable is how much of the tax will

be passed on to consumers and how much may be borne by shareholders and employees A company's ability to pass its taxes on to the consumer depends

on several factors, such as the price elasticity of demand for the product and the level of competition For example, if there are numerous substitute products that become relatively cheaper as a result of the tax, the producer's owners and employees must bear most or all of the tax If substitutes are not readily available and all competitors are equally affected by the tax, most or all of the tax will

be passed on to consumers if demand is elastic

The studies in this book do not deal extensively with the distributive effect

of the taxes described, nor do they propose remedies for regressive effects Nevertheless, those who may wish to propose taxation as a deliberate instrument

to promote environmental protection must be sensitive to the distributive effects

of their proposals and must be prepared to offer corrective measures consistent with a national policy on tax progressivity One solution is a general tax cut with a progressive impact

NEED FOR COHERENCY IN TAX POLICY

A preliminary study by the editors of this book revealed an almost complete lack of coordination between the income tax system of the United States and its avowed environmental policies.11 Indeed, they often conflict with each other,

so that the incentives for businesses to reduce their taxes may actually aggravate

or perpetuate environmentally harmful practices For example, U.S tax law disproportionately encourages the extraction of toxic minerals, such as mercury

and asbestos, even though U.S environmental law attempts to restrict their release into the environment

The studies in this book shed some light on the degree of coherency in the national policy in five countries From the perspective of promoting environ-mental protection in the most cost effective manner possible, correcting the existing tax structure may be more significant than devising innovative eco-taxes

A full-scale legislative review and reform of these kinds of dissonances is long overdue

In the longer term, the growing importance of environmental affairs clearly demands a stronger institutional coordination between the divisions of govern-ment responsible for tax legislation and those responsible for environmental policy At the very least, governments should assure that proposed tax legislation undergoes formal evaluation of its environmental impact Better still, they should establish meaningful channels of communication between environmental min-istries and finance ministries in order to gain the full effectiveness of coordinated planning and policy-making

A third and perhaps most important area for coherency between tax policy and environmental policy is the objective evaluation of the effectiveness of environmentally oriented fiscal measures Which incentives work? Why or how

do they work? The economic analysis of the real-world effects of tax policy on the behavior of firms and individuals is a difficult task deserving of substantially greater attention from economists than it has so far received It has critical importance in a time when governments are searching for economic incentive systems, including taxes, to promote complex, but urgent, policies that cannot

be effectively administered through central regulation and direction

ORGANIZATION OF THE STUDIES

Each chapter has the same basic organization Each begins with a general description of the governmental and legal structures of the country and explains how environmental taxes germinate in the given institutional medium The second part of each chapter evaluates the coherency of each country's general tax struc-ture with the basic elements of the country's environmental program The third and generally central part of each chapter describes the fiscal measures already adopted as part of the overall environmental protection strategy—and sometimes selective proposals for change Where data or studies are available, the descrip-tion is accompanied by an evaluation of the effectiveness of the fiscal measure from the environmental policy point of view Unfortunately, there has been little effort to follow up on the initiatives with empirical studies to see if these ex-periments are working As lawyers, the authors are not themselves well qualified

to correct this deficiency We implore our economist colleagues to come to our assistance

The book is not a strict comparative study For example, the authors make

no effort to identify fiscal measures used in one country that are applicable to

other countries Rather, each chapter focuses on aspects of the fiscal legislation

in that country that are significant to national policy We invite our readers to draw their own conclusions about which mechanisms are the best and which legislation is the most enlightened We will have accomplished our objective if

we have inspired others to consider and to formulate the use of fiscal measures

in general as an integral part of public policy to protect the environment

NOTES

1 World Commission on Environment and Development, OUR COMMON FUTURE

237 (1987)

2 There are many different ways to catalog the available environmental strategies

In one recent report to the U.S Environmental Protection Agency, a group of experts identified six basic strategies: " 1) scientific research and technical innovation; 2) provision

of information; 3) market incentives; 4) conventional regulatory standards; 5) enhanced enforcement; and 6) cooperation with other agencies and nations." Science Advisory Board, U.S Environmental Protection Agency, THE REPORT OF THE STRATEGIC OPTIONS SUBCOMMITTEE, RELATIVE RISK REDUCTION PROJECT, SAB-EC-90-021C, at 5 (1990)

3 Since late 1989 when we started this book, environmental taxes have begun to receive more careful consideration In March 1990, the House Appropriations Committee

of the U.S Congress held the first hearings on this subject In August 1990, the Taxation Committee of the Organization for Economic Cooperation and Development (OECD) had the subject on its meeting agenda In September 1990, the European Community Com- mission released a background study on economic and fiscal instruments in environmental policy and made proposals for European Community policy in this area

4 E.g., W Baumol & W Oates, THE THEORY OF ENVIRONMENTAL POLICY (2d ed

1988); A Freeman, R Haveman & A Kneese, THE ECONOMICS OF ENVIRONMENTAL QUALITY (1973)

5 See S Breyer, REGULATION AND ITS REFORM 270, (1982)

6 For an early description of a marketable permit system, see J Dales, POLLUTION, PROPERTY, AND PRICES (1968)

7 See A Fredlaender, APPROACHES TO CONTROLLING AIR POLLUTION 199 (1982);

Spence & Weitzman, Regulatory Strategies for Pollution Control, in Fredlaender,

CON-TROLLING AIR POLLUTION 191

8 Some of the difficulties stem from poor scientific understanding of the mental "costs" and the diffuse nature and slow emergence of these costs Although economics can, in theory, fully account for environmental effects, significant methodo- logical impediments exist For example, in Science Advisory Board, U.S Environmental Protection Agency, REDUCING RISK, APPENDIX A: THE REPORT OF THE ECOLOGY AND WELFARE SUBCOMMITTEE (1990), the subcommittee devoted a whole chapter to a critique

environ-of standard economic analysis environ-of ecological effects The report questioned the use environ-of discount rates for future effects, criticized the use of the "willingness to pay" measure

of ecological values, and noted that ecological multiplier effects need to be counted in

any economic quantification Id at 28-36

9 OECD, Issue Paper: Economic Instruments: Alternatives or Supplements to ulations?, in ENVIRONMENT AND ECONOMICS 190 (1985)

Reg-10 Note, however, that in practice the members of the EC and other countries tolerate and use tax subsidies without significant challenge

11 Westin & Gaines, The Relationship of Federal Income Taxes to Toxic Waste: A

Selective Study, 16 B.C ENV AFF L REV 753 (1989)

atten-in France there was already familiarity with the work of the Organization for Economic Cooperation and Development (OECD) on the "polluter pays" principle 2 and that economists had shown the potential advantages of recourse

to the known tools of economic policy, alongside and complementary to lation 3 However, it remains true that it is only since 1989-90, with the success

regu-of the Green party in the local elections regu-of March 1989, that the zeal regu-of the other political parties for the environment has been stimulated, that a wide- ranging debate has developed, and that plans for a general tax for the environment have been brought back on the drawing board 4

Fiscal measures relating to the environment are already quite developed in France We can identify a considerable number of taxes, often long established, addressing a great variety of the issues They play an essential role in dealing with water and waste and are used against industrial plants responsible for atmospheric and other forms of pollution If the public authorities have not acted

on the basis of precisely formulated doctrine, they have advanced pragmatically, making public funds available accordingly as they have set up new agencies responsible for water preservation (1964), waste elimination (1975), and air quality (1980), or have intervened in new areas (such as pollution around airports

in 1973) It is possible, as of now, to draw some lessons from the functioning

of these agencies If they have not all been a success, some of them are still unquestionably worthy of being retained, and perhaps even of being copied

PUBLIC FUNDS AND THE ENVIRONMENT: AN

ATTEMPTED DEFINITION OF AN ENVIRONMENTAL

FISCAL POLICY

The early, essentially economic conceptions of an environmental fiscal policy stuck to a fairly narrow definition Only taxes whose revenue was directly in-tended for use in the fight against pollution—that is, taxes that by their nature and by the basis used for their calculation were directly linked to a particular activity or phenomenon deemed to be detrimental to the environment and that were supposed to affect the behavior of the economic agents, redirecting it so

as to be more in harmony with ecology—were judged to merit such an lation Environmental taxation thus stood out from overall fiscal policy both because of technical reasons (the basis used for its calculation was not a monetary quantity, but a specific measure representing a particular degree of pollution) and because its aim was interventionist, rather than financial This does not correspond to the theory of the "polluter pays*' principle as outlined in the 1972 recommendations of the OECD, which stipulate merely that the polluter must

appel-be made to appel-bear the costs incurred by the public authorities in fighting the pollution If behind this position we can identify the theory of externalities and the will to integrate the social costs of the pollution into the production costs of the goods generating the pollution, we still cannot point to a requirement for any rigorous estimation of costs Such a narrow definition has not appeared to

us to be pertinent either for analyzing the French situation or for affording the instruments needed by political decision makers

Fiscal policy for the environment, a branch of fiscal law, can have no basis other than that given to environmental law itself.5 The environment has no reality

in itself; it is a legal notion that has a variable content Article 14 of the July

10, 1976 Protection of Nature Act stated the objectives of environmental islation in the following terms:

leg-The protection of landscape and natural habitat, the preservation of the different species

of flora and fauna, the maintenance of the biological equilibrium to which this legislation contributes, the protection of natural resources against the different causes of deterioration which threaten them, all these are aims upholding the general interest

However, not all of the provisions dealing with the areas mentioned here are part of environmental legislation We could not contend that the regulations governing maritime or inland waterways navigation form part of environmental law because they concern the utilization of water or that the legislation concerning town planning is essentially an aspect of environmental law because it is an instance of the utilization of space The environment, in law, exists only as a

concept whose utility is functional Legislation pertaining to the environment has as its specific object the protection and management of certain collective goods held to be useful to human life The function of environmental law is therefore the achievement of a policy that will ensure the preservation and the management of ecosystems, of living organisms and resources The environment cannot have any legal status apart from a reference to human activities and to the relations between humans and the world that surrounds them This body of law is therefore intended to enable the public authorities to intervene to modify human behavior relative to what is deemed to be part of the public good, whose optimum use is not guaranteed through the laws of the market and through the spontaneous attitudes of producers and consumers As a consequence, the notion

of environmental fiscal measures will cover all forms of taxation that contribute

to the above-mentioned finality and that are the instruments of a policy aiming

to preserve the totality of public goods that law regards, at a given moment in time, as "the environment."

The indicators pointing to such a use of taxation will most likely be discernible

in the regulating principles of the tax The first of these principles is the allocation

of the revenue of the tax Any tax that is funding the budget of an agency specifically charged with the protection of the environment or that, within the budget of a general-purpose public authority, is intended to cover expenditures arising out of such duties is to be regarded as an environmental fiscal measure

In this first category we may, for example, include the license fees collected by the Financial Agency of a River Catchment-Area or the tax collected by the Clean Air Agency; the second category will include taxes and fees levied by local authorities for the removal and disposal of waste and taxes raised by the state to offset the costs of carrying out checks on potentially dangerous plants Alongside this financial and budgetary objective, a further indicator is the interventionist spirit of the tax The tax is intended, both through its existence and/or through the amount due, to affect the behavior of economic agents, dissuading them from engaging in a pollution-generating form of activity by inciting them to opt for activities respectful of the environment or by granting compensation to those who have suffered environmentally undesirable effects This interventionist aim is generally stated by the public authorities, but it must also be given formulation in the regulating principles of the tax Thus, we may remark that environmental fiscal measures will frequently present a certain num- ber of traits that are little used in or that depart from the general principles of the fiscal code Thus, the basis of calculation for the tax can be a physical value

or unit, and not a monetary unit, that is estimated according to the quantity or level of pollution (a quantity of sulfur monoxide or carbon monoxide, the volume

of waste, etc) It is this quantity or degree that will enable the calculation of the amount due Similarly, when a fiscal advantage is granted specifically for plants reducing levels of toxic discharge, we will not hesitate to speak about environ- mental fiscal measures

The two purposes of environmental fiscal measures—the budgetary function

of covering expenses relating to environmental protection and the interventionist function of influencing the behavior of consumers or producers in relation to the environment—often exist concomitantly and as mutually supportive aims The financial system putting into practice the "polluter pays" principle is an excellent example of this To restrict environmental fiscal policy to tax measures that fulfill these two purposes is, however, to our mind to adopt a very reductive and unproductive view on the question

The proposed definition that environmental taxation is to support any ronmental protection policy can involve difficulties concerning its application Certain taxes have their product allocated for a variety of uses, not all of which operate in the interests of the environment, with the result that the qualification

envi-of a particular tax as environmental may give rise to discussion The criterion adopted (financing environmental policies, influencing pollution producers, or compensating victims) does enable us to make the evaluation clearly Thus, the sum due to a local authority when a real estate developer exceeds a certain ratio between the constructed surface area and the overall area of the plot or erects a building whose height exceeds the prevailing norms could be used by local authorities to create parks and playgrounds, but it could also serve to finance local housing authority schemes or the restoration of run-down buildings As a result, the tax functions less as an instrument of environmental policy than as

an instrument of town-planning policy The 1983 statutory budget guidelines eliminated the possibility of making such allocations Similarly, the tax on temporary residences levied by the local authorities in certain tourist resorts could be integrated into the overall investment budget of the authority (for parks, refurbishment of amenities, etc.), but it could also be used to promote tourism

or to solve problems related to road traffic As such, it operates merely as a supplementary source of revenue in the local budget

THE DIVERSITY OF THE PUBLIC FUNDS ALLOCATED

FOR ENVIRONMENTAL POLICIES

We must not limit our attention to environmental fiscal measures If we wish

to give a complete and realistic picture of existing law, we must go beyond the notion of taxation and consider the total panoply of public revenue measures, all of which can potentially be used as part of environmental policy The public authorities often have the choice between different funds that vary only in terms

of their particular regulating principle within the fiscal code, and not in any substantive ways Each country has in this area its particular, more or less arbitrary system of classifications

Let us first examine the general fiscal system, made up of taxes instituted by

the legislative assemblies, usually in line with the proposals of the government,

by virtue of article 34 of the constitution which empowers the Parliament to establish all forms of taxation and to fix their regulating principles These prin-ciples are governed by the General Code of Taxes (Code General des Impots

[CGI]), and the taxes are administered by the General Department of Taxes with its external services, the regional and the departmental (the traditional French unit of state administration) offices, along with local tax offices, or else by the General Service of Customs and Indirect Duties The Ministry of Finance has shown scant enthusiasm about the use of the fiscal instrument for the environment

A strong awareness of ecology is something alien to the outlook of its top officials Furthermore, this ministry has generally manisfested hostility toward taxes spe- cifically levied in favor of autonomous agencies outside its control It loathes tax abatements, which complicate legislation and reduce revenue, and only re- signs itself to such an eventuality if subject to particularly strong political pres- sure Until now, such pressure did not exist in relation to the environment or, when it did, immediately came up against a strong and even better organized opposition Faced with the Ministry of Finance, the Ministry of the Environment has neither the political clout nor the bureaucratic influence within the central administration to enable it to impose its plans

The major national taxes—the value-added tax (VAT), income tax, corporate tax, capital gains tax, wealth tax, and death duties—cannot easily be used in favor of the environment By virtue of a fundamental principle of French fiscal law, these taxes cannot be allocated to specifically designated expenditures VAT is subject to the directives of the European Economic Community con- cerning the harmonization of taxes on turnover This leaves little latitude to the legislatures in the different member states It is true that there has been a proposal

to modulate the rate of the VAT on certain products according to the degree of their harmfulness to the environment, as, for example, in the case of agricultural fertilizers But in addition to the stated opposition of the agricultural lobby to such an initiative, the effectiveness of such measures is by no means certain because of the very mechanics of the VAT This is so because the VAT borne

by production costs can be deducted from the VAT that is then recouped on sales, a system that effectively neutralizes any surtax levied on fertilizers Income taxes and taxes on corporate profits are also little used for environ- mental purposes The fundamental principles of these taxes allow one to deduct, under the heading of overhead or amortizements, expenses incurred by companies attempting to reduce environmental nuisance factors, whether through research costs, capital expenditures, or expenses for payroll or supplies This can account for a considerable sum in certain sectors of industry such as chemicals, petro- chemicals, and heavy metals The General Tax Code (CGI) affords companies the right to a special amortizement for constructing or financing plants intended either to treat industrial waste water, in accordance with the December 16, 1964 Water Act (art 39, E of the CGI), or to deal with atmospheric pollution and smells (art 39, F of the CGI) When construction of such a plant is completed, the company is entitled to proceed with a special 100 percent amortizement of the cost These provisions are of a temporary nature, but have each time been re-enacted on the expiration of the period of validity fixed by law Expenses intended to save energy and raw materials also receive advantageous treatment

Energy-saving equipment included in the list drawn up by the Ministry of Finance and by the Industry Ministry can be amortized in line with the mechanism of decreasing amortizement, with rates that are above the normal amortizement rates (art 30AA, 2 of the CGI) The measure essentially covers equipment intended to recover energy, systems enabling the combined production of heat and power, fuel-consuming appliances and systems with improved energy yields, and technologies harnassing or using energy sources other than electricity and fossil fuels The same benefits are granted for equipment used in energy-saving initiatives that comply with state standards Initiatives of this nature have, fur-thermore, benefited from the financial aid of the state within the framework of the provisions for aid in the financing of energy-saving investments Finally, equipment intended to save raw materials that are listed by the Ministries of Finance and Industry (metals, basic chemicals, wood and its by products, textiles and leathers, plastics, and rubber) also benefit from the provisions of these measures (art 39AA, 3 of the CGI)

That these last measures are to be considered elements of general economic policy is borne out by the conditions attached to the last-mentioned advantage:

"the benefit of this provision is reserved for equipment used in operations which allow for the economizing of raw materials, thus contributing to the equilibrium

of the balance of payments." This is one of the instances where the interests of the economy and those of the environment clearly coincide However, in France,

as in all Western countries, concern for saving energy and recycling waned considerably in the mid-eighties with the sharp fall in the price of oil The 1991 budgetary legislation marks a return to these concerns and envisages various incentives

Taxes on income or on corporate profits can also be allocated for the ronment by granting deductions for gifts made to associations and public interest organizations, such as associations for the protection of the environment, or by sponsoring initiatives in favor of the environment We shall give some examples

envi-of these below However, we must emphasize that all this is quite marginal The one national tax that could be oriented toward environmental ends is the domestic tax on petroleum products, which realized about 131 billion francs in

1990 This revenue is constantly increasing, both through inflation and through the steady demand for petroleum products But even if that tax constitutes an extremely large part of the final cost of oil products, and especially of the cost

of petrol for motor vehicles, this does not amount to an environmental policy tool It is simply a convenience for the national budget, which can thus generate revenue that is both abundant and easy to collect Insofar as there has been a specific policy in relation to these products from the mid-seventies onward, it has been purely for economic reasons and has been aimed at limiting imports and their effects on the balance of payments Yet the public authorities have consented to a slight effort by attenuating the tax on lead-free petrol, which, thanks to this modest tax reduction, has a selling price that is about forty centimes per liter below the price of high-grade petrol

Taxes that serve to finance the local authorities (the commune, which, whether urban or rural, is the smallest French territorial administrative unit; the departe-

ment; and the region) are also little used for environmental purposes, even though

they could potentially be more actively used for these ends.6

Communes, the districts made up of groups of adjacent communes, ments, and regions have at their disposal four different taxes for which each local authority votes a rate These taxes are added together, thus enabling the calculation of the amount due by each taxpayer About half the revenue is generated by a company tax payable by businesses and by the self-employed, other than farmers Its basis for evaluation consists of 18 percent of the payroll bill paid out by the firm in the second year prior to the fiscal year in question,

departe-or, alternatively, for some small taxpayers, the base consists of one-tenth of the professional income To this must be added an amount calculated as approxi-mately one-sixth of fixed capital asset value (company equipment and machines),

a sum that is supposed to represent the income they are able to generate This tax could be adapted toward environmental ends by levying a surtax on polluting companies and by enabling companies to deduct and to offset, for the calculation of the basis on which one is liable for taxation, that portion of the plant that is used for depollution or that is beneficial to the environment The law grants a further one-third abatement of the taxable base for plants used to treat industrial waste water and to fight atmospheric pollution and smells when the plant in question already qualifies for the special amortizement allowed in the GTC, referred to above Nuclear power plants and airports are entitled to this one-third abatement since their particularly high cost would have produced

a disproportionate taxable base The reduction in annual payments that results from this mechanism can be calculated at between 1 and 2.5 percent of the cost Its effect is thus far more marginal than the special 100 percent amortizement

We should note, nonetheless, that whereas this last-mentioned measure is fective only if the firm makes a profit, the reduction in local tax affects the actual costs borne by the firm and is of a permanent nature

ef-The local company tax operates according to a logic that is in essence rather antienvironmental since local authorities are anxious to attract to their area com-panies that, through their payment of taxes, will benefit the local budget Local authorities thus put forth greater effort to set up an industrial estate than to preserve an undeveloped natural expanse Local representatives have frequently supported the setting up in their area of plants that are reputed to be harmful to the environment, and sometimes even to public health, and that have been vigorously opposed by environmental associations The success of the program for the construction of nuclear power plants has been due to cooperation between the highly centralized policy conducted by the French Electricity Authority (EDF), which enjoys the unflinching support of the Ministry of Industry and of the local political milieu, which has agreed to the setting up of energy plants that are a major source of local fiscal revenue The system has been perfected

thanks to the mechanism known as local company tax adjustment, through which

the local authority area in which the plant is actually set up receives only the statutory maximum amount of tax, while the remainder is distributed among the adjacent local authorities liable to suffer undesirable neighborhood effects and disadvantages as a result of the existence of the plant

A habitation tax is payable by all persons and organizations that occupy property for residential purposes, whether as owner-occupiers or as tenants The taxable basis is supposed to represent the income potentially generated by the building and is calculated by the local taxation office according to a series of particularly complex mechanisms Assessment takes account of the surface area

of the dwelling, its quality, its state of upkeep, the existence or not of the usual modern conveniences, and also its location This last item, which can affect the taxable basis by as much as 40 percent, takes into account the existence of communal amenities, transport, and shops and the quality of the neighborhood,

as well as the existence of clear, open areas surrounding the dwelling, the quality

of the view, access to sunshine, and the presence or not of environmental nuisances

The July 30, 1990 Act, which generally revised the mode of assessment of property used in the evaluation of direct local taxes, modifies the general prin- ciples of calculation Article 4 allows for augmenting the taxable base by a factor

of 1.1 or 1.15, or alternately for reducing the taxable base by a factor of 0.85

or 0.9, to take into account the particular situation of the property within the area where it is assessed—that is, within a group of communes or within part

of a commune deemed to be part of a uniform local market for property leasing The maximum band of variation is thus 30 percent It is hoped that, unlike what

has prevailed in the past, the fiscal administration will pay attention to this

indicator and revise it periodically to take into account changes that may intervene

in the environment of a particular property

Thus, a good-quality environment increases the taxable base, whereas ronmental deterioration decreases it This state of things is not the expression

envi-of a policy, but merely the consequence envi-of fiscal realism: A building located in

a very pleasant area has a higher value, and its tenants are usually people who are better off than those who live in a run-down neighborhood The effect of these measures is ambivalent If they do offer fiscal compensation, in the form

of a tax reduction, to people living in an unappealing environment, they also

"penalize" those living in a preserved environment

The developed land tax has, in the case of residential property, the same fiscal basis as the habitation tax, the difference being that the former is payable by the real estate proprietor The remarks made above therefore apply to this tax also In the case of buildings serving a commercial or industrial purpose, the base for taxation is identical to that adopted for the local company tax The developed land tax could be used much more actively to support environmental policies since its effects are precisely those that result from the mode of evaluation

of the taxable base—effects that, for the moment, are modest We may add that since the January 10, 1980 law modifying direct local taxation, the communes

may tax pylons carrying power lines when the voltage exceeds 200 kilo volts The amount of this tax is revised annually in proportion to the variation in the revenue of the developed land tax realized nationwide This measure compensates communes for the undesirable effects of the passage of high-voltage wires The revenue is not specifically allocated for environmental protection initiatives, but rather is added to the general budget of the commune Parliament has thus acceded

to a demand of local representatives, while at the same time involving them financially in the matter of the passage of high-voltage lines and thus defusing hostility toward the exorbitant right of the EDF to install its power lines wherever

it wishes

The non-developed land tax is the local tax having the most complex tionship with the environment.7 Its taxable base is a value calculated by the tax administration, which is supposed to represent the income that the proprietor may earn from the land in one year Prior to the above-mentioned July 30, 1990 law, land was classified into thirteen groups, which could then be further divided into subgroups, in order to take account of the various uses to which land might

rela-be put The 1990 law makes a slight modification in the regulating principles

of the tax and stipulates that assessment is to be made by applying a rate to the surface area and by taking account of the classification of the land into one of seven groups, which have further subgroups The first group comprises arable

or pasture land; the second, lakes, ponds, and all other water-covered areas; the third, vineyards; the fourth, land used for fruit growing; the fifth, wooded areas; the sixth, roads and other lands belonging to commercial or industrial plants; and seventh, all other grounds This tax is largely used as an instrument of interventionist policy for economic purposes, whereas the legislature and the fiscal administration are indifferent to the ecological interest of the different classes of land Article 1395 of the CGI exonerates the following categories of

land from the tax:

• lands sown, planted, or replanted for trees during the first thirty years

• reclaimed marshes during the first twenty years after reclamation

• lands uncultivated or lying fallow for fifteen years that are planted with fruit trees or are used for crops during the first ten years after clearing or plantation

The effects of these provisions are perverse Land that is left in its primitive natural state, and that therefore produces no revenue, is nonetheless assessed as having a certain value The owner is liable for payment of an annual tax, which, however modest, will appear heavy to the owner who must acquit it The owner

is therefore inexorably drawn to cultivate the land, or to have it cultivated, since

he will then be entitled to long-term tax exoneration and, naturally, to the income

it will generate The phenomenon has been clearly analyzed in a study that shows that even forestation is not necessarily in the interest of the environment insofar

as proprietors tend to choose tree varieties for their economic yield, rather than for their ecological interest.8

The fiscal administration accentuates this built-in indifference of the tax to the ecological conditions of the development of rural areas Its records carry a large percentage of errors, which means that its fiscal classifications do not correspond to the actual uses of the soil Notification about changes in the nature

of the plants grown is to a considerable degree affected by fraud and is poorly checked, thus leading to a reduction in the tax revenue Income available to the proprietor is correspondingly improved It has been demonstrated that an increase

in the land area farmed or cultivated results in a drop in the proprietor's tax burden He clearly has an incentive to put the maximum area of his lands into cultivation

But the same study, paradoxically, shows that farmers are, for the most part, unresponsive to the fiscal aspect of the management of rural areas, despite their customary protests about a tax system judged to be excessive No doubt the explanation for this lies in the fact that the very mechanism of the tax is not widely known and is not perceived by the taxpayer as a factor that he can integrate into his strategy Furthermore, the amount due is never objectively very onerous and is thus regarded as one operating cost among many Whatever else we may say about what is a fairly confused situation, there is one certainty: The land tax is not used for environmental purposes, and its incentive is to maximize cultivation of land, rather than to adopt a "softer'' approach

This brief overview of the general tax system shows that it either is not technically adapted to the requirements of an environmentalist policy or mis-apprehends such a policy to the point of producing environmentally undesirable consequences

Can we then say that the solution resides in specific taxes? The environmental

fiscal system is made up primarily of taxes that have a specific purpose, and whose underlying principles are often in derogation of general fiscal principles Its essential goal is the financing of a particular service whose duties are the task of environmental protection or management, the fight against what is en-vironmentally detrimental, and compensation for the latter's effects The nec-essary resources must be found Instead of diverting a part of general tax revenue,

it has been deemed more convenient to establish new taxes which, through their mode of assessment and collection, are adapted to their environmental objectives While some of these specific taxes respect principles close to those of general

taxation, many obey a logic that is sui generis, often a marked exception to the

general code

In the first category, which is numerically less important, we may place taxes that abide by general fiscal principles as laid out in the General Tax Code and

that are subject to the provisions of the Book of Fiscal Procedure, which spells

out the former These taxes are instituted by law, which lays down their main rules; the government may further specify rules either by decree or by ministerial order They are put into application by the fiscal administration, no matter what territorial authority may be their beneficiary, and all disputes concerning them

are to be settled in accordance with the general regulations concerning fiscal

contentions laid down in the Book of Fiscal Procedures

The most representative example of this category is the domestic disposal tax It can be instituted by either one commune or a group of communes whenever they are collectively responsible for waste disposal The tax is payable

waste-on all property subject to the developed land tax and is calculated according to the potential net income used as the basis for the calculation of the developed land tax The rules governing its administration and any disputes concerning it are those of the developed land tax (arts 1520 to 1526 of the CGI)

We may also mention the tax on forest clearance regulated by the CGI (arts

1011, 1723 ter A, 1840 N quinquies) and the Rural Code (arts L 314-1 to L 314-14) It already involves certain particularities insofar as the declarations are registered by the agricultural administration of the departement, though the tax

is collected by the commissioners of the General Tax Office

The number of sui generis taxes is quite considerable Some analysts regard

them as quasi-fiscal taxes in order to distinguish them from the above-mentioned taxes and from the parafiscal taxes we shall deal with below Their common feature is that they are in fact taxes, and, as such, they require a decision of the Parliament However, Parliament defines their governing principles without ref- erence to those of the CGI, usually because management of these taxes is con- ferred on a specific agency, and not the normal fiscal administration of the state The regulating principles are in each instance particular to the tax in question since the legislator deems himself to be at liberty in his choices We shall examine

a few examples below, among which we may cite license fees to cover charges for the verification of nuclear plants, taxes payable by plants subject to envi- ronmental protection monitoring, pollution license fees levied by catchment authorities, and fees for the protection of sensitive nature areas These taxes have in common the fact of having been devised essentially to generate funds for the financing of specific actions, rather than to have an intentional interven- tionist effect on the behavior of economic agents

Finally, the third category is made up of parafiscal taxes, a notion specific to French fiscal law 9 Article 4 of the January 2, 1959 Act, which outlines the framework of budgetary legislation, defines them as taxes levied for either eco- nomic or social ends to benefit an organization of private law or an industrial and commercial public agency that is instituted for a specific purpose (in contrast with the general-purpose nature of the territorial authorities) and whose financial and accounting structure reproduces that of private companies These agencies are, furthermore, to a large degree subject to private law, rather than to the law regulating public bodies

Jurisprudence, whether of the Conseil Constitutionnel or of the Conseil d'Etat—which is the supreme jurisdictive body of administrative law—has in-

terpreted the notion of economic or social interest in a fairly broad sense, by

including within it objectives of culture and professional training 10 The 1959

law sets out a minimum of guidelines: Parafiscal taxes are established through

a decree of the prime minister, who has authority to fix their regulating principles Their collection beyond December 31 of the year of their institution requires their registration on a list that is attached as a supplement to the budgetary provisions act, thus guaranteeing a degree of parliamentary control

The government has itself further specified the status of these taxes by a decree

of October 30, 1980, whose main innovation is to set a five-year limit on the validity of a new tax; beyond this, a clear decision to renew the measure is required The chief interest of these taxes is the fact that they can be instituted

by decision of the government, which lays down not only their regulating ciples, but also the detailed conditions governing the use of the funds raised This is often the result of a compromise arrived at between the state and those representing economic or social interests The decree through which a parafiscal tax is set up has therefore an objective going beyond the mere creation of a new source of revenue: It often comprises the essential financial basis and status of

prin-an interventionist body, whose mode of operation has resulted from negotiations between the public authorities and the socioeconomic group concerned These possibilities have been used in the pursuit of environmental policies

A first parafiscal tax was set up in 1973 for the benefit of the public authority constituted as Paris Airport The levy created was intended to cover the various expenses incurred in the fight to reduce noise levels around the airports of the Paris region It was abolished in circumstances we shall detail further on Sim-ilarly, since the end of the 1970s, the National Agency for the Recovery and the Elimination of Waste levies a parafiscal tax whose regulating principles were several times subsequently modified in order to finance the disposal of waste oils A decree of June 7, 1985, which was renewed in 1990, set up a parafiscal tax on atmospheric pollution levied by the Clean Air Agency; the resulting revenue is used mostly to subsidize pollution-prevention investments intended

to reduce the pollution levels of firms emitting large quantities of sulfuric oxide Numerous proposals for the establishment of such parafiscal taxes, on pack-aging notably, have not materialized (report by Michel Barnier, parliamentary representative, "Green Plan" of Environment Minister B Lalonde in note 4)

It is true that the Ministry of Finance is not very favorable to this form of taxation; its administration for the most part escapes the control of its services, and it confers on the agencies to which its product is allocated a considerable degree of autonomy, despite the numerous controls to which they are subject Disputes concerning these taxes are resolved by the administrative jurisdiction, which can receive a plea for the annulment of the decree instituting the tax or the agency that benefits from it, as well as any litigation arising from its collection

Finally, beyond this framework of statutory levies, we must consider the question of the pricing of public services Financial language here resorts to a number of expressions: remuneration for a service rendered, license fee, price The jurisprudence of both the Constitutional Council and the Conseil d'Etat

have given identical definitions Price is the direct counterpart paid by the user

of a public service or public amenity for the use of this service or amenity." The main legal consequence stemming from this notion of remuneration for a service rendered is that its institution does not require a law, but rather is authorized by an administrative authority: a decree by the prime minister in the case of the state, and the deliberations of the assembly in the case of a local authority or public body Remuneration thus escapes the mechanisms of financial management and the procedures for contention, which have been laid down in the case of taxes It requires, by definition, the existence of a public service providing benefits for users

In the field of environment, this implies that a public agency has established

a service or amenity that can be used by the public, who are required to pay a corresponding price The examples of this are numerous Communes or groups

of communes operating a public service for the collection and treatment of sewage can claim a purification fee, calculated on the volume of water consumed by users This service must, furthermore, be operated as a service of an industrial

or commercial nature and must balance its costs through the revenue collected from its users

Communes can institute a fee on the removal of domestic waste Fees are supposed to be proportional to services rendered, an aim that in practice is difficult

to achieve.12 Communes can also demand payment of a fee when they remove and treat corporate waste that has characteristics other than those of household waste and that they have no statutory obligation to collect Charges are generally fixed according to a flat rate, or in rather approximate fashion The small number

of those liable for such a charge and the amounts involved make this a profitable operation

Experience has, however, demonstrated the ambiguity of the system The levying of a charge can turn out to have a dissuasive effect on polluters, who may be tempted to evade it through the uncontrolled disposal of their waste A waste-disposal service—financed through taxation, but free for the user—might,

by contrast, attract a greater number of users This explains why the Servant Report (Paris, La Doc Franc 1984), commissioned by the Ministry of the Environment, did not adopt a clear position on the question of who should bear the financial burden of the elimination of small volumes of waste: the producer, the state, or the local authorities? It nonetheless stated its preference for the levying of a single tax on industrial waste whose rate would vary according to the degree of toxicity; the beneficiary of this would be the state That appeared

to be at once the simplest, fairest, and most secure solution

Michel Barnier, a member of Parliament, proposed, in his report to the National Assembly published in 1990, the creation of interregional agencies, operating on the principles of a mutual benefit organization Their funds would

be constituted through "fees charged for toxic waste and by the contributions

of users and of local authorities which would be calculated according to the nature and the volume of the products dispatched for dumping or for treatment.''

Barnier, though a member of a parliamentary group showing no eagerness to increase the level of fiscal and statutory national contributions, is thus proposing the creation of about six new taxes in different fields

THE LEGAL STATUS OF SOME ENVIRONMENTAL TAXES

Taxes for Inspectorates

Fees to offset the costs of checks on firms presenting an environmental risk demonstrate an interesting use of fiscal policy Checks concerning compliance with environmental regulations are the responsibility of a number of services Administrative, municipal, and prefectoral authorities, as well as police depart-ments, can establish the existence of infringements and can, if it proves necessary, notify the competent judicial body All concerned parties, including environ-mental defense associations, some of which have been certified to represent the general interest of the environment by the administration, are equally free to file complaints and so enjoy an enlarged capacity for action

It is nonetheless important that there be specialized control bodies, able to ensure the systematic supervision of certain firms presenting particular risks and able to initiate preventive measures or sanctions The creation of such unspec-tacular, low-profile bodies is rarely seen as a budgetary priority In France, this has been possible only when specific receipts have covered the operating costs

of these services

The state has the option of resorting to a technique widely used in other areas (the verification of drugs, meat, and certain types of equipment), which consists

of charging firms needing special control to defray the costs It is easy to justify

to the public and to the Parliament the introduction of such taxes, the burden of which firms can pass on to their consumers The administration sometimes presents these sums as payment for services rendered, but they really qualify as taxes since the safety controls are not services rendered to those who are subjected

to them, but rather are activities carried out in the interest of third parties and not of the firms that must submit to them.13

The oldest of these fees are the fees due by "classified firms" subject to special legislation enacted in 1917 and modified in 1976 Their regulating prin-ciples are the result of a series of reforms, all of which have aimed to improve their financial yield in order to pay a sufficiently large professional control team The December 19, 1917 law relative to dangerous, insalubrious, or incom-modious establishments had provided that these establishments should bear the costs of the checks they obliged the administration to make If any special examination and inquiry measures were ordained by the minister, "the refunding

of costs occasioned by these measures could, if need be, be demanded of the industrialist These costs are to be collected as in the case of direct taxation" (art 30) For want of political will and the requisite qualified staff, the measure fell into disuse

A governmental order of September 24, 1958, was intended to reactivate the procedure in order to generate funds to pay inspectors chosen from state agents and paid according to an allowance system It remained a dead letter

The procedure was again taken up in the Budget Provisions Act for 1968 In the National Assembly, the reform gave rise to quite an amount of controversy Representatives admitted the need for a qualified staff, but feared that new taxes would increase the burden on firms Article 87 of the December 21, 1967 law, (1968 Budget Provisions Act), specified by a decree of September 5, 1968, nevertheless reiterates that expenses incurred in the control of firms are to be borne by these firms, in the form of annual taxes at a moderate rate (100 or 300 F) Special inquiry measures ordered by the minister could also give rise to the refunding of costs

In 1971, the minister of the environment, newly nominated, discovered that the local services of the Ministry of Industry were unable to carry out the collection of the tax, which was paid by little more than half those liable for payment The 200,000 establishments theoretically concerned by the measure were not even listed in exhaustive fashion Financial considerations finally made the administration aware of the nonexistence of information mechanisms in a field that it had a specific mission to check

The Ministry of the Environment thus requested permission to recruit 260 engineers and technicians employed full-time after a period of five years The Ministry of Finance agreed on the conditions that the progression of the tax's product be equal to the budgetary expenditure thus occasioned and that the annual control fee be fixed by decree so as to increase it in line with needs The modifications to the Budgetary Provisions Act of December 24, 1971 (art 12), set up two distinct taxes

First, all classified industrial and commercial establishments are liable for payment of a single tax levied on their creation or their beginning operations and payable at the moment of their authorization or registration The rate was fixed at 3,000 or 1,000 F, according to the different categories of firms The self-employed are granted a reduction A penalty equal to twice the amount of the tax is imposed on any operator either failing to give the required information

or making an inexact declaration The Budgetary Provisions Act for 1990 (art 119) increases this rate to 10,000 F solely in the case of establishments requiring prior administrative authorization (about 58,000) to 2,000 F for small traders employing no more than two employees, and to 4,800 F for other small businesses

Furthermore, an annual licensing fee is levied on establishments that by virtue

of either the nature or the volume of their activities are a potential source of particular environmental risk and that, because of this, require periodic and thorough controls This class comprises a little over 4,000 establishments en- gaged in one or more activities on a list drawn up by decree This fee is equal

to the amount of a basic tax fixed at 500 F to which is applied a factor of from

1 to 10 since the 1990 Budgetary Provisions Act, according to the gravity of