Environment taxes in VietNam

They are: i Taxes on using environment elements, as the natural resources tax, land use tax; ii Taxes and fees on petroleum and oils; and iii Environment related fees and charges regulat

Chapter VI

Environment-Related Taxes in Vietnam

Environment-Related Taxes in Vietnam

1 Introduction

Sustainable growth is a basic, significant and long term goal for every country, and environmental protection is becoming a major issue, of equal importance to economic growth For developing countries, especially transitional economies like Vietnam, environmental protection policy should be established and implemented alongside other relevant policies, such as those restructuring the economy, enhancing economic growth, eradicating poverty and creating jobs

After 20 years of renovation, Vietnam has recorded encouraging achievements

in economic growth, national security and social order, poverty alleviation, urban and rural planning, development investment in infrastructure, development of industrial parks, removing industrial factories from urban and densely populated areas in order to further facilitate economic development and, at the same time, tackling pressing environmental problems These measures have been carried out extensively nationwide Nowadays, environmental impact assessments are a must and have become a standard and a tool to appraise investment projects from environmental and natural resource protection perspectives However, the prevention and minimization of environmental pollution, control of environmental degradation, and reduction in the intensity at which resources are used has recently not met expectations

In addition to propaganda and education to increase community knowledge of the community on environmental protection, and the adoption and application of cleaner technology in production operations etc., Vietnam is studying the application of economic tools for use in environmental management Of these tools, taxes and environment-related charges are drawing the attention of policy makers, and economic entities, especially businesses Recently issued legal documents concerning tax and charges have incorporated provisions on the rights and obligations of organizations and individuals toward the environment from two aspects Firstly, provisions that provide guidelines to encourage and provide incentives for environmentally friendly behavior, preventive and treatment measures; secondly, provision on financial obligations of objects that involve actions of exploitation and use of the environment, and emission of polluted matters in order to partially compensate for the cost of the social welfare loss

According to the proposal as part of tax system reform strategy with the year

2010 in mind, approved by the Prime Minister in the form of Decision No 201/2004/QD-TTg, dated December 06, 2004; the environmental protection tax law shall be promulgated in 2008 In addition to currently existing taxes relating to the use and exploitation of environmental resources and factors (land and natural resources), certain new taxes shall be studied and submitted for adoption at appropriate times Under the common title “Environmental Protection Tax”, they shall be issued initially in form of an Ordinance and target polluting objects, so as to generate financial revenue for environmental protection and ecology, and contribute to preventing the transfer of

“dirty” technology into Vietnam Nevertheless, in order to implement effective taxes that satisfy the specified objectives and requirements, a number of tasks should be performed from the stage of study, the formulation of alternatives and outlines, submission for adoption, in accordance with the procedures of drafting legal documents,

to the stage of preparing the necessary conditions for implementation

Within the framework of the joint research project between VMOF and PRI of JMOF, part of the technical assistance content on policies involves studying, and proposing certain types of taxes and charges relating to environmental protection for adoption in the near future This paper explains some content and initial research results acquired by Vietnamese researchers, based on the key structure of the research subject agreed with Japanese researchers

This paper has five parts Part One discusses the situation of applying taxes and charges relating to environmental protection in Vietnam, and some suggested recommendations for further consultation with Japanese researchers Part Two discusses the introduction of government measures related to the environment and introduces a policy mix approach This part intends to clarify that environment tax is one of the policy options and careful note must be taken of existing environment regulations Part Three discusses the most basic theoretical contents of environment-related tax and narrates practical issues drawn from relevant literature Part Four describes the experience of applying environment taxes in several developed countries and summarizes the current intermediate discussion of environment-related taxes in Japan Part Five offers some hints for further improvements during the implementation process

of introducing environment-related taxes in Vietnam This part suggests some milestones which are shown relative to current problems and the discussion in Part One

2 Current Situation of Environment-Related Taxes in Vietnam

Before considering the current situation of environment-related taxes in Vietnam,

we must make reference here to legal regulations on the environment and its protection, and those in other areas relating to the environment Subsequently, the main details of current policies on environment related taxes and fees will be presented

2.1 Concept of Environment and Legal Framework on the Environment in Vietnam

The term ‘environment’ is a wide ranging concept with different definitions concerning different fields For example, natural environment, social environment, business environment, legal environment… Generally, the concept of environment implies both social and natural elements; however, that used in this context is closer to nature than society, and alongside current legal regulations on the environment

The Environmental Protection law in Vietnam was approved by the National Assembly IX in the 4th Section on 27 December 1993 and came into force from 1 January 2004, onwards According to this Law, the environment consists of both natural and artificial material elements, closely related to each other, around humans, and affecting the living, production, existence and development of nature and human beings alike The environment comprises multiple elements, including air, land, sound, light, underground, mountains, forests, rivers, lakes, the sea, creatures, ecological systems, living areas, production areas, natural preservation areas, natural views, landscapes, historical traces, and other material forms

Vietnam intends to build a system of legal documents on environmental protection in parallel with laws on natural resources However, for historical reasons, a system of legal documents on natural resources was established earlier than one concerning legal documents on the environment Since the government pursued a reform policy, adhering to the spirit of the 6th General Congress’ Resolution of Communist Party (1986), social perceptions concerning natural resources and environmental values has radically changed Beside economic values, relating to rights over assets, natural resources are also objectives focused on by the State and society, reflecting their environment values (ecology values) Therefore, in recent years, Vietnam has had many legal documents on protecting and developing natural resources, such as the law on protecting and developing forest (1991), the law on land (1993, revised in 2003), the law on minerals, the law on oils and gases (1993, revised in 2000), the law on natural water resources (1998), the ordinance on protecting and developing aquatic resources (1989), Regarding the environment, legal documents also exist in other fields, such as the civil code, the criminal code, the law on enterprises, some tax laws, and the ordinance on fees and charges

Because of the wide scope of the environment, there are many duplicate legal documents when the Environmental Protection law is compared to specific laws on environment elements In many cases, the regulations of this law usually quote other laws’ regulations on the same issue However, distinctive points in the system of legal documents on the environment might be abstracted as follows:

- Specific laws (for example, the laws on land, on protecting and developing forest ) mainly deal with civil relations concerning the exploitation and use of environmental elements; regulate rights and responsibilities of organizations and individuals in protecting and developing environment elements; regulate measures to protect and prevent uneconomical use or exhausting/damaging environment elements Meanwhile, the Environmental Protection law regulates general rules in terms of public environmental administration, relations concerned with preserving the quality

of environmental elements (for example, protecting the land’s ecological values, diversifying the biological system, ecological system, and the quality of water resources )

- Specific laws on non-renewable environmental elements (for example, those on oils and gases and minerals), not only have regulations adjusting the activities of exploitation and utilization, but also have those encouraging the development of exploiting and processing industries for economical profits Regulations on responsibilities to contribute financial obligations for objectives using environment elements, covering burdens on behavior resulting in pollution or environmental risks

- The Environmental Protection law and the law on enterprises have common

regulations concerning enterprises’ responsibilities to abide by legal environmental requirements, with restrictions or prohibitions in certain industries or fields, where there is a risk of adverse effects on the environment (explosives, retroactive elements, highly toxic substances) and conditioned industries (environmental sanitary standards and foodstuff safety )

However, the law on enterprises abolished many kinds of licenses (including those environment related), transferring to a system of self-registration for enterprises with

a post checking system Because no reasonable mechanism of post checking still exists despite the continuing inadequacy of the current investigative and checking mechanism, violations of legal environmental regulations have been on the increase, especially by enterprises This could be considered as one of the measures to compensate society for their acquired benefits and the costs born by the society 2.2 Environment-Related Taxes and Fees Policies

The system of tax policies in Vietnam is designed and gradually accomplished through two phases, of which there are proposals to apply environmental taxes However, since many major issues remain unresolved during the restructuring period (including the tolerance capacity of the economy, the adaptability of enterprises, the collecting organization capacity ), it has been impossible to promptly promulgate laws

on environment taxes Many also believe that in practice, the current taxation system in Vietnam also includes some taxes on the environment They are: (i) Taxes on using environment elements, as the natural resources tax, land use tax; (ii) Taxes and fees on petroleum and oils; and (iii) Environment related fees and charges regulated in the ordinance on fees and charges The argument behind this view is that these taxes and fees impose on organizations and individuals actually exploiting or using environment elements or engaging in activities that harm the environment This can be considered as one of the measures compensating for society, due to their benefits and social costs born

by society

2.2.1 Land Use Taxes

Vietnam imposes land use taxes through the Law on Agricultural Land Use Tax and the Land and Housing Tax Ordinance This means organizations and individuals having received land from the State for agricultural productive activities (cultivation, livestock, and fishery) are subject to the Agricultural Land Use Tax On the other hand, objectively received land for the purposes of building construction projects and housing

is subject to the Land and Housing Tax When renting land from the State, they need not pay taxes but rental, based on signed contracts The contents and results of implementation of levying land use taxes are dealt with in the document concerning taxes on land use and assets In this paper, we focus on analyzing the environmental aspect of these taxes in order to clearly determine the scope and border between environmental and land use taxes

First of all, although land is one of the environmental components, it is necessary to confirm that current land use taxes are not classifiable as environmental taxes because they do not concern activities causing environmental pollution or harming the environment Besides, the main contents and policy stance of land use taxes are also needed to analyze the following: (i) the purpose of land use taxes is to encourage land use economically and effectively, and simultaneously, to ensure equity and reasonability

in the contributions of organizations and individuals using land to the State Budget; (ii)

tax rates are levied in kg paddy in area units, in monetary terms based on the paddy price, which is based on the profitability of the use of the land (presented by land categories used for agricultural land use purposes) and the convenience in using the land, such as the land site and infrastructures (for the same land category, the level of land and housing tax is 1 to 32 times higher than the level of agricultural land use tax); (iii) regulations concerning exemptions and reductions in land use taxes are applied in the cases of natural calamities, difficulties affecting living standards, and social policy objectives Recently, the National Assembly promulgated the Resolution on the exemption and reduction in land use taxes for the farmer’s agricultural land area, as well

as the exemption of land use taxes for minorities in difficult remote communes With these issues in mind, it is clear that Vietnamese land use taxes are closer to income tax

or asset tax than the environment tax

2.2.2 Natural Resource Taxes

The Ordinance on natural resources tax was promulgated in 1990 and revised in

1998 by the National Assembly’s Standing Committee This Ordinance imposes tax on using or exploring natural resources, such as minerals, oils and gases, natural forest resources, natural marine products, natural water, and other natural resources Elements used to determine the tax payable are the amount of explored resources, the price of the same at the exploration site; and the tax rate at a certain percentage on the taxable price Tax rates are state regulated for each kind of natural resource, based on the following rule: Non-renewable or valuable natural resources would be taxed higher than renewable ones For example, tax rate of 40% is applied to natural forest resources; tax rate of 1% is applied to land used as raw materials The table of natural resources tax rates is in the Appendix 1

The purposes of enacting the natural resources tax ordinance are: (i) to ensure budget revenue; to contribute to protecting, exploring and using natural resources economically, reasonably, and effectively; and, (iii) to contribute to protecting the environment The natural resources tax revenue and its percentage ratio of total budget revenues from taxes and fees are gradually increasing (see Appendix 2) However, looking at the structure, we see that over 90% of the natural resources tax revenue comes from oils and gases Many argue that, in accordance with the Constitution 1992, land and minerals, including territories under Vietnamese sovereignty, belong either to the people or the state Therefore, organizations and individuals permitted to explore natural resources have to pay charges to buy natural resources from the State This is the reason why other global countries apply systems of "Royalties on natural resources", rather than the natural resource tax system Many also say that, in accordance with the

1992 Constitution, land and minerals in the territories of Vietnam belong to the state or the people, meaning organizations and individuals permitted to explore natural resources have to pay charges to purchase natural resources from the State This is why many global countries introduce a policy of imposing "royalty of natural resources", rather than the natural resource tax

2.2.3 Petroleum and Oils’ Taxes and Fees

Taxes and fees from petroleum and oils are relatively large revenue generators, for developing, as well as developed countries However, based on the assessments of IMF experts (June 2004), these revenues remain modest in Vietnam; and, this is considered as an unusual phenomenon Currently, taxes and fees from petroleum and oils in Vietnam include the import tariff (20%), special consumption tax (10%), VAT

(10%), and petroleum and oils’ fees1 (petroleum: 500 VND/liter, diesel: 300 VND/liter, others: not levied) Total taxes and fees from the above sources go into the Stage Budget, within which the revenues from petroleum and oils are used as one of the factors for allocating budget capital expenditure into transportation infrastructures

As mentioned in section 2.2.2 above, taxes and fees on petroleum and oils in Vietnam are deemed to be indirect environment taxes (IETs) because they are included

in the selling prices of petroleum and gases Therefore, their effects on the environment are not clear, although they have effects on the demand-supply relation and the reduction in consumption at the time of increasing prices The issue of environment pollution caused by the use of petroleum and oils (depending on factors as: total consumption amount, transportation means’ quality, fuel using proficiency, infrastructures ) has not been still adjusted through petroleum and oils’ taxes and fees This is one of the issues requiring further attention when designing future environment tax policy

2.2.4 Fees and Charges in the Environment Field

The basic legal document to enact and implement regulations on fees and charges concerning the environment and environmental protection is the environmental protection law (2003) This law regulates that organizations and individuals using environment elements, if engaged in activities causing environment pollution or breakdown, must be responsible for contributing money to resolve the pollution and improve environment.2 Based on the article 34, Decree 175/CP dated November 18,

1994, regulating details and guiding the implementation of the environmental protection law, every organization and individual is responsible for contributing money to environmental protection activities when engaging in the following activities: (i) Exploration for oils, gases, and other natural resources; (ii) Airports, ports, automobiles, and railways stations; (iii) Motorcycles and other transportation means; and (iv), Participating in business activities causing pollution Financial contributions of organizations and individuals are made in the form of fees, charges or fines paid due to administrative breaches, dependent on the nature of their behaviors concerning the environment

1 The initial point of petroleum and oils’ fees is the transportation fee Previously, Vietnam imposed road fees per transportation means, the fee level being dependent on the type of transportation, cylindrical capacity, or loading capacity, and annually; this was changed to a system of charging fees based on petroleum and oil prices However, after many projects constructing, revising and upgrading bridges and roads by using loans were accomplished, fees had to be charged to ensure sufficient funds to repay loans and finance operation and maintenance (O&M) costs for these projects The government permitted the project investors to charge fees on the means of transportation during each use At that time, imposing the transportation fee through petroleum and oil prices was thought to be unreasonable, as it was doubly imposed, and unequal, because these fuels are not only used in transportation but also for other purposes, such as electricity generators, and pump motors for irrigation Therefore, in the year 2000, the government promulgated Decree 78/2000 regulating petroleum and oils’ fees, and abolishing the transportation fee based on petroleum and oils’ prices Many believed that petroleum and oils’ fees should come under one type

of environment tax, imposed on activities causing environment pollution by using petroleum and oils, but should be indirectly collected through petroleum and oils’ prices

2 According to the program of revising the legal system, the National Assembly will ratify the Law

of revising and supplementing the Environment Law Accordingly, the presence of economic instruments for restricting pollution, and protecting the environment mean investment for improving the environment would be more focused.

The Ordinance on fees and charges, promulgated by the National Assembly’ Standing Committee on August 28, 2001, regulates the responsibility for paying environmental fees and charges including: (a) Fees and charges on issuing licenses, certificates for meeting or being eligible to environment standards for businesses involving environmental conditions, fees for making reports assessing environmental effects; and (b) Environmental protection fees for each field of businesses, of which items coming under category (a) are distinctly revenues covering the costs of public services providing the objectives needed to assess Revenues under group (b) are regulated in detail by Decree 57/2002/ND-CP, dated June 03, 2002, which guides the implementation of the Ordinance Then, there are the following environmental protection fees:

- Environmental protection fee for waste water;

- Environmental protection fee for petroleum, oils, waste gases from using coal and other fuels;

- Environmental protection fee for solid waste;

- Environmental protection fee for noise pollution;

- Environmental protection fee for airports, stations, and ports;

- Environmental protection fee for exploring for oils, gases, and other minerals

However, to date, the government has only established regulations on levying two items of environmental protection fees for petroleum and oils (petroleum and oils’ fee) and an environmental protection fee for waste water respectively.3 The remaining fees are still under study and the necessary conditions are being prepared to enact and implement them, following the program involving building legal state documents

As presented in section 2.2.2 above, the revenue from the environment protection fee for petroleum and oils may be considered as IETs tax, although it is not only used for environmental purposes With an average revenue amount within the period 2000-2003 of VND 2,750 billion, the petroleum and oils fee generates a considerable proportion of the total revenues from taxes and fees (approx 2.5%) For the environment fee for waste water, provinces have currently been regulating detailed levels for living waste water, and implementing assessments of the reported and calculated results on the concentration and number of waste from enterprises in order to determine the monthly payable amount of fees Although still without detailed results concerning this revenue, some remarks can be made on this fee as follows:

- First, the objective to bear the fee and the element used to determine the fee amount are the regulatory poisons/toxics in the waste water (currently, only 7 kinds of main poisons/ toxics, as stated in Appendix 3) This indicates that the environment fee for waste water in Vietnam is similarly one type of Pigouvian tax; meaning there would

be many difficulties in the process of implementation, although the level of fee determined during this period remains quite low

- Fee levels are separated between living and industrial waste water, due to the consideration of costs incurred by the collection organization and the feasibility of the implementation process, because it is impossible to measure and to determine the poisons/toxics in the living waste water of each household Hence, equity need not

3 The petroleum and oils fee is regulated in Decree 78/2000/N§-CP, dated December 26, 2000, while the environment fee for waste water is regulated in Decree 67/2003/N§-CP dated June 13, 2003, and effective from the year 2004 In the 4th quarter of 2005, the government plans to introduce the

Decree on the environment protection fee for exploring minerals

necessarily be taken into consideration, at least for the initial few years of implementation, with the main purpose to create a fee paying custom for enterprises and people

- The collected money, after deducting the costs of the fee collecting organization, would be collected in the environmental protection fund (at both central and local levels, 50% for each) to be used exclusively for environmental protection activities: processing and remedying pollution, improving the environment, investing in projects protecting the environment by improving the drainage system, waste water processing system,… For other environmental protection fees, this rule would also

be applied

It could be said that establishing regulations on collecting environmental protection fees represents a transitional stage to make a cornerstone for applying environment taxes in future, because they have various effects on enterprises’ production and businesses, which used to operate in the centrally planned mechanism unfamiliar with the payment of environmental costs Presently, it would be advisable to test under the form of each environmental protection fee in order to ensure it is familiar

to enterprises; and also, in that way, administration agencies may also have good experiences in the process of implementation to design the environment tax in future 2.2.5 Other Environmental Taxes

In addition to the above environment taxes and fees, the Vietnamese government has already grafted environment purposes into other taxes in the system, briefly as follows:

- Import tax: although not regulated in the law on export, import duties, goods that burden the environment are also considered in the table of import tariffs Besides, other administrative or trade restrictive measures are also laid out to implement the purposes of preventing pollution and protecting the environment; for example: prohibiting imports of certain used machinery and equipment, constraints on technical standards and the rule of origin for certain imported goods

- Enterprise income tax: the government encourages enterprises to focus on the environmental purpose, which is regulated under enterprise income tax law in two aspects Firstly, enterprises are permitted to deduct all costs concerning investment made to prevent and remedy environmental pollution; machinery and equipment used in the process of processing waste water are classified into groups of fixed assets entitled to be classed as having fast depreciation mechanisms Secondly, preferential treatment for enterprise income tax is proposed to encourage enterprises

to enhance investment on upgrading machinery and equipment in order to reduce pollution; and to encourage enterprises to move to industrial parks from living areas

- Land-related policies are also promulgated to encourage reductions in environment pollution at urban and residential areas In particular, money received from transferring land use rights related to the sale of assets located in the land of state owned enterprises is given in totality to enterprises if these activities involve moving production units from urban or residential areas in line of approved plans, instead of being going into the state budget

The contents in the second part of this paper concern the environment-related tax, which has been applied in Vietnam and of which certain points still need to be further revised and accomplished when analyzing and comparing theoretical frameworks and practical experiences from other countries, as mentioned in the first part of the paper

2.3 Future Issues Concerning Environment Taxes

The Prime Minister Decision on December 6th, 2004 deals with Environmental Protection Taxes in the following expression:

“An Environment-Related Tax Law will be summated to the diet before the end

of 2008, which imposes taxes on goods and services polluting the environment The tax base will be decided on each product and service which pollutes the environment The revenue of this tax is used only for special purposes of environmental protection, and not approved to cover any other needs of the state budget “

Based on the Prime Minister’s Decision, the Ministry of Finance has built the proposal on the strategy of reforming the tax system within the period 2001-2010 Although the drafted proposal is still not officially approved, it could be said to be one

of the bases to study and prepare the necessary conditions in future The work involving the design of environment- related taxes has been regarded in the proposal in the following directions:

- First, confirming that promulgation of the land use law is to replace the current agricultural land use tax and land and housing tax Taxes are calculated based on land prices and tax rates as percentages on taxable land price following market rules This is not a type of environment tax, as some opinions argued

- Checking the table of natural resources tax rates in the process of comprehensively assessing the results of implementing the Ordinance on natural resources tax in order

to submit the new Law on natural resources tax to promulgate, to contribute toward environmental protection and encourage the use of natural resources economically and reasonably The natural resources tax will be calculated based on explored amounts with a wider tax base Tax rates will be designed following the direction of setting up high tax rates for precious and rare natural resources and non-renewable natural resources It is also necessary to limit, as much as possible, advances toward the elimination of the natural resources tax exemption and reduction, in order to ensure the neutrality of the tax

- Based on the results of assessing the implementation of the Government Decrees on environmental protection fees, promulgating the ordinance on environmental protection taxes, including taxes imposing on objectives causing environment pollutions They include all activities of production and businesses causing environment pollution within permitted levels, as regulated in the Vietnamese environment standards Tax rates would be calculated as a percentage of turnover or production costs Besides, it is also necessary to impose an indirect environment tax (IETs) on certain produced or imported products that harm the environment when being used

3 Introduction of Government Measures and Policy Mix Approach

Part THREE deals with two issues The first session shows government measures to protect the environment, especially including the differences between tax measures and other measures The second session shows a brief summary of a theoretical approach for a policy mix on environmental policy, which summarizes and closely scrutinizes the discussion at the Tokyo Seminar on June 2004

3.1 Government Measures to Protect the Environment

Environmental protection measures have several categories: regulatory measures, voluntary measures, and economic measures Tax is just one policy tool used as an economic measure within this categorization, but the taxation measure is potentially one

of the most powerful policy instruments available for environmental protection This section introduces several measures for environmental protection and a theoretical framework for combining these tools

3.1.1 Regulatory Measures (Environment Related Agency and Implementation)

The regulatory measure is a simple concept, also known as “command and control” in environmental economics Setting standards for the emission of polluted goods is one of the easy examples This measure is often combined with penalties for violation to enhance the effectiveness of the policy as an economic measure

The advantage of regulatory measures is that this method makes it relatively easy to establish a consensus in related actors The Polluter Pays Principle (PPP) is very easily connected to this method Also, it may provide greater certainty as to the amount

of pollution that will be emitted Economically speaking, corporations will be only required to bear the costs of reducing the pollution level From an implementation perspective, regulatory measures will be very effective if the penalties are enforceable Enforcement procedures are typically implemented in the form of penalty fees by the environment-related agency and sometimes, a failure to accept government procurement

is related to this penalty The announcement by the authority, made via mass communication, will be “factual” penalty, because this announcement affects the brand image of the polluters

However, there are also some negative points associated with this regulatory measure If the emission sources are dispersed, it is quite costly to set and enforce standards In other words, this measure is much more costly than efficient alternatives in

an economic sense The primary reason is that it is more costly and difficult for the equimarginal principal to hold Another reason why this method involves high costs is the lack of incentive for companies to go beyond the regulated level This situation indicates non-optimal resource allocation in the economy

3.1.2 Voluntary Measures (by Private Sectors)

Voluntary measure means that the private sector, like corporations, will establish some environment standards voluntarily In this context, ‘private sector’ typically means industry groups, which take the incentive to establish some standards by themselves

The advantage of this method is that it is easier to make a consensus compared

to regulatory measures, as far as industry groups have some effective function However,

some cons were also apparent regarding this method The standards set by the industry group may not necessarily achieve a socially desirable level of pollution Differences could exist in the level of standards set by the governmental authority and that of the standards set by the industrial group The free rider problem will be the second problem associated with voluntary measures Because this method is a voluntary measure, an incentive may result in that if one of the corporations in an industrial group ignores the standard, the corporation may establish a favorable position in terms of the industrial power of that industry This free rider problem is often taken on board in international trade-related forums like the WTO

3.1.3 Economic Measure(s)

Economic measures fall into four main categories: environment taxes, subsidy, marketable emission permits, and deposits Overall speaking, economic measures have the advantages of placing decision making for pollution control in the hands of those most familiar with pollution control options-the polluter These measures work to keep costs low and also spur innovation

3.1.3.1 Tax Measure(s)

Tax measures are the focus of this paper The main focus on this method is the fact that taxes are designed to reduce the burden on the environment General Theoretical Issues on Environment Taxes will be discussed in detail in PART Three 3.1.3.2 Subsidy

Subsidy indicates that the government gives an incentive which is consistent with reducing the burden on the environment From an economic perspective, the effect

of a subsidy would be the same as with tax measures The measure will help achieve optimized social resource allocation via interaction with market price changes made by introducing the subsidy, provided each economic actor engages in reasonable actions This optimal resource allocation will also be achieved in an environmental context, while politically speaking, the measure will make it relatively easy to establish a consensus compared to introducing new environment-related taxes

However, certain questions arise concerning the introduction of environment-related subsidies Discussion reveals that it would not necessarily be rational to provide subsidies to those who pollute the environment and this kind of subsidy may not be designated as PPP

3.1.3.3 Marketable Emission Permits

Marketable emission permits involve the government issuing (selling or giving away) permits to pollute, which may then be traded among polluting firms This measure is discussed not only domestically but also internationally to achieve the most appropriate resource allocation in economical and environmental contexts Marketable emission permits are significantly more difficult to implement than the above methods However, in the United States, doubt concerning the ability of the environmental authority makes marketable emission permits more popular This method requires a less active regulatory authority to set and adjust environmental standards

3.1.3.4 Deposits

Deposits may also be termed liabilities in this context This includes holding polluters liable for any damage they may cause This method will be useful for regulating risky activities that lead to occasional accidents

3.2 Policy Mix Approach on Environment Policy

3.2.1 Why A Policy Mix on Environment Policy Is Needed

Several important factors should be discussed before discussing tax measures Firstly, the fact that the environment tax measure is not the only method available to solve the environment problem This point leads to consideration as to which is better to achieve environmental targets, to use economic measures or regulatory methods Economic measures have the advantages of placing decision making for pollution control in the hands of those most familiar with pollution control options-the polluter These measures work to minimize costs and also spur innovation; hence the policymakers should examine their potential benefit One complication of environmental regulations, however, is how to deal with space and time Because of the difficulty in designing efficient regulations, regulations sometimes take the approach of specifying environmental targets and then pondering the cheapest way of reaching them

In addition to the theoretical approach, the effectiveness of the policy measure should be assessed This assessment should lead to feedback in the shape of improvement to achieve the forecast target by policymakers

In this session, environmental policy will be analyzed from “Public Choice Theory” Section 2.2 will analyze the problem of which method is superior, between regulatory methods or economic measures Subsequently, we will discuss the economic method mixed in with economic measures Section 2.3 will examine the theorem against the policy mix approach in order to enhance policy choice, while Section 2.4 will enhance future discussion on this policy mix approach

3.2.2 Theorem on Public Choice-Environmental Policy Context

Economic measures have three superior features to regulatory measures: 1) Cost-Effectivity (static efficiency), 2) Incentives for research and development (dynamic efficiency), and 3) Information cost for policy implementation (information efficiency)

Baumol and Oates (1971) proved that economic measures can be used to realize final environmental targets at minimum cost in case of environment tax, while Montgomery (1972), proved the same logic in the case of marketable emission permits

Static efficiency could be examined among economic measures The comparison

is implemented in the form of economic measures-environment tax, marketable emission permits, and subsidies These policy measures have an equivalent effect in the context of the short term context and in a static sense In other words, these three measures are equivalent in the world of static efficiency However, subsidies and the other two measures make a difference in the context of resource allocation Subsidies have a separate impact on the profits of a polluting company, than the discrepancy caused by PPP (OECD 1975) This discussion leads to the conclusion that subsidies

represent the last resort of environmental policy

The next question concerns the nature of the difference between environmental tax and marketable emission permits These two policies are equivalent in terms of cost and resource allocation, although there are four areas that differ between environmental tax and marketable emission permits

Firstly, environment tax does not always realize the intended polluted level, while marketable emission permits can do so Policymakers are unable to set an appropriate Baumol-Oates tax level, if they can obtain accurate information from the cost-curve and hence can determine the tax rate only by trial-and-error

Secondly, an environment tax may trigger a change in the environmental standards to be met, because inflation may affect the effective tax rate in the civil society However, marketable emission permits can afford to ignore the effect of CPI change, since reasonable regulation of total emissions may be adjusted

Thirdly, the environmental tax could show the prices of goods in the form of the tax rate, while with marketable emission permits, it is impossible to control the price of the permit itself In a perfect market, this lack of control would not be an issue; however, market imperfections will trigger strategic or speculative actions from market participants concerning emission permits

Fourthly, the method of initial allocation is the area of greatest difference between the two measures Environment tax will not allow the burden of polluters to be adjusted; whereas this is possible with market emission permits If policymakers sell the permits at a competitive price, the polluter’s position will be the same as that in the case

of environment tax However, the burdens of polluters will be initially reduced if permits are distributed for free, which will result in unfairness, because newcomers have

to buy the permits at a higher price, as in the level of the environment tax case This difference in the initial cost allocation will lead to a difference not only in the cost burden but also in dynamic efficiency

The discussion on dynamic efficiency is based on the fact that polluters have an incentive to innovate in order to reduce the economic burden acting against them In other words, the greater their economic burden, the bigger the incentive against technical innovation (Bohm and Russel, 1985, p 417) This discussion may often be cited to show how economic measures are superior to regulatory measures In addition,

it could be used to show how the discussion environmental tax is superior to marketable emission permits in the context of dynamic efficiency, because the burdens of environment tax polluters will be bigger than those of marketable emission permits 3.2.3 Policy Mix Approach on Environmental Policy

3.2.3.1 Public Choice under Uncertainty

A Pigovian Fee is a charge per unit of pollution generated, set equal to the marginal damage of the pollution caused, at an efficient level of pollution generation This fee is levied by the government, which collects the revenue, and generally induces the provision of an efficient amount of pollution This fee is often discussed in the same manner as environment tax

However, the difficulty in implementing a Pigovian Fee is plainly evident There

is insufficient information to establish an eternal cost curve and emission-reduction curve The second best approach is to realize an environmental target with minimum emission-reduction costs This target is based on scientific examination of each environmental item

The Weitzman Theory may show the answer to the same problem from a different perspective, when cost functions are associated with uncertainty (Weitzman, 1974) Weitzman shows how the policy should be designed to minimize the damage of welfare if it is impossible for a policymaker to gain sufficient information concerning eternal cost and emission-reduction curves respectively In this approach, there are only two alternative policy choices; namely price regulation or amount regulation respectively

In reference to the public choice problem, Roberts and Spence proposed a policy-mix approach, including a mixture of marketable emission permits, environment tax and subsidy This approach minimizes the welfare cost by the policy mix, because the failure of a single policy might be covered by the merit of other policy measures, based on the correlation of each effect (Roberts and Spence 1976)

Baumol and Oates proposed that the public authority should impose a system of charges that would, in effect, constitute a set of prices for the private use of social resources (e.g air and water) Charges (prices) would be set to achieve a specific standard rather than attempt to base the level on an unknown value of marginal net damage This scheme could be combined with a “minimum safety standard” The advantages of the Baumol-Oates tax would be: 1) Taxes/charges make use of market mechanisms by charging a price for hitherto unpriced but valuable services provided by nature (Pearce & Turner 1990, pp 96) and 2) and are a way to avoid the use of direct controls and use the pricing system to control externalities 3) A standard of an acceptable environment would have to be determined Setting a non-optimal tax has a degree of arbitrariness as it would entail giving up on the true social optimum (Baumol

& Oates 1988, pp 155) However, taxes/charges are difficult to change at short notice and are poor at dealing with short term crisis periods of severe environmental distress

In these cases, it may be necessary to regulate activities beyond the level normally applied, e.g., a total ban on motor vehicle travel at certain times (Baumol & Oates 1988,

pp 192)

3.2.3.2 Limitation for Single Policy Approach

In the real world, the single policy approach will not work as expected When a certain environmental problem occurs, the regulatory measure is the first candidate to introduce environmental controls because of its ease of implementation However the full replacement of regulations by economic measures is infeasible in the real world Examination for economic measure may begin only after the case, i.e regulatory measures are not effective enough to maintain the environment; or the cost of such regulatory measures is prohibitive This situation will cause frictions with the resource allocation problem and during this procedure, economic measures are often distorted with losing the cost-efficiency for that measure

The policy mix approach is one of the theoretical approaches used to fix the imperfection of the single-policy approach The policy mix approach is the approach whereby environmental policy, composed of the policy mix of several policies,

measures ongoing feedback from experiences of economic measures against economic theory

For example, environment policy in Japan contains numerous regulatory measures Such regulatory measures do not refer only to what we call “command and control”, namely, typical regulatory measures These measures also contain several elements of economic measures, and if we conduct a detailed analysis of Vietnamese environment policy, implementation should be designed with analysis of the role of each measure, with discrepancy made between theory and reality

3.2.3.3 Categorization for Policy Mix

The first general question is why are economic measures difficult to introduce based on purely theoretical concepts? The real policy measure involves a manner of combinations of multiple economic measures and there are three potential answers to this problem

Firstly, it will be difficult for policymakers to obtain all the information to set the tax rate level in order to establish equilibrium between marginal external costs and emission-reduction costs Secondly, the rule making process will also be the reason The policy cosmos is initially designed in the form of regulatory measures before introducing economic measures For example, it is not possible to include an independent role of resource allocation within environment tax if the regulatory measure is fully abandoned Thirdly, the distribution problem will be the issue The introduction for economic measures will be subject to political pressures from interest groups, because the measure will impose more significant burdens on polluters compared to that of regulatory measures in the law-making process

Gawel proposes two active reasons for implementing a policy mix approach Firstly, this latter may present us with a feasible answer to solve multiple policy targets It may be difficult to accomplish the above results by using “single policy approach” Secondly, the policy mix approach may work to minimize political pressure/friction when introducing new policy measures

The above discussion suggests that the superiority of economic over regulatory measures will not be always apparent, therefore, the cost-efficiency of economic measures may be reduced when they are implemented in the form of a policy mix with regulatory measure In other words, regulatory measures may be more efficient than imagined, provided they are used within a policy mix alongside economic measures 3.2.4 Future Discussion on the Policy Mix Approach

Marketable emission permits are introduced in the United States, Germany and other several developed countries and the Acid Rain Program (ACP) in the US represents one of the most advanced programs in this context ACP is different from other marketable emission permits in that the program includes no restriction against sources of pollution (Bohi and Butraw 1991, 1992; Hahn and May 1994 pp 33-35; Kete 1992, pp 84-86)

This program will suggest several general points for future discussion Firstly, even if marketable emission permits are introduced in an advanced manner, every scheme involving this measure represents a policy mix approach Secondly, the role of

regulatory measures should be revalued in an effective manner

Under the discussion for Baumol-Oates taxes, discharging the water surcharge (DWS) in EU countries is a good example The Germany DWS regime was at first clearly designed to emulate Baumol-Oates taxes, and the incentive effect and dynamic efficiency were clearly of concern in this regime Andersen (1994) makes a comparative analysis of such aspects including France, Holland and Germany OECD also analyzes the experience in China in developed countries (OECD 1997)

In summary, there are two important lessons when decision making on environment policy Firstly, cost efficiency is not the sole standard criterion to assess policy measures In the real world, in addition to the problem of costs, accomplishing environmental targets and/or preventing non-reversible damage via regulation will be the issue The resource distribution problem is also a candidate for a policy decision These multiple targets of the environment policy framework should be discussed

Secondly, the existing theory framework involves an undervaluation of the effect

of the distribution problem in the case of policymaking The awarding of subsidies, an unreasonable measure in the context of environmental economics, has become a role of genuine importance in the real world This discrepancy leads to the unrealistic aspect of the theory framework in explaining existing environment policy Therefore, the distribution problem must be discussed in the policy mix approach to set feasible and desirable environmental policy

4 General Theoretical Issues on Environment Taxes

The introduction of environment-related taxes seems to climbing in many global nations, especially developed nations The general trend in recent times shows that environment–related taxes are introduced through tax reforms, which aim to construct a neutral tax system, enlarging the tax base and reducing tax rates In contrast to general trends in the tax reform process, environment-related taxes do alter the prices of goods, which are inputs of production, as well as business activities or consumer goods that exert a harmful impact on the environment It is noteworthy that carbon or gasoline taxes are imposed on motor vehicles in order to generate the required revenue to cover the cost of protecting the environment This part discusses the following key points in detail: (i) The rationale to impose environment tax; (ii) Narration of the types of environment taxes; (iii) Considerations of the design of environment–related taxes 4.1 Environmental Protection Objective

According to the common concepts of economists, environmental damage occurs when the social cost of each activity involving environmental factors exceeds the benefits generated by the same.4 The divergence between social loss and benefits may arise owing to one or both of market and policy failure respectively The former can arise when there are poorly defined property rights concerning forest use or waste emissions into rivers or the atmosphere, whereas the latter may occur when undesirable policies are used, for example a microeconomic policy that changes relative prices so as

to encourage the excessive use of natural resources For example, chemical pesticides are used on a vast scale with government subsidies

4 There are a number of definitions concerning the concept of environmental loss, but in this paper, the author uses the traditional concept of economics

A variety of policy instruments are available to address such environmental problems In the cases of market failure, structural measures, regulatory policies or tradable permits could be appropriate In the case of policy–induced environmental problems, removal of the policy or modification thereof may be the best solution However, in other cases, taxes may provide a solution to environmental problems, whether they are caused by market failure or policy failure Economic instruments that use a price mechanism, such as taxes and tradable permits, are often preferred by economists because they do not require any costly regulatory apparatus and encourage a reduction in environmental damage by the least costly means

The choice of policy instruments (regulatory or tradable permits versus tax) may depend on the source of uncertainty When we have good information relating to an efficient level of consumption or the production of a good, but are unsure about the appropriate tax rate to achieve the expected level of production or consumption, tradable permits or regulation would be a preferable solution From an economic perspective, the issue here is what will create the greatest cost if the wrong policy is adopted Only when the cause of failure is found, can a solution be set forth

4.2 Tax Policy Objective

Environmental taxes allow us to raise a given level of revenue with a lower efficiency cost than would otherwise be possible It is noteworthy that they provide double benefits because they reduce the social cost of environmental damage and the rates of other socially costly taxes, thereby contributing to an overall reduction in the social cost of the tax system Environmental objectives are met by raising the tax rate on emissions until the marginal social cost of using environmental resources is equal to the marginal social benefits of using the same From a revenue perspective, the tax rate should be set such that the marginal social cost of that tax rate is equal across alternative tax instruments The attractiveness of having double benefits should not be underestimated Many estimates suggest that the marginal welfare cost of taxation is about one third or higher, meaning taxes, such as carbon taxes, could dramatically improve efficiency while still allowing revenue to be raised When we pick up the tax measure, announcement of effects against taxpayers will be one of the key issues to examine in future

4.2.1 Environment-Related Taxes

A variety of taxes may be related to the environment and four related categories may be illustrated The first two categories are Pigouvian taxes or indirect environment–targeted taxes These taxes can reduce environmental problems by changing the relative prices of activities, thus discouraging various activities that cause environmental damage The third category is taxes that have unintended environmental implications (favorable or unfavorable) These taxes, such as income taxes, which have incentives encouraging certain forms of economic activities, have played an important role in environmental damage in some developing countries The four categories of taxes are those known as environmental taxes and the revenue they generate is often spent on environmental protection

4.2.2 Pigouvian and Baumol Oates Taxes

Pigouvian taxes are the classic solution to resolving environmental problems These taxes are specific rate taxes levied on units of emissions or of damage caused by

the activity The tax rate per unit is set such that the marginal social cost of an activity is equivalent to its marginal benefit The tax rate is specific because the rate is set according to the damage generated by an activity rather than the price of the same

Pigouvian taxes are viewed as efficient solutions to many environmental problems because they use the price mechanism to encourage modification to economic activities which, in an ideal world, is less costly to administer, and encourages an efficient reduction in damage compared with a regulatory mechanism Taxes induce efficient allocation of pollution reduction across consumers and also in the composition

of that adjustment, such as in terms of the scale of the activity, technological change and factor substitution There are, however, a number of practical difficulties in implementing Pigouvian taxes The difficulty in determining the marginal social cost required to set the correct tax rate is a major impediment to the use of these taxes In addition, there are also difficulties in monitoring, measurement and compliance

Baumol and Oates proposed that the public authority should impose a system of charges that would, in effect, constitute a set of prices for the private use of social resources (e.g air and water) Charges (prices) would be set to achieve a specific standard rather than attempts to base the level on an unknown value of marginal net damage This scheme could be combined with a “minimum safety standard” The advantages of the Baumol-Oates tax would be: 1) Taxes/charges make use of market mechanisms by charging a price for a hitherto unpriced but valuable service provided by nature (Pearce & Turner 1990, pp 96) and 2) are a way to avoid the use of direct controls and use the pricing system to control externalities 3) A standard of an acceptable environment would have to be determined Setting a non-optimal tax has a degree of arbitrariness as it would entail giving up on the true social optimum (Baumol

& Oates 1989, pp 155) However, taxes/Charges are difficult to change at short notice and not good at dealing with short term crisis periods of severe environmental distress

In such cases, it may be necessary to regulate activities beyond what is normally applied, e.g., a total ban on motor vehicle travel at certain times (Baumol & Oates 1989, pp 192)

4.2.3 Indirect Environmental Taxes

With regard to practical difficulties in imposing Pigouvian taxes, we can employ other taxes to achieve environmental objectives These taxes - called indirect environmental taxes - are levied on the use of productive inputs or consumption goods, where the use of those goods is related to emissions causing environmental damage Indirect environmental taxes do change the relative prices and their efficiency is dependent on the nature of the link between the tax base and the environmental damage

An indirect environment tax is equally as efficient as a Pigouvian tax if it is levied on a tax base that is linked by a definable functional relationship to that damage The less well defined the relationship between the use of the consumption of taxed goods and the environmental damage caused, the less effective are these taxes The relationship between the use of taxes and their effectiveness in securing environmental objectives can be illustrated by two indirect environment taxes: namely carbon tax and petroleum tax

A carbon tax is equally efficient as a Pigouvian tax because there is a fixed relationship between the tax base (fuel) and the environmental damage A carbon tax is intended to address global warming concerns arising from the emission of carbon dioxide that results from the combustion of fuels A Pigouvian tax is levied on the

emission of unit of carbon dioxide However, there is no end-of-pipe technology that permits a change in the relationship between the combustion of fuels and emissions of carbon dioxide; hence a tax on the fuel is equivalent to a Pigouvian tax, meaning there

is a fixed proportional relationship between the use of the fuel and the emission it causes

Petroleum taxes intended to address local air quality concerns are not as efficient

as Pigouvian taxes on emissions or damage There is no fixed relationship between the use of petroleum and environmental damage A tax on petroleum is not related to the emission of pollutants because the pollutants are also a function of the vehicle’s operating efficiency, driving speed, and the road quality… In this case, although a tax

on petroleum may reduce pollution, it is not an efficient policy from a theoretical perspective An efficient tax on vehicle emissions would likely result in a reduction in emissions from a variety of reactions to the increased cost of emissions, depending on the least-cost means of reducing the latter For example, emissions could be reduced by reducing overall mileage, improved vehicle maintenance, and technological adjustments, such as the use of catalytic converters Indirect environment taxes, such as petroleum taxes, do not encourage adjustment of all these criteria and actually may discourage the use of certain means of emission adjustment, such as changes in the use of catalytic converters

4.2.4 Taxes with Unintended Environmental Implications

Some taxes have unintended implications on the environment The excise levied

on various energy products is often viewed as environmentally favorable when it discourages environmentally harmful activities Taxes could unintentionally have environmentally harmful consequences by creating distortions that cause environmental damage For example, an income tax may favor agricultural investment that encourages capital intensive activities in areas unsuited to that form of agriculture

4.2.5 Earmarked Taxes

Some taxes, although labeled as environmental taxes, but actually those that raise revenue earmarked for environmental purposes rather than those that change the relative price of using environmental resources There are sound fiscal arguments against the use of earmarked taxes They imply a coincidence between the level of increase in revenue and the expenditure requirement, and discourage effective evaluation of expenditure alternatives In some countries, tax measures have been legitimized by identifying the importance of the environmental expenditure to which they are put

4.3 Factors Influencing the Scope and Design of Environment-Related Taxes

In considering tax reforms that may meet environmental objectives, the policymakers have two general consideration First, in reviewing all taxes, consideration can be given as to whether or not there are special incentives or tax rates preferences which might unintentionally result in environmental damage Second, the policymaker can consider what role Pigouvian and indirect taxes can play In the following text, the focus is on the scope and design of environment-targeted taxes

Pigouvian taxes are difficult to define and administer Efficient setting of a Pigouvian tax firstly requires the tax base of emissions or damage to be determined,

followed by a tax rate set such that the marginal social cost of environmental damage is equal to the marginal cost of abatement Determining the shape and nature of these damage and cost functions, even to within a reasonable degrees of accuracy, is a considerable challenge Many of these difficulties - specific to environmental taxes, such as ecological valuation and damage measurement - apply to varying degrees to indirect environment-related taxes

Many environmental concerns have a special or temporal dimension, and this can make it difficult to structure a tax related to the damage or emission For example, the cost of air pollution from automobiles is highest in urban areas and often at particular times of day Taxes on gasoline, for example, are blunt instruments to deal with these aspects of environmental damage A combination of taxes and regulatory devices represents the best way to tackle this difficulty

Other aspects of environmental damage may be exacerbated by the imposition

of an environmental tax, even if a link between the tax and a source of environmental damage is established Environmental taxes are likely to be ineffective if there is macroeconomic instability Setting a specific environmental tax is a wasted effort when inflation rates are high Thus, the fine tuning of environmental taxes, as discussed in industrial countries, may not be appropriate in all countries

Environmental taxes may not have the desired incentive effects of modifying production methods that reduce environmental damage Rather, companies such as state enterprises, that are not profit maximizing, pass on environmental taxes without seeking

to reduce the tax burden by modifying their production methods This is an important concern in the case of economies in transition but also in many developing countries, where public utilities and enterprises may play an important role in the economy

There are also political economy concerns There is a danger that the use of environment taxes, by intentionally using the tax system to modify incentives, will encourage numerous other demands to use the tax system for the special treatment of specific activities The experience with special tax provisions is not encouraging A political impediment to the introduction of environment taxes is the argument that they harm international competitiveness The conflict between revenue objectives and environmental targeting, or that between equity with raising environmental taxes are also factors that need to be carefully considered when formulating and adopting environment-related taxes

New tax measures may end up becoming a significant drag on economic development However, Japanese development during the Oil Shock represents a good example of economic regulation established to boost competitive power in the industrial sector

5 International Discussion on Environment Taxes

5.1 Environment-Related Taxes in Developed Countries-EU cases

a very brief comparison for environment-related taxes These packages contain fuel tax, carbon tax, and electronic tax, and several special taxation measures to improve the environment

5.2 Environment-Related Taxes in Developing Countries-Chinese Case

Wang, Yang, Liu etc (1998) makes an excellent summary of taxation and the environment in China: Practice and Perspectives

“China has largely established a tax system appropriate to a market economy In general, the new tax system reflects comprehensive tax law, a fair tax burden, simplified rules and a rational division of responsibilities It creates a favorable tax climate to enhance fair competition among enterprises and the further establishment of a market economy It also plays an important role in defining the relationships between the state and enterprises and between central and local government In addition, it ensures a steady growth in national tax revenue.”

This observation could be applied to the current situation concerning environment taxes Environment-related tax items in China include natural resource taxes, urban maintenance and construction taxes, vehicle use tax and others These

“green” taxes account for about 8% of overall tax revenue The authors appreciate the existing framework provides a foundation for this “greening tax system”

However, they also state that “the present tax system is not very environmentally friendly” The scope of the reform should be to include as many environmental costs as possible within the relevant taxable categories and rates

Considering the situation in Vietnam, oil related taxes make up a high proportion of total tax revenue Now, we would like to introduce the current oil-related tax system in China in order to make comparison with that in Vietnam In China, consumption tax was introduced as part of 1994 tax reform to influence consumption patterns, and restrain luxury goods consumption With petrol and diesel oil in mind, the scheme is very similar to SCT in Vietnam, and the tax is levied on per liter basis However, there is only one significant difference In China, due to the close relationship between air pollution and energy consumption as well as vehicle usage, imposing taxes

on these items may, in theory, restrain the rise of energy related consumption or decrease the energy consumption on vehicles, since the Chinese consumption tax rate is from 3% to 8% From an environmental perspective, limiting vehicle use can directly alleviate the problem of air pollution In summary, two tax items could be seen as designed within the context of an environment-related tax, even if the tax level was not theoretically designed as such

5.3 Objective of Imposing Environment Taxes-Stage for Environment Taxes

The economic model says that a policy mix approach can accomplish target emission standards, even if introducing a lower tax rate, with a combination of subsidies Emission amounts for carbon dioxide and consumption amounts for fuels are typically discussed as a tax base in the story of environment-related taxes Among this scheme for environment-related taxes, the final tax bearer should be the final user of that energy However, the tax system of environment-related tax could be designed in various ways The stage of imposing taxes and tax debtors in the system may be discussed in relation

to various forms of distribution Of course, the hybrid of both stages will be the issue

Table 4-2-1 will show a breakdown for each stage of imposing tax The table includes categorization and existing Japanese tax items relating to environment issues

Table 4-2-2 summarizes the merits and demerits for imposing taxes at each stage The “uppermost stream imposition” and “upstream imposition” makes it difficult to shift the tax burden in the tax system design, while the tax administration will be easier

to take compared to “upstream imposition” “Upstream imposition” will be very attractive to facilitate designing the refund, reduction and exemption of taxes, in addition to avoiding the problem of shifting tax burdens while administration will be difficult due to the lack of links with the current tax system

When considering environmental taxes, it will be helpful to consider which sector will be targeted for each of the environment related items For example, a warming-prevention tax should be considered associated with household, transportation, and industrial matters Other public administrative costs and the impact on existing regulatory measure must be known to analyze at the stage of imposing taxes

5.4 Relief Measures of Environment-Related Taxes

In designing environment-related taxes, relief measures should be discussed based on several policy objectives Firstly, industrial policy will be considered as a means of preventing competitive power in the industrial sector or any rapid change in the industrial structure The measure is sometimes designed horizontally on a national basis, for example, coal is a tax exempt item in Germany Another measure is to pick up specific industrial sectors For example, electric consumption tax in Finland is subject to tax reductions for the mining, manufacturing, and industrial sectors The agricultural sector and transportation are also often targets for tax relief For example, the liquid petroleum tax is reduced in Germany for the agricultural sector

Secondly, social policy issues will be considered to determine the household tax relief For example, natural gas and electricity consumption are tax-exempt items in Holland under the national energy regulation tax In addition, consideration on Small and Medium Enterprises will be an issue in this context For example, private power generation under 2MW is tax exempt in Germany under tax on electrical items

Third, environment-friendly activities are the objectives for tax exemption or reduction For example, wind electricity is eligible for refund under Finland’s CO2 tax The use of public transportation would be a good target within this context, another example being the railway exemption under Norway’s CO2 tax

Such consideration should be kept in mind when designing environment-related taxes These EU environment-related taxes take into account the greenhouse effect on a global scale Consideration for policy objectives could be used to design environment-related taxes on water resources or soil pollution However, due to uncertainty on the environment, taxes on water resource or soil pollution may be more inefficient than regulatory measures This point should be thoroughly discussed as part

of a future policy mix approach

5.5 Applications for Revenues on Environment-Related Taxes in EU Countries

Three patterns of tax revenue application could be considered;

- All revenues are used to meet environmental objectives;

- All revenues are used to pump the general-account budget; and

- Hybrid measures are made to combine a purpose account and a general-account budget

Of course, the neutrality of tax should also take into account the fact that revenues are used as the source of tax cuts or to fund social security systems The experience of EU countries concerning environment tax could be summarized as the following Table 4-4

The table of international comparison suggests that a policy mix approach is already implemented in several EU countries, also in a theoretical context Subsidies and budgetary measures should be reexamined before introducing environment-related taxes In general, allocation for general cost-budget is a preferable measure to consider effective resource allocation in the usage of environment-related taxes Of course, these new environment-related taxes should be considered to coordinate, not only with existing regulatory and economic measures but also existing tax measures - especially those energy-related in the case of anti-greenhouse taxes

5.6 Current Situation on Environment-Related Taxes in Japan

5.6.1 Brief Summary of Environmental Issues and Existing Japanese Taxes

There are three categories of environment taxes based on their nature and function in Japan Firstly, taxes which require those who cause pollution to fairly and equally bear their economic costs do not exist in Japan (e.g carbon tax) Taxes in this category are now discussed by government officials, scholars, and citizens Secondly, the Japanese system includes several taxes with different purposes, but results in decreasing pollution Energy related taxes and the Motor Vehicle Tonnage Tax are good examples We could discuss this good example in the context of combined discussion concerning the objective of thwarting global warming with the first categorization tax The third possible answer will be tax reduction for a specific policy goal For example, accelerated depreciation for environment, gentle capitalization expenditures in CIT or tax reduction for environmentally friendly cars in Motor-related taxes are already introduced in the Japanese system

5.6.2 Why Are Only Energy Related Taxes Discussed in Japan?

Environment-related taxes have also become a hot topic in Japan As noted, to date, discussion of environment-related taxes has been related to an anti-warming tax, linked to the Kyoto Protocol on climate change The next question is why other environmental targets need not be discussed within the tax language

Firstly, such tax will be difficult to introduce, because the scheme requires the wide consensus of civil society, whereas for the anti-warming tax, historical discussion and the current scheme facilitate constructive discussion Moreover, the Kyoto Protocol will be a reasonable driver for enhancing the positive position from the taxpayer perspective Anti-warming moves do not represent closed business on the domestic scene In order to make effective regulations, discussion should be internationalized

Secondly, regulatory measures are more effective in the world of water and soil pollution The conflict between regulatory and economic measures will result in a more complicated discussion compared to other environment policy targets