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January 11, 2011


Who Should Shoulder Environmental Taxes? Taken from the Perspective of the "Ground Zeroes" of Climate Change Action

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Lecturer: Jiro Adachi, Program Coordinator for the Green Tax Reform Program of the Japan Center for a Sustainable Environment and Society (JACSES), a nonprofit organization

The Advantages and Disadvantages of Environmental Taxes

"Environmental taxes" is a general term for taxes that help to conserve the environment. Environmental taxes that are levied on carbon dioxide (CO2) emissions from the burning of fossil fuels such as oil, coal, and natural gas--a major cause of global warming--are specifically called carbon taxes. The Japanese government often refers to carbon taxes with the phrase "environmental taxes." So today, I will also use the words "environmental taxes" to refer to the taxes to curb CO2 emissions.

Why are environmental taxes necessary? Suppose that there are two types of products, A and B, and that producing A involves three times as much CO2 emissions as producing B. In this case, from the viewpoint of CO2 emissions, it is obvious that B is more environmentally friendly than A. But in countries where there are no environmental taxes, like Japan, if B is more expensive than A, the number of people who buy B won't increase. No matter how hard companies work to produce eco-friendly products, they cannot continue to do so if nobody buys them. In this context, the introduction of environmental taxes stems from the idea that levying taxes on products based on the amount of CO2 emitted in their manufacturing process will make eco-products more competitive in sales, which will have an effect in cutting CO2 emissions and will consequently help slow global warming.

Since this kind of scheme does not yet exist, there is a high possibility that economically poor small island countries and future generations will unfairly bear the burden associated with global warming. One of the advantages of environmental taxes is their ability to create "price incentive effects" by properly incorporating environmental costs into the economic system, so as to correct such a distortion of the market.

Another hoped-for advantage is "announcement effects." Through the communication form of environmental taxes, the fact that using fossil fuels emits CO2 and accelerates global warming may be conveyed to many people more easily. Environmental taxes also promise to produce an "effect of maintaining financial resources," by allocating tax revenues to climate change measures.

On the other hand, there are people who raise questions over the introduction of environmental taxes. Some say that if Japan introduces environmental taxes in isolation it will have a negative impact on the international competitiveness of the Japanese industry. Also, since greenhouse gas emissions vary widely depending on the type of industry, others are concerned about whether industries that emit large amounts of greenhouse gases, such as the steel, paper pulp, and cement industries, will be able to withstand their tax burden. More and more companies are likely to move their plants overseas if their operation costs increase in Japan. If this occurs, total greenhouse gas emissions won't be reduced globally. When I talk with business people, some of them say that if environmental taxes were to be imposed, they won't be able to raise the necessary funds for research and development of innovative technologies to cut CO2 emissions, and that this could spoil their emission reduction efforts.

Discussing Energy Taxes as a Whole

Now let's turn our attention to trends overseas. Northern European countries that are known as environmentally advanced countries introduced environmental taxes as early as the beginning of the 1990s. Germany and Italy followed suit in 1999, as did the United Kingdom in 2001. Their aim was to achieve their CO2 reduction targets adopted under the Kyoto Protocol in 1997. Recently, Switzerland and Ireland also introduced them in 2008 and 2009 respectively. Evidently, many leading European countries have already introduced environmental taxes.

Behind the fact that European countries are proceeding with the introduction of environmental taxes to some degree is that, as consolidation of the European Union (EU) progresses, there has been debate over instituting an environmental tax system that is common throughout the EU. Although the EU has not yet introduced the system entirely, it is still being discussed.

The United States is also considering introducing environmental taxes, but is not very active about it. Meanwhile in Canada, Quebec and British Columbia introduced environmental taxes at a local level in 2007 and 2008 respectively. As for Asian countries, although none have passed anything, China and South Korea have started to consider it.

Looking at the examples in Europe, we notice that they have remodeled their conventional energy tax systems when introducing environmental taxes. If environmental taxes are levied without changing the existing gasoline tax rate, their introduction will be far from convincing. Remodeling the conventional tax system is thus the key to introducing environmental taxes.

What's important here is to design a new tax system that will increase the entire tax rate on energy. For example: If the current gasoline tax rate is 20 yen per liter, it should be reduced to 15 yen, and then a 10-yen environmental tax added to it. As a result, the rate of gasoline tax will increase to 25 yen per liter, which will lead to a reduction of CO2 emissions from the use of gasoline. Germany and many other European countries have designed their tax systems in this way.

Japan's gasoline tax rate is higher than that in the United States, a highly motorized country, but is quite lower than those in European countries. Nonetheless, the ruling Democratic Party of Japan is proposing a reduction of the gasoline tax rate by 25 yen per liter. Also, the Ministry of the Environment proposed last year to reduce the gasoline tax rate (per liter) by 25 yen and then impose a 20 yen environmental tax on gasoline. This will end up reducing the gasoline tax rate by 5 yen. Under this situation, car users will benefit, while citizens who use public transportation to help prevent global warming will have to bear the extra cost.

Tax Increase on 'Bads' and Tax Reduction on 'Goods'

Currently, Japan has the following energy taxes: gasoline taxes imposed on gasoline, which consist of the volatile oil tax and the local road tax; the diesel oil delivery tax on diesel vehicles like trucks; the liquefied petroleum gas (LPG) tax on taxies that run on LPG; the petroleum and coal tax on petroleum, coal and natural gas; the airplane fuel tax on airplane fuel; and the electric power source development promotion tax on electric power.

When considering reform of the existing energy tax system, it is important to take into consideration which authority is responsible for each tax. For example, energy policy-related taxes, such as the oil and coal tax, and the power source development promotion tax are authorized by the Ministry of Economy, Trade and Industry. Meanwhile, the volatile oil tax, local road tax, diesel oil delivery tax, and airplane fuel tax are authorized by the Ministry of Land, Infrastructure, Transport and Tourism, since these are related to improvements for roads and airports. In general, it is extremely difficult to coordinate the activities of different authorities. This is why the Ministry of the Environment once proposed levying environmental taxes without changing the existing energy tax rates. However, this proposal hasn't worked, partly due to a backlash from the business sector, which wants to avoid an increase to its tax burden.

Assuming that environmental taxes were successfully introduced, what should the tax revenues be used for? In Japan, a considerable number of people say that it is natural to use them for environmental measures. But in Europe, this way of thinking isn't so common; in fact, revenues from environmental taxes are often used to reduce other kinds of taxes.

For instance, in Finland and Sweden, environmental tax revenues are earmarked for reducing income taxes. In Denmark, Germany, Italy, the U.K., and some other European countries, the revenues are used to reduce premiums for social insurance, labor insurance, and annuity insurance, etc. (which are considered to be taxes in a broad sense). In short, these countries levy environmental taxes on the one hand and reduce other taxes on the other, so that their government revenues are almost unchanged. This is based on the idea that they can revitalize the economy and employment by increasing taxes on "Bads"--matters that go against environmental conservation and are thus unfavorable to the whole of society--and reducing taxes on "Goods"--matters that are socially important, such as labor force and employment.

Many Japanese people have this idea that environmental taxes mean a tax increase, and tend to say something like, "Let's all endure pain for our society." However, Japan can probably pull from Europe a different approach to thinking about environmental taxes.

Tax is Money Funded to the Government

A discussion about environmental taxes may be unfamiliar to you. So now let's review what taxes are in the first place. Perhaps you feel that tax is money that is taken away from you. In principle, this shouldn't be. We should think of tax as money we leave to public policy experts, such as government officers and politicians, in trust. In other words, we fund governments by means of taxes. In this sense, governments have a responsibility to explain to taxpayers whether tax revenues are being used effectively, while we taxpayers have the right to place a check on the government's use of the revenues.

Where is the ground zero of climate change? Many people think of Tuvalu and other small island nations. Certainly, these countries are a symbol of the places on Earth most vulnerable to the devastation caused by climate change. But in terms of where climate change measures are taking place, ground zero is in fact each of our households, business worksites, and the like. In order to formulate policies to address climate change, such as environmental tax policies, the conditions of these "ground zeroes" should be taken into careful consideration. Also, policymakers need to understand the Japanese business community's place within the world as a whole. They need to ascertain the whole global economy when considering the introduction of environmental taxes. These taxes are part of not only environmental policies but also the economic policies for our future economy.

At our respective "ground zeroes," each one of us is a CO2 emitter as well as a leading player in advancing climate change measures. At the same time, we are the people who will pay environmental taxes if they are introduced. In this context, I believe it is important that each and every citizen checks the use of environmental tax revenues by the government, and expresses his or her opinion when necessary.


Jiro Adachi, Program Coordinator for the Green Tax Reform Program of the Japan Center for a Sustainable Environment and Society (JACSES), a nonprofit organization
Adachi first became involved in NGO activities as a university student, when he worked to help reform official development assistance (ODA) and strengthen environmental measures carried out by corporations. After working for Toray Industries, Inc., he started his new career at JACSES in 1995. Currently, Adachi also serves as a coordinator for the Carbon Tax Study Group, a member of the CDM advisory committee of the Japan Quality Assurance Organization, and as a member of a committee organized by the Ministry of Economy, Trade and Industry to study economic measures to address global warming. His coauthored books include: Environmental Taxes: Tax and Financial Reform and a Sustainable Welfare Society, Carbon Markets and the CDM, Limits of the Earth, and Declaration of Our Green Job Hunt: What We Want to Know.