UK: Energy and Environment 2 - The price of pollution.

UK: Energy and Environment 2 - The price of pollution. - The environmental tax approach is simple: those who pollute, pay; those who don't escape. Could it work? By Malcolm Brown.

Last Updated: 31 Aug 2010

The environmental tax approach is simple: those who pollute, pay; those who don't escape. Could it work? By Malcolm Brown.

"Make the polluter pay." It has a euphonious ring to it, so much so that one almost feels it should be in Latin alongside other legal/commercial phrases like caveat emptor (let the buyer beware). It also sounds like a piece of pure natural justice: you made the mess so you pay to clear it up. But then, of course, the fact that a measure is right and logical and just has never been any guarantee of its being implemented. After all, the polluter in this case is big business and big business knows how to protect its bottom line.

This time, however, it seems just possible that, with a fair political wind, it could happen. When the notion of environmental taxes was first mooted in the UK three years ago its advocates were treated with a good deal of hostility. Today, the leading expert in the field, Professor David Pearce of University College, London, a special adviser to environment secretary Michael Heseltine, believes that both business and government are prepared to give the idea a fair hearing.

Heseltine's advisory committee on business and the environment, led by John Collins, chairman of Shell UK, has been giving a lot of thought to the economic approach to pollution.

As for the Secretary of State himself, he was open-minded rather than immediately dismissive in December 1991 when European environment and energy ministers gave the European Commission the green light to bring forward legislation for an energy tax as part of a drive to cut carbon emissions. Heseltine is, of course, keeping his political options open; no politician with any savvy would rush into speaking in detail about any kind of new tax so close to an election. But while saying there were bound to be consequences from the point of view of competition and therefore the proposals required more study, the Secretary of State also commented after the December meeting, "We believe that in principle it is something we must explore."

So, environmental taxation, though not yet perhaps an idea whose time has come, is certainly an idea whose time may be fast approaching.

"The hostility that greeted some of our ideas in 1989 has disappeared, by and large," says Professor Pearce. It came from those who resented the idea that the rules of the pollution control game might be changed. "They'd been playing cricket and now somebody said, 'From now on we're going to play football.'"

The traditional approach to the pollution problem has been for governments to lay down standards, enshrine them in law and punish those who break the law by fines and court action. This is the so-called "command and control" system. The environmental tax approach is more subtle, relying more on incentives than punishment. Polluters pay taxes (they pay a premium up front for their dirty habits). Those who do not pollute escape the taxes.

Advocates of the market-based system suggest that it is much more powerful than "command and control". In his book Blueprint 2: Greening the World Economy, Pearce says that market-based incentives keep down the costs of complying with regulations. They act as a continuous "irritant" to the polluter "who therefore has a repeated incentive to avoid the market-based instruments by introducing cleaner and cleaner technology."

This is spelled out by Pearce in a recent paper in The Economic Journal, the journal of the Royal Economic Society: "Carbon taxes", he says "act as a continuous incentive to adopt ever cleaner technology and energy conservation. Standards tend to be "technology-based" and therefore encourage technology switches up to the point judged by the regulator to be "the best available". But unless standards are continually revised and set slightly above the best available technology, there is no incentive for the polluter to go beyond the standard. A tax, on the other hand, is always present as long as carbon-based fuels are used."

Another benefit is that carbon taxes can be easily modified as new information comes to light. "Regulations, on the other hand, are difficult to change in a flexible manner." He considers this to be particularly important where the greenhouse effect is involved. "The science is changing rapidly and we should therefore seek a policy instrument capable of responding to successive revisions of data and science."

Such taxes provide a clear incentive at the level of the consumer - he will avoid products which involve pollution because their prices will be higher than those of clean products.

The "polluter pays" idea is not new. The Organisation for Economic Cooperation and Development (OECD), the club of rich industrialised countries, put it forward first in 1974. A large part of the rationale behind it, of course, is that businessmen listen to market signals particularly keenly. Supporters cite the explosive rise in oil prices during the '70s as persuasive evidence of the effectiveness of market signals in changing behaviour. Between 1960 and 1973, said Pearce in an article in The Guardian just before publication of Blueprint, the UK used roughly the same amount of energy to produce each £1-worth of economic activity. "By 1984 that ratio had fallen dramatically because of the great oil price hikes of the 1970s."

Several European countries have already begun to introduce various kinds of environmental tax. Germany, the Netherlands, Finland, Denmark and Sweden have a tax on carbon fuels. The German "carbon levy" will produce DM 4,000 million a year. Norway has an environmental tax on pesticides and fertilisers. Italy, worried by the problems associated with disposable plastic packaging, has introduced a small tax on plastic bags. The UK has been hesitant, but opportunities for action are there in embryo. Last summer the National Rivers Authority introduced new charges for holders of "consent to discharge" certificates who will now pay an annual charge based on the volume of the discharge, its content and the water into which it is discharged.

The charges will meet the cost of the work involved in monitoring discharges and their impact on rivers, a cost which was previously met from general taxation. The rivers authority, quite correctly, insists that the charge will only recover costs and is not a pollution tax or penalty. But that, of course, could easily be changed if the political will was there.

Of all the possible taxes, the carbon tax is the most high-profile. The idea of a carbon tax is that the tax is graduated according to the carbon content of the fuels. Coal is taxed more harshly than oil which in turn attracts a higher tax than natural gas. According to Pearce and other experts, electricity would not be taxed directly but would pay the taxes on the carbon fuels. In short then the more a fuel added to the problem of global warming the higher would be the tax impost. The more environment-friendly it was, the lower the tax.

The incentive effect would not just work on industry. There would be an effect on domestic energy consumers too. Those who could choose their heating systems would tend to choose the less polluting - and therefore cheaper - system. Those who did not have the option of choosing a system anew or of changing their system would probably still help lessen pollution since they would tend to buy less energy and thereby conserve it.

There are potential disadvantages, of course. Taxes like these tend to bite harder on poor and elderly consumers rather than the younger and better off. That ought not to be an insuperable problem, however. Many taxes are regressive, but the solution is not usually to abandon them but to devise mechanisms to compensate the poor and elderly, effectively returning them to the status quo.

Understandably, perhaps, one of the biggest champions of a carbon tax is the nuclear industry. Its releases of carbon dioxide per kilowatt hour when producing electricity are negligible so it would fare well under a carbon tax regime, much better than its competitors. At a speech to the Tory St Stephen's Constitutional Club in London last year, John Collier, chairman and chief executive of Nuclear Electric, conceded that the tax was "a subject of the utmost political delicacy". He then proceeded very lucidly to spell out its benefits.

The arithmetic of pollution was quite clear. If the price of their product took no account of environmental damage, said Collier, industrial users and the electricity industry in particular would continue to have an incentive to use disproportionate amounts of fossil fuels.

"It could be said that they are currently being 'subsidised' to use environmentally unfriendly fuels. However that subsidy is not paid for by us but by later generations. That is the real case for a new tax regime; without it a multiplicity of private interests will ensure that progress to cutting emissions slows to less than a snail's pace."

Whatever was done with imposts like a carbon tax, suggested Collier, would have to be done very carefully to take account of what Heseltine later called the "consequences from the competition viewpoint". A high rate carbon tax would, at least initially, favour countries like France where 75% of electricity is generated by nuclear power (compared with the UK's 80% generated by coal). Organisations like the Confederation of British Industry do not share Collier's enthusiasm. They plead first that there is insufficient evidence to back claims that a carbon tax is the most cost-effective way of reducing emissions and second, that European business must not be put at a cost disadvantage vis a vis the rest of the world by having to bear a community-imposed tax.

"European Community emissions account for 11% of worldwide emissions," says the CBI. "If the EC enforced it (a carbon tax) on its own it would be relatively ineffectual. The US accounts for 23% of emissions and Japan 5% - so they should be included - also the major developing countries such as China, Taiwan, South Korea and India, from which the fastest growth in greenhouse gas emissions can be anticipated."

When the European Commission published its carbon tax proposals last September big business spoke up. ICI's representative in Brussels, Dirk Hudig, said the heaviest energy users in Europe would face a serious competitive disadvantage to their American, East European and Chinese rivals whose countries showed no signs of adopting a similar tax. "Whole areas of European industry could be pushed out of business or out of Europe."

Advocates like John Collier understand the difficulties but say that quite apart from the environmental benefits the sceptics may not have fully understood the other potential benefits. For example, "The amount raised by a carbon based tax could be neutralised by reductions elsewhere."

Pearce agrees. He thinks the doubters may be converted when they realise that far from being a danger, environmental taxes may actually be good for industry. "The big thing that hasn't dawned on industry yet is that they can actually benefit from these things.

"If you look at the environment White Paper there is this statement that an environmental tax doesn't exist to raise revenue, it exists to alter people's behaviour. Nevertheless, it will raise revenue and if you think of something like a carbon tax it so happens that you wouldn't have to have a very big tax to get very big revenues out of it. That would be an embarrassment to a government - $10 on a barrel of oil would actually raise quite a lot of money - so you'd have to give the money back again." This could be done, says Pearce, by reducing other taxes on effort and initiative. "So you'd reduce corporate taxes or you could reduce income taxes. If I was in industry I'd say 'Hang on, I don't like the look of this carbon tax because it's going to tax one of my inputs. On the other hand if I lobbied government cleverly enough and used all my government liaison men and public relations men I could actually get a reduction in corporation tax.'"

It would be a good deal from business's point of view and a wonderful one for the politicians. They would be able to appear both internationally responsible - agreeing to co-operate on environmentally-beneficial policies - and generous to industry. "They can reduce tax anywhere, whichever one they want to reduce."

The next big venue for discussion of energy taxes will probably be the United Nations Conference on the Environment and Development in Rio de Janeiro in June, 1992.

There the really thorny problem will be how to treat Third World nations if energy taxes are to be universalised. The poorer nations may conclude that saving themselves and their populations has to take precedence over saving the environment. Beyond that is the whole issue of eastern Europe. As states in the eastern bloc have moved towards democracy and the market economy the extent of their pollution problem has become clearer. In some cases it is appalling.

The big question now is whether as well as adopting free market economics to ginger up their industry and give their populations a better deal they might try for a market-based solution to pollution.

Malcolm Brown is a freelance journalist.

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