Analysis of the Efficiency and Equity of Green Taxes

According to enthusiasts for green taxes, taxation is the way to a better environment and a healthier economy. True or false?

Unfortunately, in a world of convenience, pollution is the price we pay for those conveniences. Automobile manufacturing releases smog in the atmosphere, but we demand more gasoline cars. Complaining about garbage dumps increasing in size, yet we still throw out garbage. To take an extreme view as set out above is hypocritical. However, those problems are real and must be dealt with both in an efficient and equitable manner. The purpose of this analysis is to explain if green taxes are the optimal solution to environmental problems.

“Green taxes” are taxes levied on households or firms that produce waste. The purpose of those taxes is to deter households and firms from producing environmentally unfriendly waste. For example, households are taxed on the number of bags of garbage they throw out. An example for some firms would be a tax on the amount of carbon they release into the atmosphere by manufacturing. The revenues generated from green taxes are to be diverted to the restoration of the environmental damage caused by firms and households and to pay for the removal of refuse from our neighbourhoods.

Green taxes seem to be the answer to some of the environmental problems we are faced with today. Taxing households on the number of bags of garbage, in theory, should reduce the amount of garbage going to the city dumping grounds. Taxing the manufacturing firms on the amount of carbon released into the air, in theory, should reduce the smog produced within our cities. Using economic models, we can prove the success or failure of these green taxes.

Green taxes have a general tax base. Everyone generates waste. Therefore everyone who pollutes should have to pay. This type of tax is very efficient as you are being taxed on the amount of waste you produce. In a sense, green taxes are user charges (for the use of the environment). One example of user charges was used in the article, Garbage In, Garbage Out. In that case. a green tax was levied on local garbage disposal by selling stickers to be placed on garbage bags or bins. This method accomplishes the goal of user charges on households by forcing individuals to buy stickers for each bag of garbage. Unfortunately, researchers found people would compact more garbage into a container, resulting in only reducing the amount of disposal by approximately 3%.

An example of a green tax on the firm was used in Taxes for a Greener Planet. The local government levied green taxes on automobile manufacturers based on the amount of carbon and pollution created by their specific industry. Once again, in theory, the manufacturers should have reduced the amount of pollution they released into the atmosphere. However, the firm’s transaction cost of reducing pollution was greater than the cost of paying the levied tax. This resulted in the firm paying additional taxes, which were in turn passed onto the consumer. The government received additional revenue without accomplishing what it set out to do; reduce pollution.

The Alternative Budget group provides a number of green tax schemes that are to reduce the amount of pollution and obtain better externality cost accounting criteria by polluters. However, they do not set out an administration plan of action to accomplish this, merely a suggestion of the overall adoption of green taxes.

After reviewing this limited material, the main thought that stands out is the decision we must make a distinction between saving the environment or prolonging it. If the choice is to prolong it, then the green taxes which are to be levied should reflect this. For example, governments could look at acceptable pollution levels and base their budget and factor in these figures.

However, if the choice is to save the environment, then green taxes have to be levied for that purpose. For example, the diversion of the various tax revenues into planting more forested areas with strict restrictions on the specified use of green tax revenues.

In reality, it is obvious that no matter how much tax is levied on polluters, pollution will continue. Using this as a starting point, then giving incentives for reducing pollution rather than punishments for those who pollute would achieve more success in reaching a government’s goal, no matter which goal that was.

Green taxes appear to be a way of reducing the polluter’s activity, but to levy these taxes both in an efficient and equitable manner seems impossible. For example, two households produce waste. Household A disposes 10 lbs. of garbage per day and household B disposes 20 lbs. of waste per day. Both households are able to fit their waste into the same-sized container. It may be efficient to charge both households the same amount because they each use one container, but it is not very equitable for household A.

The efficient and equitable solution would be to charge by weight. Household B generates twice the amount of waste than household A, therefore household B should pay more. This type of system would be both efficient, using weight opposed to containers, and equitable; more weight, higher taxes.

Using the same example, look closer at these two neighbours. Household A is a single senior citizen on a fixed income and household B is a married couple. Does taxing on weight still seem efficient and equitable? What if household B is a single mother with two kids and a mortgage and household A is earning more on pension than household B is earning working part-time with subsidies. Is it still equitable to charge more to B then A? In this situation, would be inequitable to punish the mother for the additional 10 lbs. of garbage?

The same argument could be made for the firm. Assume there are two firms both in the same industry. Firm A generates 50 tons a day of carbon into the atmosphere, and Firm B generates 100 tons a day. The efficient manner of tax would be to tax firm B twice the amount of firm A. But is it equitable? Suppose Firm A and B generate the same amount of production. Firm A invests in environmentally friendly equipment, which reduces its carbon output by half, but Firm B invests in better wages and benefits for its employees. In this case, Firm B would be paying higher green taxes. As a result, it could charge higher prices for its products or reduce the number of products being manufactured. Either way, the tax has given Firm A an advantage at the expense of Firm B. Even if Firm B were able to reduce more of its profit margin and survive with this tax in place, Firm B would lower its carbon by a certain percentage. However, a reduced profit margin would certainly eliminate Firm B’s chances of obtaining similar equipment to that of Firm A. But what incentives has this tax given to Firm A to lower their amount of pollution? Zero. Firm A can continue to pay the levied taxes as a result of increases in revenues obtained from Firm B’s disadvantage.

Are green taxes good in theory? Perhaps, they do not actually accomplish any meaningful reduction in environmental pollution. In fact, based on the limited information used for this paper, green taxes accomplish nothing more than additional tax revenues for the government.

The objective behind green taxes is to preserve or protect the environment. In a world of growing pollution and increasing pollution, any system of taxation levied for the protection of the environment is a grand idea. However, implementing such a type of taxation is an administrative nightmare and not very successful, as demonstrated by past attempts.

Whatever system is adopted must contain both rewards and punishments or subsidies and taxes. The taxes must be earmarked for specific purposes to either pay for the rewards of subsidies for reducing pollution and recycling or to repair the damaged environment. If the revenues are not restricted for the green purpose, the green taxes will become a disguise of taxation for the government. Similar to the objective behind why the Income Act of Canada was implemented and remains in effect, even though the war ended many years ago.