What is the relationship between the environment and taxes?
Environmental tax is used as an economic instrument to address environmental problems by taxing activities that burden the environment (direct carbon tax), or by providing incentives to lessen environmental burden and preserve the environment activities (tax credit, subsidy). It is used as part of a market-based climate policy which was pioneered in the U.S. that also includes cap-and-trade energy emission allowance trading programs which attempt to limit emissions by putting a cap and price on them.
Environmental taxes are designed to internalize environmental costs and provide economic incentives for people and businesses to promote ecologically sustainable activities, to reduce CO2 emissions, to promote green growth and to fight climate change via innovation. Some governments make use of them to integrate climate and environmental costs into prices to reduce excessive emissions, while raising revenue to fund vital government services.
Carbon Tax: Under a carbon tax regime, the government sets a price that emitters must pay for each ton of greenhouse gas emissions they emit so that businesses and consumers will take necessary steps, such as switching fuels or adopting new technologies, to reduce their emissions to avoid paying the tax since taxes have distortionary effects, affecting free-market decisions. They are favored, because administratively assigning a fee to CO2 pollution is relatively simple compared to addressing climate change by setting, monitoring, and enforcing caps on greenhouse gas emissions and regulating emissions of the energy-generation sector. The tax revenues from these taxes address the failure of free-markets to consider environmental impacts. Four subsets of environmental taxes are distinguished: energy taxes, transport taxes, pollution taxes and resources taxes.
According to the Organization for Economic Co-operation and Development (OECD) greater reliance on environmental taxation is needed to strengthen global efforts to tackle the principal source of both greenhouse gas emissions and air pollution. Because outside of road transport, 81% of CO2 emissions are untaxed and tax rates are below the low-end estimate of climate costs for 97% of emissions. Coal, characterized by high levels of harmful emissions and accounting for almost half of carbon emissions from energy use in the 42 countries, is taxed at the lowest rates or fully untaxed. Only 40 governments out of 197 that have signed on to the first legally binding, climate change Paris Agreement have adopted some sort of price on hydrocarbon, either through direct taxes on fossil fuels or through cap-and-trade programs.
Carbon taxes have been implemented in twenty‐nine jurisdictions out of 197 that have signed on to UNFCCC’s Paris Agreement. A Scandinavian wave starting in the early 1990s saw carbon taxes legislated in Denmark, Finland, Norway, and Sweden among other countries. A second wave in the mid‐2000's saw carbon taxes put in place in Switzerland, Iceland, Ireland, Japan, Mexico, Portugal and the UK. This year Canada, Argentina, South Africa and Singapore implemented a carbon tax. These carbon tax rates range from $1- $139 per ton.
A carbon price/tax of between $50-$100 per ton would be needed to be implemented by signatories to deliver on Paris Agreement commitments by 2030 according to a report titled “High-Level Commission on Carbon Prices”, written by Nobel Laureate Economist Joseph Stiglitz and Nicholas Stern.
Tax Credits: Through tax credits, subsidies and other business incentives, governments can encourage companies to engage in behaviors and develop technologies that can reduce CO2 emissions. Just as tax credits for fossil fuel energy sources has enabled growth and development, the renewable energy tax credits are incentives for development and deployment of renewable energy technologies.
According to the IMF as well as the International Energy Agency (IEA), the elimination of fossil fuel subsidies worldwide would be one of the most effective ways of reducing greenhouse gases and battling global warming. In 2009, G20 countries pledged to phase out “inefficient fossil fuel subsidies” by 2025. While Paris Agreement commits its signatories to hold global warming to well below two degrees Celsius through significant greenhouse emission cuts.
Energy subsidies of signatories might require coordination by the OECD and integrated implementation, because of regulation at the World Trade Organization in light of globalization and increased interconnectedness of energy and environmental policies via the Paris Agreement.