Receipts from green taxes falling, says study

Matthew Phan, Business Times 8 Mar 08;

DESPITE an increasing number of environmental taxes - accompanied by loud cries for more - receipts from green taxes as a percentage of GDP fell slightly in developed countries from 1996 to 2005, according to a study by KPMG.

'It is odd to see the apparent importance of environmental taxes in so many economies has actually fallen,' said Owi Kek Hean, head of tax services at KPMG Singapore.

While GDP growth across OECD countries was strong over the period, green taxes as a proportion of total tax revenue seem to be falling in importance, he said.

Receipts from taxes classified as environmental in the OECD fell from 2.72 per cent of GDP in 1996 to 2.52 per cent in 2005. And as a proportion of total tax revenue, they declined 0.45 of a percentage point.

Environmental tax receipts among the 13 European Union nations fell during 1999-2005 from 2.8 per cent to 2.6 per cent of GDP, and from 6.7 per cent to 6.4 per cent of total taxes.

Environmental taxes as a percentage of GDP fell in 18 of the 29 OECD countries, by as much as 3.35 percentage points in places like Greece, where it was previously as high as 5 per cent.

The US had the lowest proportion of environmental taxes - 0.89 per cent in 2005, 0.13 of a percentage point down from a decade earlier.

Turkey had the highest such taxes of any OECD country, at 5.49 per cent in 2005, up more than three percentage points from 1996.

KPMG said the trend suggests that linking taxation to environmental change is complex. Taxes aimed at improving the environment could have unintended consequences, it said.

For one, it is difficult to categorise activities as 'good' and 'bad', with the latter taxed.

Pollution is not the result of an attempt to harm the environment, but often a side effect of activities intended to enhance our enjoyment of it, like travel or keeping warm, said KPMG.

Also, the paradox of environmental taxes is that the more successful they are in changing people's behaviour, the less revenue they will raise, it pointed out.

In the UK, for example, the fall in receipts was largely due to a fall, in real terms, in duty from road fuel. The same was true for many other large European economies.

And governments now have other ways of influencing behaviour, such as regulations or emissions trading schemes, KPMG said.

Governments need to take a balanced approach, with taxes as part of a package that includes other, more direct measures, says the study, undertaken by KPMG's Tax Business School in the UK.

Mr Owi said the study in some ways validates the carrot rather than stick approach that Singapore has taken so far.

Singapore has tended to use awards or tax allowances, such as for energy efficient equipment, to encourage green behaviour.

KPMG's study also said 'reliefs can never hold as significant a place in the environmental tax armoury as charges'.

Environmentally-friendly alternatives do not exist for all harmful actions, so policy must aim to reduce such actions by negative incentives, rather than just encouraging substitutes by positive incentives, it said.