Taxation and Personal Finance

The warnings about the urgency of global warming have recently and rapidly gained momentum, urging governments to take action without delay. Yet the debate over what instruments to, and to not, use to protect the environment may hinder the hurry to combat rising pollution, most notably of which is climate change.

As the most currently released report on global warming – by former World Bank chief economist Nicholas Stern – points out, green taxes are a viable option (Stern 2006 p.18); however, taxes are "more visible than other policy instruments" (OECD 1997 p. 10) so they attract the bulk of the discussion. The first OECD report on taxation and environment also concluded that "environmental and fiscal policies can and should be made mutually reinforcing" (OECD 1997 p. 7). Current taxes in the UK include: fuel duty, land tax, vehicle tax, energy tax and the "Climate Change Levy" (Cottrell 2004).

In addition to these taxes, there are also savings to be had: fuel benefits are available in the form of a lower tax charge based on Co2 emissions (Chadwick 2007b), there is a first year allowance of 100% for companies investing in energy saving and low emission technology (Chadwick 2007a), and there is a VAT reduced rate for the installation of energy saving materials (Chadwick 2007c).

Recently there has been much discussion considering: 'pay-as-you-drive' taxes, taxes on cheap flights (BBC News 2006), higher road taxes, higher parking fees, a rise in the annual duty on the least fuel efficient vehicles (Jones 2007) and incentives for the installation of wind turbines or solar panels on residential homes – such as selling any surplus of power back to the national grid (Tempest 2007).

The following green taxes are also common: licence fees for fishing and hunting, severance taxes for minerals and forestry, garbage disposal charges, recycling refunds, and specific taxes for items with "substantial negative externalities" (World Bank 1995). There are arguments for and against taxes, each with strengths and weaknesses, disclosing only one practicable truth: green taxes are only one of a number of important instruments for tackling environmental problems and should be utilized in tandem with these other instruments to neutralize some of the disadvantageous capacities of taxes.

The diversity of environmental situations must also play an important role in the implementation of tax policies in different places – plans must depend on particular circumstances. The following paragraphs will analyze further the positive and negative aspects of green taxes. Green taxes are aimed at both cutting the usage of natural resources and the accompanying harmful emissions and products, as well as the encouragement of reducing and recycling of waste (BBC News 2004).

The underlying theory of green taxes is that by raising the "price of pollution…consequently polluting activities [will also be reduced]" (Metcalf 1999 p. 658). A green tax gives every person/organization, by virtue of their being a consuming citizen/agency, the "option of responding to the new tax or charge by cutting their consumption" (Professor Paul Ekins cited from BBC News 2004) with no special treatment. And since "it is complicated to negotiate with the tax authorities", it is unlikely that anyone will obtain such treatment (Skou Andersen 1994 p. 26). Taxes can provide a "continuous incentive for pollution abatement and technical innovation" (OECD 1997 p.7).

It is because the tax is paid on each unit of consumption, or relieved based on conservation, there is a "permanent incentive to reduce pollution and to develop more efficient control techniques" (OECD 1997 p. 17). The levying of a tax affects the choices of both consumers and manufacturers. For example, a green tax on products, like "fertilizers, pesticides, batteries [and] fuels," increases the relative price of the products, thus providing a constant incentive to "use and manufacture less polluting ones" (OECD 1997 p.17).

For consumers it is to save on cost of the product, and for manufacturers it is to maintain the competitive edge with a lower priced product. In this there is the prospect to develop and prosper. The "transition to a low-carbon economy" means that there will be a shift in competitiveness, but the dynamic of competition will still exist and there will be new "opportunities for growth" (Stern 2006 p. 6) inside the environmental-scientific realm as well as external industries who make use of greener tools and activities.

Addressing the issue of concern over trade and competitiveness, "current environmental policies in OECD member countries" have not had a detrimental impact on "either individual sectors or economies as a whole" (OECD 1997 p. 17). One such growth opportunity – in fact, an indirect one – is found in employment. It is posited that a reduction in labour taxes, "financed by new or increases in" green taxes, can "provide benefits in terms of higher levels of employment" (OECD 1997 p.9).

In terms of improvement, green taxes contain a double benefit: environmental protection and lower unemployment. This is tied into another strong argument for the use of green taxes; their "possible use to lower other taxes" – for instance, "taxes on capital income"- that means a degree of "income shifting can be adjusted with how the green tax revenues are returned to households" (Metcalf 1999 p. 672).

Last, "economic instruments" like green taxes relieve public expenses of paying for the burden of environmental issues by "shifting the costs back to the market"; green taxes would diminish the "need for a large bureaucracy… [responsible for] the high costs of clean up" (Skou Andersen 1994 p. 26). Not only this, but revenue would increase (O'Riordan 1997 p. 23), which the government can use to put more efforts and resources into green policies.