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2021 | Book

Fiscal Control of Pollution

Application of Ecotaxes in India


About this book

This volume analyses the process and structure of ecotaxes in India to bring forth its rationale, application and incidence on emerging environmental problems on the backdrop of the environmental issues confronted by the Indian economy. Being at infant stage in India, the concept of ecotaxes is plagued with large empirical difficulties. This book provides a holistic understanding of the complexities in the design and implementation of these fiscal instruments at the country level. After elaborating on the theory, history of its applications, the book provides an innovative methodological exercise. It examines the adequacy and relevance of ecotaxation in the Indian context, along with ensuring that the distortions due to the proposed levy are minimised. The incidence of these taxes on the households, the double dividend hypothesis and the effect on competitiveness of the producer are a few of the core themes elaborated upon in this book. This is demonstrated through a linear general equilibrium framework of Environmentally extended Social Accounting Matrix (E-SAM).

The book provides material for the researchers and graduate students on the methodological structure of eco-taxes. The proposed methodological intervention could be utilised by the researchers who wish to analyse the macroeconomic impact of any tax through the framework of Social Accounting Matrix (SAM). Additionally, the process as well as the implications and nuances provided in the book will assist the policy makers to design innovative policies for dealing with environmental issues. The volume also has something for the practitioners by helping them comprehend various effects of these instruments on different stake holders of the economy and thus will be useful as a policy prescription. The three policy scenarios analysed in this study could be considered by the policymakers while attempting to design these instruments in the Indian context and thus ending the extensive reliance on the age old and grossly ineffective Command and Control (CAC) Policies.

Table of Contents

Chapter 1. Introduction
Market based and fiscal instruments have long been proposed by the economists for tackling environmental degradation; however, India for some reason has till date remained largely elusive to these instruments and has focused on the command and control (CAC) measures which could not bring effective control in the CO2 emissions in India. The concern for using ecotaxes to reign pollution emerges primarily from the failure and inefficiency of the command and control measures on one hand and market price-based instruments on the other in curbing the unabated pollution. As the opening chapter, the concept of ecotaxes/other measures have been explored through the understanding of its brief history in the Indian context. An attempt is undertaken here to comprehend this in the context of the theoretical foundations of these instruments with Prof. A. C. Pigou’s arguments and thereafter exploring the critical issues pertinent to these instruments by categorising them into descriptive, economic and fiscal issues. The issues to be considered for effective design of ecotaxes have been distilled down to the issue of non-existence of a comprehensive definition and thereafter the issue pertaining to base and optimal rates of ecotaxes and issues of incidence, double dividend and competitiveness.
Rajat Verma
Chapter 2. International Experiences of Ecotaxes: A Few Lessons
There are countries which have implemented ecotax system; here, in order to understand the ecotaxes world over, an extensive examination of the international experiences of fifteen countries has been undertaken so as to comprehend the relative experiences in not just levying ecotaxes but also for analysing the status of other fiscal instruments such as subsidies, rebates, etc. The two primary questions explored in this chapter are: first, what is the superiority and limitations of ecotaxes over other Environmental Fiscal Instruments (EFIs) and what lessons can India deduce from the design of EFIs in other countries? To answer these questions, the experiences are analysed and categorised into two groups: OECD and emerging economies. Former group consisted of eleven OECD countries, and of these, five were Nordic, and others included Australia, Canada, Netherlands, Germany, United Kingdom and United States of America. Among the emerging economies, Brazil, India, China and South Africa were chosen so as to make the analysis comparable. The revenues from these taxes were computed and examined. The explanations for the computed revenues in the fifteen countries have been deduced from: the analyses of the data points, mathematical reasoning, policies adopted and the variances in the tax rates. The major outcome of this analysis is that energy taxes followed by transport taxes were the most prevalent forms of ecotaxes across the OECD countries. Further, pollution taxes could be difficult to implement because such instruments would require complex and costly administrative and technological structures. The revenue as a proportion of GDP and total tax revenue in OECD countries ranges from 2 to 4% and 5 to 10%, respectively, with US and Canada being an exception. On the other hand, for emerging economies ratio of revenue to GDP and total net indirect tax revenue is between 0 to 1% and 1 to 10%, respectively. All these results could be explained from the fiscal policies followed by these countries. The OECD/EEA database, which is the only major database, did not comprehensively compile the EFIs of developing countries, especially that of India.
Rajat Verma
Chapter 3. Environmental Regulations in India
India has a good number of environmental regulations, but these are tangentially touching the core aspect of the issue. Here we have looked into all the environmental regulations in India by analysing the ways in which the environment should be regulated effectively. The command and control (CAC) policies have been critically examined vis-à-vis the market-based instruments. This has been done first by constructing a comprehensive definition of ecotaxes and thus examining the existing taxes in India which could be deemed as environmental taxes in the strict Pigouvian sense. Thereafter, in this study, polluting sectors and goods were identified for the potential levy of ecotaxes in all the three types of pollution, i.e. air, water and land. Finally, the status of the CAC policies and their compliance by the polluting industries were examined by studying the interrelationships between the legislative, executive and judiciary. Fifteen types of environmentally related taxes were identified in India of which only two could be deemed as direct environmental taxes: ‘vehicles tax (on old automobiles)’ levied in Andhra Pradesh, Tamil Nadu, Rajasthan, Karnataka, Goa and Maharashtra and ‘vehicles entry tax’ in Himachal Pradesh and Uttarakhand. The environmental legislations are overlapping, and the powers given to the pollution control boards (PCBs) are insufficient and thus these laws act as toothless tigers. Alert judiciary has played very significant role in protecting the environment in India; however, it is also plagued with delays in the judgements and is constrained with the lack of technical expertise in several environmental pleas because of which the judgements are not pragmatic.
Rajat Verma
Chapter 4. Designing Ecotaxes in India: An Environmentally Extended Social Accounting Matrix (E-SAM)
Designing ecotaxes requires an understanding of the intertwining relations between sectoral activities that generate pollution in the environment. An attempt is undertaken in this chapter to holistically construct an E-SAM for India. Using the methodology of E-SAM in such context is unique, and this is substantial improvement on the only existing E-SAM for India of Pal et al. (2015) by including significant environmental components, i.e. water and land so as to analyse their interactions with other sectors of the economy. Apart from a comprehensive dataset for designing ecotaxes, an attempt has also been made to arrive at potential tax bases and a theoretical deduction for the optimal rates of these taxes, thereby addressing the design issues related to these taxes. The E-SAM has 33 core sectors of the Indian economy along with three categories of labourers, namely unskilled, semi-skilled and skilled. Further, the E-SAM also has five categories of rural and four categories of urban households, and there are three environmental categories of air, water and land. The five foremost polluting sectors or tax bases were identified using the pollution coefficients from the E-SAM, and these are thermal (NHY-non-hydro), fertilisers (FER), iron and steel and non-ferrous basic metals (MET), paper and paper products (PAP) and textile and leather (TEX). Here, for the very first time, an attempt is made to construct theoretical scaffolding for arriving at optimal rates for ecotaxes which underscored the idea of redundancy of arriving at specific numbers of tax rates as these numbers are most desired ideal scenarios. Environmental taxes can be easily subsumed under the framework of the GST by providing a separate tax slabs for these taxes with the provision of using the proceeds from these taxes for revenue transfers and earmarking the revenue for environmental purposes.
Rajat Verma
Chapter 5. Analysis of Incidence Through E-SAM
The question related to the levy of ecotaxes has been examined empirically in this chapter along with the most desired discussion on incidence, i.e. who ultimately pays the tax? The progressivity of the ecotaxes has been examined using the framework of E-SAM on five rural and four urban household categories which have been classified based on their occupational structure. This analysis is attempted to address research gaps in the literature which pointed out that the studies did not examine the effect of such a tax by incorporating all the three environmental components. A price vector model has been used to model the incidence of ecotax on households. Here ecotaxes have been modelled on the value of outputs of the five most polluting sectors in India; thermal (NHY-Non-Hydro), fertilisers (FER), iron and steel and non-ferrous basic metals (MET), paper and paper products (PAP) and textile and leather (TEX). Such an ecotax could be categorised under output tax. An important outcome of this exercise was that the ecotaxes were found to be overall progressive in both rural and urban household classes for both 5 and 10% tax rates. However, in the case of rural household categories, the tax was found to be mildly regressive for the household class of Rural Agricultural Self-Employed (RASE). Revenue generated from this levy could be utilised for making the tax progressive, and it was found that to make this tax progressive for the household class RASE, it is necessary to transfer revenue in the range of meagre 2–10% of the total revenue that has been generated from the levy of this tax.
Rajat Verma
Chapter 6. Double-Dividend Hypothesis and Competitiveness: A Critical Examination
Developing ecotaxes for a populous country such as India is a challenge due to complexities of economic activities and information non-availability. The pressing question addressed here is regarding sustaining its growth while preserving environment. It is normally difficult to achieve these goals simultaneously, and thus the trade-off seems inevitable at first glance. This is also the case with ecotaxes as the inefficiencies related to the levy of this tax could result into costs that may even outweigh the environmental gains. This complex issue has been delved in this chapter. Cost on the economy and its agents have been studied at two levels, first the impact on the economy as a whole for which three indicators have been utilised: GDP, wages of the workers and emissions/degradation into/of the environmental resources. Second, the effect on the taxed sectors has also been studied through the change in their export competitiveness. The other related issue that has been analysed is whether the revenue generated from the levy of ecotax could be recycled back into the system to attain the additional dividend (or the double dividend) by reducing the inefficiency from the levy of ecotax. In order to supplement the analytical framework, a guarded simulation exercise is undertaken here. The outcomes from the simulation exercise at both 5 and 10% tax rates using the E-SAM framework are that the revenue recycling did generate double dividend as there were cost savings not in terms of increment in GDP but in terms of environmental improvement depicted through emissions of GHGs, wastewater discharge and land degradation. The trade-off between the preservation of environmental quality and economic growth could be overcome via revenue recycling. The effect of ecotaxes on competitiveness of the polluting sectors and the wages of the workers due to the change in export competitiveness was found to be minimal at both the tax rates.
Rajat Verma
Chapter 7. Summary and Conclusions
Ecotaxes have undoubtedly arrested the environmental degradation in the countries wherever it has been implemented since past three decades. However, the issues as fundamental as non-acceptance of a uniform comprehensive definition and other issues pertaining to the ambiguity of its effects on the economy plague its adoption in the countries that have historically relied on command and control (CAC) measures, the prime example of which is India. In this chapter, attempts have been made to discuss these threadbare issues and their solutions, which were examined in this book by simulating the effect of ecotaxes on various stakeholders in India. The concerns related to designing of these taxes could be narrowed down to the notion of identifying the base and optimal tax rates. The pollution coefficients of the E-SAM resulted into the five most polluting sectors such as thermal (non-hydro), fertilisers, iron and steel and non-ferrous basic metals, paper and paper products and textile and leather. Their value of output was considered as the tax base. Through an elaborate mathematical derivation and visualising the suppliers as large and small scale, it was shown that the optimal rates are just a theoretical construct and is mathematically infeasible. Therefore, it is an idealistic scenario which is unattainable. The ecotax was found to be overall progressive, thus negating the equity concerns. The double dividend could be reaped, and the effect on export competitiveness is also minimal. Thus, it could be concluded that ecotaxes would prove to be the game-changer in arresting the environmental damage while ensuring that the growth is not traded off.
Rajat Verma
Fiscal Control of Pollution
Dr. Rajat Verma
Copyright Year
Springer Singapore
Electronic ISBN
Print ISBN

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