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Book Review
Green taxes
P. S. Vijay Shankar
ECOTAXES ON POLLUTING INPUTS AND OUTPUTS: Raja J.Chelliah, Paul P. Appasamy, U. Sankar and Rita Pandey; Academic Foundation in association with the Madras School of Economics, Chennai, 4772-73/23, Bharat Ram Road, Daryaganj, New Delhi-110002. Rs. 595.
Economists have for long grappled with the problem of externalities, particularly that of environmental pollution. The approaches to deal with the problem range from a “command and control” approach leaning heavily on the regulatory arm of the state to the use of appropriately-designed economic instruments like taxes and fees on polluting inputs and outputs. This book explores the scope of using “eco-taxes” to control pollution caused by selected in
dustries in India. It also draws upon the relevant lessons from international experience on environmental taxation. An eco-tax, as defined in the book, is a price-like instrument that assigns a price to the negative social externalities created by production. It translates the principle of “polluter pays” into practice.
Empirical richness
The major conclusion of the study is that while implementation of a regulatory approach seems tricky particularly if the source of the pollution is difficult to define (“non-point sources”), the use of eco-taxes is no simple matter either. Any doubts on this matter would be settled by reading the chapter on automobiles, which discusses in detail the problems of defining the tax base and arriving at appropriate rates of taxation. Moreover, an eco-tax can be implemented only with the backing of a state with a regulatory capacity to impose penalty on the non-compliers. Therefore, the authors conclude that we need to arrive at a mix of regulatory and economic instruments in each case.
A major part of the book is devoted to specific proposals to arrive at this mix for industries like coal, automobiles, pulp and paper, phosphates and detergents, plastics, chemical fertilizers, pesticides and lead batteries. It is this empirical richness which makes the book a substantial contribution to the existing literature on pollution abatement in India.
The book strongly takes the view that eco-taxes cannot be a standalone intervention. For instance, it highlights the important point that by discouraging polluting technologies, the proposals for eco-taxes effectively create a space for the promotion of non-polluting technologies. We refer to the discussion on chemical pesticides and the alternative bio-pesticides such as neem-based products. We cannot control the use of chemical pesticides while the government’s pricing policy continues to favour them. Hence, the effectiveness of eco-taxes is contingent both on the appropriate pricing policy of chemical pesticides as well as the policies adopted by the government to promote environmentally friendly alternative technologies.
Similarly, in the case of chemical fertilizers, the book argues for a reduction in government subsidy to products like urea rather than imposition of eco-taxes to tackle pollution created by the excessive use of chemical fertilizers. Reduction of product-based subsidies for chemical fertilizers will raise their market price sufficiently to reflect their true cost of production and thus render their alternatives like bio-fertilizers and organic inputs economically viable. This would lead to a more balanced application of plant nutrients and to the promotion of environmentally sustainable agriculture. Similarly, (though the book does not take this example) restructuring of electricity tariffs would make the price of water reflect the true cost of its extraction and thus render the whole range of water recycling technologies economically viable. While this is true for cases where such “proven” technologies do exist, it is also necessary to ensure larger public investments in the development of new, appropriate, low-cost and environmentally friendly technologies, an aspect not sufficiently emphasised in this book.
Complexities
Technologies at a nascent stage require large-scale trials and experimentation under different “field conditions”, preferably under the tutelage of the public sector institutions. An innovative suggestion put forward by the book is to earmark the revenue earned from eco-taxes as a separate fund to be used to promote clean technologies. Needless to say, this requires a commitment on the part of the governments not to give in to pressures of political expediency at the expense of a long-term vision.
As mentioned, eco-taxes are by no means as easy to implement as they appear. The book touches upon but does not go into two major complexities. The first is the need for a reliable and comprehensive database for estimating the tax base and deciding on tax rates. This is a huge informational challenge that accompanies the proposals in the book. How such a database can be created and maintained needs some elaboration. Secondly, the focus of the book is on the design of eco-taxes within the central government tax system. How this system will work in a federal set up with state and local governments as additional players needs a detailed study. However, as the authors have shown an awareness of these issues, the book has made a good beginning in laying out the basic principles involved in eco-taxation. More detailed and industry-specific studies could come up with innovative suggestions on how to operationalise these principles in the Indian context.
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