The Vienna Institute for International Dialogue and Cooperation (VIDC), a member of Tax Justice Europe, just published an awaited and rare study exploring the role of environmental taxes from a tax justice perspective, as well as environmental taxes and their potential in a developing country context.

Titled “A Climate of Fairness”, the report is authored by Jacqueline Cottrell, an environmental economist, and Tatiana Falcão, a tax lawyer and a member of the UN Tax Committee’s Subcommittee on environmental taxation.

“Developing countries are increasingly affected by environmental pollution, the authors state. Air pollution resulting from fossil fuel combustion for power generation and transport is having an increasingly high impact on life expectancy. Deforestation, soil degradation, air, soil and water pollution, and poor resource management are an obstacle to poverty alleviation. All economic predictions indicate that climate change will hit developing countries hardest.”

Martina Neuwirth, an International Economics and Finance Development Policy expert at VIDC and former member of the GATJ Coordinating Collittee, explains: “The Global Alliance for Tax Justice promotes progressive tax policies that support people to share in local and global prosperity, access public services and social protection, and benefit from an economy that acts in the interest of people and the environment. But tax justice is not part of the debate when discussing environmental finance. In a similar way, climate and environmental finance are absent in tax and tax justice contexts. The Vienna Institute for International Dialogue and Cooperation (VIDC) therefore decided to commission this study“. “The objective is to provide guidance both from the fiscal and regulatory perspectives, while exploring the potential for environmental taxes to contribute to more progressive and sustainable tax systems and more equitable societies in developing countries.”

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The report represents a guide for countries willing to implement environmental taxes, sharing principles and legal designs. It analyses the “three dimensions of sustainable development and the tradeoffs between them: 

 

• Environmental effectiveness: analysing whether the tax is capable of leading to an overall reduction in pollution and/or result in reduced consumption of energy or other scarce resources.  
• Direct and indirect social impacts, including gender impacts.
• Economic and fiscal impacts, including impacts on GDP, international competitiveness, employment, and government revenues.”

The report then focuses on some country cases in more depth – China, Mexico, Morocco and Vietnam, and the impact of environmental taxes in low-income countries.

“The objective is to analyse the environmental, social, economic and fiscal impacts of environmental taxes in these countries and to draw conclusions on the compatibility of environmental taxation and the principles of tax justice.”

Cottrell and Falcão raise the following question, considering the regressive nature of environmental taxes: Can an environmental tax reform be implemented in a way that fosters social (and gender) equity? 

“Environmental taxes can address some of the environmental problems faced by developing countries while encouraging sustainable production and consumption patterns and delivering the financial means necessary to enhance environmental and social indicators. However, environmental taxes may result in both direct and indirect price increases of goods and services, which can have negative impacts on social equity, particularly in poor households.”

The report’s conclusion is that is is possible, as long as the tax reform is implemented carefully and well designed.

“This report aims to address this potential conflict and to consider the trade-offs and complementarities between environmental taxation and social equity. It analyses the role that environmental taxation has to play in obtaining tax justice and considers whether and to what extent environmental taxation can contribute to more progressive and sustainable tax systems and more equitable societies in developing countries”, VIDC explains.

On an international level, the report assesses the role of border tax adjustments “as a possible measure to enable high environmental tax rates or a high carbon price in particular countries or groups of countries“. It also explores the creation of a multilateral, intergovernmental body on environmental taxation under the auspices of the United Nations to address a number of global tax justice issues.

The full report is available here. You can also read the executive summary on VIDC’s website.