Pay if you pollute

Pay if you pollute

The Union government will probably let another budget go by without applying the polluter pays principle to reduce damage to environment. Pay for the damage if you pollute. Pay more if you pollute more. This, in simple terms, is the polluter pays principle. The Indian government chooses to ignore the message emerging from countries across the world, that makers and users of vehicles must pay the full cost of damage to environment from transportation.

European nations are designing fiscal instruments to develop a sustainable transport policy. Two newly published reports, one from the Swedish Environmental Protection Agency (sepa) called eu -- Fuel and Vehicle Tax Policy and the second from the Organisation for Economic Cooperation and Development (oecd) called Variabilisation and Differentiation Strategies in Road Taxation have elaborated on these measures . The fiscal instruments include taxes on fuel, vehicles and infrastructure use (see table: Taxing polluters worldwide). These European Union (eu) countries are now using market-based instruments not only to control vehicular pollution, but also to address related issues like growing number of vehicles, mobility and congestion. Thus, makers and users of vehicles in these countries are being made to pay for the noxious gases they emit. The underlying principle is that mobility has a cost and that must be paid for.

The European experience shows that economic instruments are very effective in controlling vehicular emissions as these edge out dirty fuels and poor quality vehicle engines fast. Taxes, both direct and indirect have been slapped. There is direct taxation of vehicles based on their emissions levels and on fuels according to their quality. These make the targeted products more expensive and less attractive in the market. Indirect taxes like road pricing and high parking charges serve to restrict private vehicle ownership and usage.

Environmental considerations are the driving motive for such initiatives. Concern over local air quality has led to increasing differentiation of fuel duty rates through the 1990s in many eu countries. Similarly, concerns over climate change have led to increases in fuel prices in uk , Germany, Denmark and Italy. Some states have also used taxation policy to promote biofuels. Moreover, ecosystems sensitive to transit traffic have also led to specific measures in the Alpine regions of Austria and Switzerland.

Dirty fuel dearer
Many dramatic developments have taken place with respect to fuel taxes to achieve clean air objectives. Countries like uk and France are changing their fuel pricing policy to discourage use of dirty fuels like diesel.

Though both diesel and petrol in the eu are heavily taxed, yet diesel had traditionally enjoyed lower duty rates for its fuel efficiency benefits. The sepa report says that "there is increasing concern about the adverse effects on human health of particulate emissions that come from diesel engines in larger amounts than petrol engines. This is the reason why the uk government decided that there was no further justification in differentiating fuel duties in favor of diesel and instead increased duties on diesel higher than petrol." uk has slapped a 'fuel duty escalator' under which the duty rose by a fixed percentage above the rate of inflation each year from 1993 to 1999. Initially, the duties increased by 3 per cent above the rate of inflation, then subsequently by 5 per cent and then to 6 per cent. uk today is the only country in eu where diesel costs more than petrol. The tax imposed on diesel in uk is nearly twice that in France, which is the second highest taxer. However, in the face of strong opposition from the transporters uk the escallation clause was dropped.

In the meantime Germany and Italy have introduced similar measures. In Germany, the tax on motor fuels will increase $0.03 per litre each year until 2003. In Italy, fuel duties on petrol and diesel will rise progressively until 2005, when they will have increased by 7 to 12 per cent over the 1999 levels. Even France is reducing the price difference between the two fuels.

The oecd report calls for a differentiation of the fuel tax rates on the basis of the type and quality of the fuels to discourage use of dirty fuels. "Most appropriate is a tax differential between petrol and diesel (in order to limit the higher air pollution damage of diesel) and between different contents of sulphur (in order to raise incentives for low sulphur diesel)," the report says. Tax out polluting technology
One of the reasons behind the tardy development of pollution control technologies is they are not linked with the market. Fiscal measures that directly affect the profit of a company will initiate a prompt response. Therefore, many European countries tax vehicles according to a wide range of criteria -- engine capacity, size or power, meeting different levels of Euro emission standards.

In the eu countries, not only are private vehicles heavily taxed, they are moving fast towards differential taxes. Car-owners have to pay a purchase or initial registration tax in addition to value added tax and also an annual tax. In almost all countries, diesel cars are made to pay higher taxes than petrol cars (see graph: Taxing dirty diesel). In many countries (like Denmark), such high car registration tax has successfully reined in car sales.

The first steps for establishing an emissions-based tax were taken in Germany in 1985. From July 1997, the differentiation was significantly broadened for passenger cars. New passenger cars are taxed with six different tax rates according to their emissions. In all the six categories, taxes on diesel cars are 1.4-2.8 times higher than on petrol cars. This taxation system has been a huge success. High taxes on cars not meeting any Euro emission norms led to retrofitment of 700,000 cars with catalytic converters to at least meet the Euro I standard. Moreover, while in July 1997 only 0.36 per cent of new passenger cars were low emission cars, the share surged up to 70 per cent by July 1998 as the manufacturers rushed to grab the benefits.

A differential sales tax was introduced in Sweden in 1987-88 based on whether a car had catalytic converter or not. In 1974, a kilometre tax was imposed on diesel vehicles. This was replaced by an extra energy tax on diesel fuel in 1993. The annual motor vehicle tax in Sweden is also differentiated according to the fuel used. The taxes on diesel passenger cars are much higher than on the petrol cars. Besides, cars with advanced emission norms are given a five year tax holiday on annual vehicle tax. Simply increasing and differentiating purchase tax might not help. It is essential to support it with measures like differential annual tax during the lifetime of the vehicles as well.

The oecd report thus emphasises more on the effectiveness of annual vehicle tax over one-time high purchase tax to "help to accelerate a clear technological path".

Discouraging vehicle usage
There is also a growing interest in systems that will discourage driving by taxing the road usage to control pollution. In Paris, different levels of tolls are imposed on different motorways to regulate the peak hour traffic. Since 1992, Sundays have been divided into green hours and red hours for traffic returning to Paris through one of the motorways. While the toll was increased by 25 per cent for the red hours, it was reduced by 25 per cent for the green hours. These measures lead to spreading of the traffic resulting in reduction of congestion. The resultant shift in traffic flow has been up to 18 per cent, from the congested to the less congested routes.

The Netherlands has proposed to introduce road pricing in Amsterdam in 2001 and three other metropolitan areas by 2003 to shift people from using private cars to car pools and other modes of travel like bicycles. The heavy-duty goods vehicles in Switzerland pay an annual road tax based on the kilometres driven and the weight of the vehicle. The charge is levied on the whole Swiss network. Austrian Ecopoints system allocates points to eu member states to achieve a given level of emissions from freight traffic in the Alpine passes like the Brenner Pass to protect the Alpine ecosystem.In contrast, the Indian government still has no agenda on green taxes. While heavily taxing petrol, it incurs heavy loss on account of cheap diesel. By not linking the diesel price to the international market, the government keeps diesel cheap through a hidden subsidy adding to the burden of the exchequer and at the same time not tapping the potential revenue sources (see box: Fuel comes cheap in India). It is time for the Indian government to learn from the experience of countries that charge for the environmental cost of diesel (see graph: Environmental cost of emissions). Indian policymakers refuse to comprehend the virtues of simple market policies to encourage technology development in the transport sector (see box: Future lies in green tax). At present car-owners in India pay taxes which do not differentiate between cars that have different emission levels. Besides, till before uniform quality of diesel with 0.05 per cent sulphur was introduced in Delhi, people were paying higher prices for the better quality diesel than the inferior one. Hence, there was no incentive to buy a car with better technology or clean fuel that causes low emissions. All that matters is the running cost of the vehicle that depends on the deliberately kept cheap fuel prices. Unless the environmental and social cost of polluting fuels and technologies are reflected in their price and tax structure, no amount of regulation can bring down pollution.