Tax reforms, which would penalise the unlimited use of nature, are fast becoming an imperative part of preparing national budgets, prodded by the realisation that ecological costs have to be accounted for, here and now. But will Manmohan Singh pay heed to Kamal
Paying nature's bill
IN THE last 100 years of industrialisationindustrial firms have sought to increase their efficiency and profitability through increases in labour productivity. One fallout of this was the replacement of human labour with machines thatin turnhas resulted in heavy natural costs as industries became increasingly energy- and material-intensive. All this has happened partially because materials and energy have been cheap. Ecological costsin particularhave been externalised to be borne either by the poor of the current generation or to await payment by future generations.
If environment-friendly industrialisation is to be promotedmarket signals should be organised to force firms to increase their efficiency and profitability through increases in energy- and materials-productivity. Environmental economists are therefore beginning to argue in favour of "ecological tax reforms"which would penalise unlimited use of nature. The purpose of these taxes would be less to raise revenue for governments and more to modify economic behaviour.
Those in favour of ecological taxes point out usuallyit is incomes and profits that are taxed. They argue it is better to tax activities that a society wants to discouragesuch as pollutionrather than those it wants to encouragesuch as hard work and thrift. This would lead to higher economic growth -- less pollutionmore workmore savingsand greater incomes. For examplea higher petrol tax in USA could lead to cleaner air and less traffic congestioninduce technological transformation towards a cleaner car and result in smaller government budgets and reduced foreign trade deficits.
Such taxes could also make the ecological costs incurred by a society much more explicit. It is estimated that the US federal laws on environment lead to an annual expenditure of US $100 billionbut the costs on industries and consumers remain largely concealed. For proper decisions to be taken by a societyeconomists argue the costs should be realised in a way that they are much more visible.
Advocates of ecological tax reforms are essentially saying that taxes or charges ought to be levied on:
(a) the use of natural resources and energy to force producers to be more efficient and consumers to be more abstemious in their use; and
(b) generation of harmful emissions and toxic substancesso that producers will innovate cleaner processes.
Politicians in market-run societies arethereforedisplaying keen interest in ecological taxes and incentiveswhich give them the political opportunity to integrate environmental concerns with the market. With the election of the Clinton-Gore team in the USthese ideas should receive a major boost. Clinton's environment-friendly vice-presidentAlbert Gorestrongly argued during his election campaign that environment-friendliness can be painlessly combined with economic growth and perhaps even speed it up. Bill Clinton's favourite think tank the Progressive Policy Institutehas already published a shopping list of ideas for the new presidentcalled Mandate for Changewhich pleads for a broad-based switch from environmental regulation to economic incentives.
In Indiaminister of state for environment Kamal Nath is pushing the ministry of finance to include green elements in the 1993 Union budget. A list of ideas have also been submitted to the finance ministry officials.
A series of fiscal instruments have been developed and are already in operation in industrialised countries (See table). A recent study of 14 industrialised countries revealed they were using a total of 170 economic instruments -- an average of 14 per country. Roughly 50 per cent of these were in the form of chargesabout 30 per cent were subsidies. Ironicallyit was the European countries that took the lead in implementation of economic instrumentswhile the more market-oriented US relied largely on regulatory measures to manage its environment.
Pollution charges are now being levied in several European countries. Companies in these countries now pay on the basis of total quantity of pollutants released by them. In Indiaon the other handit is the concentration of pollutants in the effluent that is measuredand as long as the concentration is less than the specified standardthe pollution caused by the company is acceptable. But this method does not encourage the company to further reduce its pollution further.
In Germanylevies on pollution finance water pollution control measures. Water pollution charges are collected by provincial governments and reinvested in new treatment plants. Charges are levied on the basis of "units of noxiousness" in the effluent. For example50kg of chemical oxygen demand (COD) or 20 grams of mercury constitute one unit of noxiousness. The number of units of noxiousness is estimated from the pollution load contained in the annual quantity of effluents. In Germanypollutants consist of the following parameterssubstances or substance groups: CODadsorbable organic halogenstoxicity to fish and heavy metals such as mercurycadmiumchromenickelnitrogenphosphoruslead and copper.
Levying pollution charges is not always easy. With industries using up to 1000different substances in Germanyit is impossible to monitor each individually. Often an industrial firm has no idea of what chemical it is using -- apart from its trade name and use -- or its likely effect in combination with other effluents. For this reasonpollution control authorities rely on a range of standard tests that they keep improving and changing. Within the next two to three yearsGermany will rely solely on a set of four biological tests which will be used for all waters: fish toxicitydaphnia (freshwater fleas)light bacteria and algae. Taken togetherthese tests are expected to show up almost any pollutant in a more simplified manner.
Says J B Opschoor of the Free University of AmsterdamAmongst economic instruments, charges tend to have a greater impact as they differentiate more between the various options that economic actors have to choose between.But he insists that the level at which the charges are fixed are important in bringing about change in economic behaviour. For instancethe Netherlands has been successful in inducing entrepreneurs to set up treatment plants as a result of water charges. But to understand thiswe have to compare the water pollution charges levied per capita in different European countries in 1986: Germany2ECUs (European currency units); France4ECUs; and the Netherlands33ECUs. Thusit was more profitable for Dutch entrepreneurs to control pollution than to pollute.
USA uses emissions trading to control air pollution. Economists argue this approach makes air pollution control more cost-effective than the current practice of fixing air pollution standards and expecting all companies to pollute below those standards. In emissions tradingthe government fixes the total amount of pollution that is acceptable to maintain a desired level of air quality in a region. It then distributes emissions permits to all companies in the regionwhich add up to the overall acceptable level of emissions. Companies that are not using their entire quota can trade the unused quotas. This gives them an incentive to pollute less and earn moneyselling the unused quota. As long as the overall emissions remain within the set limitsthe regional regulatory authority is satisfied.
The UK is working on a comparable scheme that will combine charges and subsidies to influence the market price of productsthus pushing environmental laggards to behave better. Under this schemethose exceeding a certain environmental benchmark would be finedwhile those below the benchmark would receive subsidies. In paper mills across the countryfor examplea desired benchmark for water used per tonne of paper produced could be fixed by the government. Any company consuming water above that level would be fined heavilywhile those consuming less would receive a financial incentive.
It is obvious this area of economic research is still new and many more ideas and instruments will emerge as economists apply their minds to it. Once governments in market economies become receptive to the idea of ecological taxationmany more economists will certainly jump into the fray. With the election of Bill Clintongovernment intervention is no longer considered a dirty act in Western countris.
India has been using a variety of financial incentives to promote environment-friendly activitiessuch as the use of renewable energy systemswater pollution control and forest conservation (See table). Most of these incentives are rebates on customs and excise dutieshigher depreciation rates and direct subsidies to users of renewable energy systemssuch as solar cookers and photovoltaic devices. The minister of state for non-conventional energy sourcesSukh Ramrecently announced subsidies on capital cost of up to 25 per cent for grid-connected projects and up to 50 per cent for non-grid connected projects as incentives for entrepreneurs setting up mini- and micro-hydel projects. These incentives are intended to reduce the cost of the electricity generated by these projects.
These incentives are essentially subsidies and their effectiveness is yet to be studied. Other forms of economic instruments have yet to be explored. Finance secretary K P Geethakrishnan told a recent meeting organised by the Centre for Science and Environment that in the years to comeas the government tries to reduce its budgetary deficit and overall rate of customs dutiessubsidies and tax rebates will become less important as economic instruments.
There is a growing desire to explore other kinds of economic instrumentstoo. The ministry of environment and forests (MEF) has commissioned a review of the impact of its water pollution cess and another study by the National Institute of Public Finance and Policy (NIPFP). There is undoubtedly a need to develop economic instruments that can increase the use-efficiency of key natural resources such as water and energy. Indian industries and cities are profligate users of both water and energy and invest little in their conservation or recycling. These resources should be so priced that users find it profitable to conserve and recycle them.
Water is a clear example of wasteful expenditure in agriculturein industry and by rich urban households. Whether the water source is a river or a groundwater aquiferharnessing of water resources results in ecological and social disruption. Massive damsbuilt to store river waterdisrupt riverine ecological regimes and displace thousands of peopleand overdrawn groundwater results in groundwater depletionland subsidence and uncertainty in crop production. This water is then used wastefully by farmers and the urban-industrial systemboth of which do not pay its full ecological cost. Finallythe used water is sent back untreated to the natural systems. As a resultmighty rivers such as the Ganga and the Damodar have been reduced to industrial sewers and the groundwater aquifers around cities are heavily polluted.
Despite this obvious misusewater rates are not fixed so as to induce companies to use it efficiently. This has been reported by several studiesincluding the water audits of the paperfertiliser and steel industry conducted by the Bureau of Industrial Costs and Prices (BICP) and the NIPFP study on water rates for the Ganga Project Directorate (See boxes: Targeting the paper industry and The price of water). In the few instances where water rates are high or water is scarcethe companies concerned have undertaken water conservation measures on their own. The Madras Refineries Ltdfor examplefinds water availability such a problem it buys city sewage and treats it for use in its plant (See box: A zero-effluent project). Resource pricing rules mustthereforebe set in a manner that will encourage companies to be more environmentally responsible.
Though state governments levy a water pollution cess under a Central lawlargely to augment the financial resources of the state pollution control boards (SPCBs)the cess is obviously too small to have any impact. The BICP study on paper mills argues strongly for a substantial increase in the cess to promote water conservation activities. The MEF has recently enhanced the cess. It would be useful to monitor its impact.
Detailed studies will have to be conducted if effective economic instruments are to be evolved for environmental improvement in a developing country. For instanceif municipal water supplies were taxed heavilyindustries would try and manage groundwater supplies themselves. Since groundwater use in the country is still to be properly regulatedcompanies would exploit groundwater and avoid investments in pollution control. The needthereforeis to tax water-using technologies rather than water itself. Such a tax would move the flush toilet market towards water-saving toilets initially and laterif the tax was steadily enhancedtowards a toilet that uses no waterbut composts excreta in situ. Such a tax wouldhowevernot work for tubewells for it would not be acceptable to the powerful farming lobby.
Unless thought through carefullyeconomic instruments can prove to be a mixed blessing. Take the case of the reduction in import duties on wood and wood pulp that were announced during prime minister Rajiv Gandhi's regime to protect forests. Indian companies found it cheaper to import pulp from Canada than buy eucalyptus wood grown in India and pulp it. As a resultfarm forestrywhich had taken off in the early 1980scrashed by the late 1980s. In sparsely populated Canadaland has a lower value than insayPunjab where farmers can grow an alternative crop.
With devaluationimports have become expensive and the paper industry is pushing the ministries of environment and industry to allot itat subsidised ratesvast tracts of government forest land where it can grow its own wood. This would constitute access to another subsidised natural resourcethe ecological cost of which would be heavy. The social cost would be heavytoobecause many poor people would be displaced from these public forest landswhich provide them with fuelwoodfodder and other forest-based products.
Numerous economic policies that have nothing to do with the environmental policies of the countrynonethelesshave an impact on the environment andbefore these policies are changedthese impacts must be studied. The fertiliser subsidyfor examplehas encouraged heavy fertiliser use and intensive agriculturewhich has led to nutrient-depletedexhausted soils that need to be increasingly fertilised each yearand groundwater and surface water pollution because of the leaching out of nitrogen and other nutrients from the fertilisers.
If this subsidy was removedthe heavy-chemical-input agriculture of the Green Revolution would be adversely affectedbut this would be good from the environmental point of view. Howeverfarmers would then either turn to another form of intensive agriculture or go back to extensive agriculture. Intensive organic farming practices using mixed cropping systemsnitrogen-fixing plants and increased use of farmyard manure would be more environmentally benign because extensive agriculture would mean further encroachment upon forestswetlandsgrazing lands and flood plains. But are such practices already at a stage that they can be extended to millions of farmers over large areas?
This example stresses the importance of linking use of economic instruments with technological research and planning. Reduction in fertiliser subsidies should not increase the cost of food productionbut make the agricultural system more environmentally benign. Similarlythe purpose behind taxing flush toilets is to force the waste disposal industry into finding a cheapnon-water-using toilet.
Technological innovations arethereforeneeded to reduce adverse environmental impacts and economic instruments would clearly work best if economicenvironmental and technological planning were integrated. In a country such as Indiawhere private industry has not yet shown a propensity for research and development or technological innovationsthis raises questions such as whether economic instruments would not result in greater demand for technological imports and whether these imports would be suitable for Indian conditions. Furthermorestate research and development bodies would have to be strengthened to provide technological know-how where the private sector fails.
There is yet another question about economic instruments. Will they succeed any better than regulatory instruments in a soft state like India? Economic instruments will require a high level of monitoring and regulation and where pollution control inspectors have failed to deliver the goodswhat is the guarantee that the tax collection machinery will succeed? NIPFP's Sudipto Mundle saysIdeally, I would look for an economic instrument that does not need any regulation.But how easy is that? Both economic instruments and legal controls will work in a society only to the extent that it is serious in implementing them. Corruption isthereforean important factor that could blunt the impact of any mechanismand economic instruments must be so designed that they are open to public scrutiny and less amenable to corruption.
There are also questions about the level at which such economic instruments should be applied -- whether at the Centralstatemunicipal or the settlement/village level? This is an important dimension and must be considered while designing economic instruments for environmental management in India. Taxes on the use of groundwater and forests are best levied by village communitiesespecially as the state has proved itself incapable of managing or regulating such resource use. Similarlyair pollution taxes should be levied by local bodies at the urban level.
Balotraa town in Rajasthancollects a cess on every bale of cloth that comes into its jurisdiction. The money collected will be used to set up a common effluent treatment plant. But the system is still not foolproof because units located outside town limits are not forced to pay the cess. Farmers who live near these units face the consequences of the pollution in the form of declining agricultural yields and drinking water shortagesbut they have limited political clout.
In Indiathereforethe subject of economic instruments raises some fundamental questions that need to be resolved if environmental management is to improve. The pricing structure can be changed in a way that forces the urban industrial system and the "consuming public" to become environmentally responsible. But what is the guarantee it will do so and in a manner that ensures not just environmental sustainabilitybut also social equity? Prices are fixed as the result of negotiation between buyer and seller and it depends heavily on the strength of the seller and buyer with respect to the other.
The governmentwhich currently controls most of the country's natural resourcesmay not fix a value for scenic beauty or traditional use of a piece of landbut local residents may want to do so. This is true of those who are fighting against the current alignment of the Konkan railway through Goa (see Down To EarthOctober 311992The government may also not value the firewood-fodder-water supply function of a forest as much as a local community. Thisin purely economic termswas the key contention of the Chipko women who refused to let government-sponsored contractors chop down their forests.
Thereforethe starting point for any true economic reforms in a country such as Indiasharply divided as it is between the poor and the powerfulshould be establishment of community rights over natural resources. This step alone would take the market economy a long way towards ecological prudence and restrained natural resource use. The people would play a role in determining the cost of a natural resource -- the Chilika lake in Orissafor instance -- and thereby reduce the role of the bureaucracy and of corruption in giving rise to unbridled market forces that bypass the ecological and social costs of natural resource use. Clearlycommunity rights should be the starting point for ecological-economic reforms in India. Further to thatnobody is likely to oppose the government if it wants to tax the rich and curb their wasteful use of the environment. But one policy cannot be a substitute for the other.
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