Down To Earth's round table on fiscal instruments to manage the environment brought together economists, environmentalists and representatives from industry. What emerged was that the concept of economic instruments, though still at a nascent stage, is becoming increasingly important. There are diverse aspects to the issue and experts are struggling to determine how to tax natural resources.
Will imposition of green taxes be viable?
PARTICIPANTS: G D AGARWAL ADVISERENVIROTECH INSTRUMENTS PVT. LTD D N BASU PLANNING COMMISSION KANCHAN CHOPRA PROFESSORINSTITUTE OF ECONOMIC GROWTH V B ESWARAN FORMER REVENUE SECRETARYMINISTRY OF FINANCE K P GEETHAKRISHNAN FINANCE SECRETARYMINISTRY OF FINANCE ARUN KUMAR CENTRE FOR ECONOMIC STUDIES AND PLANNINGJAWAHARLAL NEHRU UNIVERSITY SURENDRA KUMAR MANAGER (SAFETY AND ENVIRONMENT) SRIRAM INDUSTRIAL ENTERPRISES LTD SUDIPTO MUNDLE RESERVE BANK CHAIR PROFESSORNATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY M N MURTHY PROFESSORINSTITUTE OF ECONOMIC GROWTH K P NYATI ADVISER (ENVIRONMENT) CONFEDERATION OF INDIAN INDUSTRY D K ROY BUREAU OF INDUSTRIAL COSTS AND PRICES U SHANKAR VISITING PROFESSORNATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY TRILOK N SINDHWANI DEPUTY CHIEF CONSULTANTENGINEERS INDIA LTD STEPHEN SMITH DEPUTY DIRECTORINSTITUTE OF FISCAL STUDIESLONDON ANIL AGARWAL EDITOR'DOWN TO EARTH'
Anil Agarwal: In the West there is growing interest in the use of fiscal instruments for environmental management and there are a number of reasons why these measures may also be relevant for us. The most important is the growing disenchantment with regulatory systems. A number of instruments have emerged and the question is whether they are effective or not and at what level they are effective. For instancein Europestudies show economic instruments for pollution control are effective only when the penalty is high enough to provide an "incentive" to build water pollution treatment systems.
An interesting case in India is one concerning Madras Refineries. Because of water shortageMadras Refineries treats its effluents and will soon become a zero-water discharge company. It treats waste water and reuses it. The need for water is so great the company is prepared to make the enormous investment required. Additionallyit takes in 2 to 3 per cent of the total sewage of Madrastreats it and uses that water. Sogiven certain resource constraintsour companies are prepared to put a reasonable amount of investment in pollution control.
A major concept emerging in Western countries is ecological tax reform. Herea levy is charged for the use of natural resources so that the use of materialssuch as energybecomes more expensive and is reduced. Western economists contend this reform will not lower standards of living. But in a country such as Indiait may be difficult to tax a resource across the board because certain uses of the resource have to be kept cheap.
If municipal water is supplied to industries at a very high rateindustry will try to move towards utilising ground water. Since ground water use is more difficult to regulateit could easily lead to overexploitation of this resource. Then the option would be to tax tubewellsbut this would lead to a conflict with agriculturists.
One couldhoweverthink of taxing technology that uses resources such as water. For exampleif flush toilets were taxedit could push technological systems towards less water-using toilets. Even the consumer will be forced to be more sensitive about the issue.
The purpose of fiscal instruments should be to push for a different kind of technology. In the Westgovernments plan only for economic instruments and leave the rest to the private sector. But in our countrythe private sector has not shown much enterprise in research and development. If you tax flush toiletswill industry develop less water-using toilets or composting toilets?
Sudipto Mundle: I am not very enthusiastic about the possibility of a green budget this year. Not because I think these issues are not importantbut because I think they are so important we should not rush into a green budget without considering the consequences.
The introduction points to the wide range and complexity of the issues involved. My colleagues and Iwhile working on these issueshave learnt the characteristics of industries differ and so must the policies that have to be put in place. For instanceindustries with hazardous wastes cannot be monitored only by using fiscal instruments. In such cases we will continue to need command-and-control systems. But there are other industries where we have to think of imaginative tax subsidy instruments to control pollution.
Secondlythere is the conflict between interests of growth on the one handand ecological costs on the other. It would be unfair to burden Indian industry with restrictions and then expect it to be competitive in the international market.
Thirdlyit is easy to say we must adopt the "polluter pays" principle and impose taxes on polluters. The implicit assumption in India is that only the government and government servants act in public interest and everybody else acts in self-interest. Everybody has private interests. As a resultmoney is transferred from polluters to those who are supposed to regulate pollution and nothing happens to the level of pollution. We must think of a system where polluters or other constituencies with clout have an interest in reducing pollution.
M N Murthy: I have studied the problem of pricing water for industrial use. The cost of water pollution abatement can form the basis of setting a pollution tax. But the tax will have to also take into account damage to victims of water pollution -- information that is practically impossible to collect.
Western countries follow the "taxes standards approach"where an industry-specific tax is recommended to induce the industry to spend on pollution abatement. In Indiadata on costs and extent of pollution is very poor and pollution abatement costs depend on the technology used. Keeping these in mindwe have attempted to compute the average cost a factory will incur in reducing pollution to meet national minimum environmental standards.
D K Roy: The approach is to have some sort of tax on pollution. But a stick policy alone is not going to work. What is needed is a carrot and a stick. We have to find the carrots.
The first thing is to identify industries that generate resources from pollutants. In the case of the distillery industrywhere 70 per cent of the fuel requirements can be generated from pollution controlthe government has announced a package of incentives for controlling pollution.
Water is an interesting case. We find the greater the water consumption per unit of product of an industrythe larger its water pollution. Petroleum consumes 10 to 30 cubic metres (cum) of water per tonne of productfertilisers 10 to 500 cumpaper 200 to 500 cumcane fruit products 10 to 50 cumtextiles 200 to 350 cummining 1 to 12 cumiron and steel 12 to 50 cum and electric power 6 to 10 cum. Industries also evade penalties by diluting effluents and bringing them to prescribed standards. But in the processwater is wasted. A study conducted by the Central Water Commission shows by the year 2025we will have consumed all of our water resources. Clearlythe need is to conserve water. But how do we conserve water and at what cost? We do not treat water as a scarce commodity.
Agarwal: From what you saypeople regard water as a very cheap resource. Surely the economist would know how to make it more expensive.
Roy: When I studied the fertiliser industryI found some people pay 20 paise per cumothers pay as much as Rs 10 per cum and some do not pay anything. Where water is expensiveindustries have started recycling. For instancea few steel units have found it is possible to recycle water and reduce consumption from 20 cum per tonne of steel to 14 cum per tonne of steel just by investing a little. Comparativelywater consumption in Japan is 12 cum per tonne of crude steel produced.
Agarwal: But this is a case of the stick operating where the cost of water is very high.
Roy: It is not the stickbut the scarcity that drives the trend. A fertiliser unit in Madrasfor instanceis aiming at zero discharge and has invested in an expensive pollution control method because water is not available at its location. Alsothe fertiliser industry can do this because input costs are subsidised.
V B Eswaran: The situation in Madras is unique. When there was an acute water shortage in 1975the authorities found there was no way but to encourage people to recycle and reuse water. In factthe Ennore thermal station uses sea water for cooling.
Murthy: In water-scarce areasthere is a kind of self-correcting mechanism that operates. But where the cost of water is lowthe mechanisms are not operative and industries actually have an incentive to dump waste in water bodies.
Agarwal: I am still not convinced. There is a scarcity of water in other parts of the country as wellbut it is not perceived. This is where we need to make water expensive.
K P Nyati: I want to dispel the notion that if you conserve waterpollution is automatically reduced. Economic instruments should promote conservation of all resources. That should be the starting point. To conserve resourceswe have to reduce waste.
One of the simplest things could be an environmental audit report containing data about energy and water consumption. With this dataa national average index for sectoral or product-wise resource use can be computed. Tax rebates can be offered to resource users who don't exceed the average.
This leads to the question of resource pricing so that the use of products that damage the environment decreases. A simple case is the difference between steel tumblers and glasses. The functional utility is the same. But when you do a life-cycle analysis -- energy intensity per year of functional utility -- it is better to promote stainless steel tumblers. This can help change consumer preferences.
D N Basu: We should take a holistic viewbut I think there are certain obvious necessities that cannot wait. Water is one. While there is hardly any part of the country that has a water surplusno conscious attempt has been made to introduce fiscal instruments for water-saving devices.
Kanchan Chopra: We must remember 90 per cent of the water is used in agriculture. Unless we correct the pricing structure of watersaving some water in industry is not going to have much effect.
Secondlymarket instruments will have to look at whether supply or price can affect the use of a particular resource. It is vital to create a situation where a perceived resource scarcity at a national level becomes a scarcity at a micro-unitfor the farmer or industrialist.
Agarwal: A study done by the Tamil Nadu Agricultural University showed if 2 to 3 per cent of the rice acreage is diverted to grow water-saving crops such as milletsthere would be enough water to meet the municipal water supply needs of Tamil Nadu. But how can we control overuse of water in agriculture?
Chopra: Energy pricing could be useful in this context. If the enormous energy subsidy is reducedit will lead to better use of groundwater.
Agarwal: But is it clear agricultural production will not go down if the use of irrigation water is reduced?
Chopra: Nobut it could lead to changes in cropping patterns -- from water-intensive crops to others.
Eswaran: In 1975though there was less rainfall in Orissathe delta produced excellent crops of rice because distribution was good and the crops got water at critical times. We must use water more rationally by irrigating at critical times. The best option is for farmers' cooperatives to take water in bulk from the irrigation authorities and to ensure distribution themselves.
T N Sindhwani: The extent of water used depends on supply and cost. Taxesin this contextmust be industry specific and target specific. Tax must be at the municipality level. There is no use asking me to pay tax for a steel plant in Bihar because I cannot relate to it. A local tax makes sense because the person who suffers also benefits.
U Shankar: How do you ensure such a tax is enforced? For instancewe have talked about reducing customs duty for pollution control equipment. But many companies have set up abatement plants as showpieces because there is no incentive to operate them. In a product marketone can operate the industry as long as one can cover the variable cost. In the pollution marketthe cost of running the plant is so high and there is no incentive to incur these costs. There isthereforeno use in subsidising capital costs. Enforcement requires a stickthough it could be a different one. In the USfor instancethe level of tax is much lower but many companies have conformed to standards because what the economic instrument is intended for. There are two types of problems: One is the over-use or abuse of critical resources and the other is the degradation of resources. When I use the term "critical resource"I consider the resource is not adequate. In our countrythe most critical resource is fossil fuels and the action is needed urgently.
Water cess is an existing fiscal instrument. But its purpose is to collect resources to strengthen pollution boardsnot to conserve resources or control pollution. Collection assessments for water cess -- a tax based on water use -- during 1991-92 were Rs 10 crore for industry and Rs 10 crore for municipalities. Actual collection was about Rs 8.5 crore from industries and only Rs 1 crore from municipalities. Why is it that while both use equal amounts of wateronly one pays for it?
Regionwisetooindustrial water cess collection varies. It is more in Madhya PradeshUttar PradeshRajasthanPunjabHaryana and Bihar than in MaharashtraGujaratTamil Nadu and Karnataka. In Madhya Pradeshmore than 30 per cent of water cess comes from thermal power plants and 20 per cent each from the metallurgical industryespecially steel plantsand from the large paper mills. The chemical industry is the most toxic and yet its cess does not account for even 5 per cent. Mere collection of cess will not help control pollution.
If money is collected to manage the economy. Similarlyif money is collected to manage the environmentthen critical resources should be given priority. Anda certain percentage of a unit's turnover should go towards the management of the environment.
The tax should be based on turnover to avoid the anomalies of water cesswhich does not take into account the nature of pollution. Cement factories consume very little water -- a one-million-tonne cement plant pays only about Rs 50annually as water cess -- but cause land degradation while extracting limestoneconsume considerable amounts of fossil fuels and produce substantial air pollution.
Metering of water is another problem. In 95 per cent of the casesmeters are not installed. Even if they are installedthey do not work and are not reliable. It would be better to tax something like the value of the product so that it becomes a part of the environment management cost.
When it comes to resource managementthe focus should be on productivity as it is difficult to specify how much material a unit should use. One can lay down normal or optimal resource use and units producing more with much less material should be given rebates.
Eswaran: In the governmentthe budget is looked upon as a broad canvasnot just as a series of taxes and expenditure propositions. Soapart from fiscal and economic incentives and disincentivesone should have an idea of the background against which these instruments will be designed. The purpose of the green budget is to preventrather than cure.
Surendra Kumar: Implementing environment protection measuresboth at local and global levelsrequires enormous investments. The industry looks forward to radical changes in fiscal incentives under a green budget. Pollution control equipment and instruments should qualify for 100 per cent depreciation when they are commissioned. Excise and customs duty on pollution control equipment should be dropped. Banking should provide subsidised loans for purchasing pollution control equipment. Anda 100 per cent cess rebate should be given to industries conforming to water pollution standards.
Similarlythe adoption of the ecomark in industries should receive appropriate fiscal incentives. Technological changes and other costs incurred for the adoption of ecomark should be subsidised through bank loans.
Arun Kumar: But there is a macro aspect of the problem that we should not forget. We are in a regime that aims to reduce taxes andin particularthe multiplicity of taxes. This discussion takes us in the opposite direction. The use of taxes as an instrument without looking at income generation and distribution in society will not work.
Macro fiscal policies must form the backdrop of any green budget. The state at all levels spendsthrough its various budgetary processesanything above 33 per cent of the national income. This large magnitudeif not influencedwill affect the environment.
If the industry can pass on its coststhen it would not care about taxes. I would suggest a tax on the gross profits of the corporate sectornot on the net profits. We must also move away from indirect taxes to direct taxes to make an impact on income distribution and consumerism.
What is the environmental impact of liberalisation? With liberalisation will come a cut in spending in the social sectorwhich will increase the marginalisation of the poor. Polluting industries could shift to the Third World because this would be seen as our "comparative advantage" in the international market. There will also be growing pressure to exportwhich may lead to lower environmental standards. All this will have an impact on natural resources.
The state's capacity to protect the environment will decline. Alreadythe private sector has greater freedom to exploit natural resources. But I do not think the country is resource-scarce. We are capable of mobilising resources if need be. What we need are corrective taxes and expenditure patterns. We also need better planning for resource use and the removal of poverty.
Mundle: Despite my reservations about rushing into a green budgetissues of macro-management of the economy should not give us an excuse to say that nothing more needs to be done in terms of more specific environment measures. Fiscal systemshowevermust be subsidiary to empowering local people. Unless those who are the victims of pollution actually have some clout over the pollutersfiscal incentives will not get very far.
In terms of specificsthere was discussion about water charges. The issue is implementation. Can you actually charge the proper recovery cost of water? The states don't recover the actual cost of wateror for that matterelectricitysimply because they are unable to do so.
We should differentiate between fiscal intervention aimed at changing consumption patterns and that intended to modify the behaviour of producers. Consumption patterns can be changed with excise duties. Apart from items such as tobaccowhere the duty rate is 300 per centexcise duty for most items ranges between 5 and 20 per cent. While there should be uniform excise duties as far as possible to avoid market distortionin this case you could use excise duties to move away from environmentally unfriendly items.
Thenthere is the question of forest resources. AgainI don't know if it can be implementedbut is it possible to give some tax credit to enterprises that extend forest cover? The point often made is that the important thing is not to discourage the use of woodbut to encourage the production of wood.
But I would caution against rushing into a pollution tax. Producers would either pay the tax and pollute or cut pollution and not pay the tax. The relevant consideration is the cost of abatement against the tax. Obviouslythenthe tax has to bear some relationship with the cost of productionwhich may call for differential taxes.
Roy: This is theoretical. For such a tax you must calculate the cost of pollution control. But industrialists do not give out figures and they don't tell you anything.
Mundle: I agree information is the keywhich is why we must not rush into the pollution tax. This is exactly what I am trying to say.
G D Agarwal: We are talking not of the green budgetbut about pollution control. In Indiathis question of meeting standards does not make sense. Vigilanceinspection and monitoring is difficult and almost non-existent. All industries claim they meet the standards. This becomes a problem even in terms of giving rebates. If left to the industry to reportthey will simply claim they meet pollution standards and hence qualify for tax concessions. We should not get into the business of pollution unless we understand it.
Stephen Smith: In Europeconcern about the impact of environmental tax measures on international competitiveness of industry has limited the progress of ecological tax reforms. The introduction of policy measures has also been very slow.
Agarwal: In Europe alsothe use of economic instruments is very new and there is a lot to learn. Are instruments like water pollution charges working?
Smith: Distinction needs to be made between instruments introduced to raise revenue and those introduced to influence behaviour. Some water charges are really quite small and their main purpose is to raise revenue to finance common effluent treatment. These do not affect behaviour all that much. The shift is in considering taxes and incentives that have the possibility of influencing behaviour.
K P Geethakrishnan: We are looking at a scenario where within ten yearsthere will be 200 million people added to the population. The majority of these will be either below the poverty line or just hovering around it. This is the category for whom getting two square meals a day is a much greater priority than any concern for environment. The second equally alarming scenario is the projected increase in the cattle population. And the biotic pressure of this combined increase in population of 200 million people and 90 million cattle is going to be tremendous. How do we bend the entire resources of the country towards reversing this downward trend?
There have been so many suggestions about taxes. In Indiawe seem to have more items on the agenda than any other developed country. But in all these caseswe have been reacting to a specific demand. Somebody says the use of aluminium should be promoted and you immediately put down an entry. Someone else insists the import of something else should be facilitatedand you make another entry. The problem is you are not seeing a total picture and the sum total may not add up to very much.
We are moving towards reduction in all tax ratesso how can we sustain concessions for environmental measures? We have never used penal provisions such as high charges for water. We don't even charge for educationhealthwater or electricity. When I don't charge as a matter of principle for the country as a wholehow can I charge when somebody is to be penalised?
We arehowevermoving towards recovering part of the charges for various services. This process of fiscal correction will continue. I am told at least eight states have agreed to a minimum electricity tariff of 50 paise for agriculture. I would therefore suggest we think in terms of punitive levies to control pollution. The time is ripe to implement water charges. Municipalities hard up for money would react favourably to increases in charges for their service. These taxes should raise revenues at the local level and push environmental efforts. We need to focus on major items that will benefit the country and must ask for them to be protected on a continuing basisnotwithstanding the direction the budget is taking.
Agarwal: Clearlythe use of economic instruments will become increasingly important. But it is not an area where economists and technologists have done much work.
The purpose of many of these instruments should not be preventivebut transformative. They must change behaviour or the use of technologies to those that are far more ecologically sound.
I am a bit sad that nobody took up my example of toilets because I do believe it is one technology that leads to a tremendous amount of ecological degradationbesides being inequitous. I think there should be at least a 10per cent tax on flush toiletswhich will push towards technological development also.
We have to focus on measures that have a large impact. The question also is at what level these taxes should be levied. For thisthe question of who will manage the resources is a very central one. Good environmental management in Europe takes place because there is greater local control of resources. Conflict resolution in Europe is done at the local level.
If the tax rate is lowthen the one instrument that the government has usedwhich is concessionswill not be available. Andif it's largely market forces that will workthen we need to influence the behaviour of the market. That's a large area of work. How do we force the market into directions that are resource-friendly? And is this possible?
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