Two birds, one TAX: Leveraging taxation to regulate climate change and support economic development.

 

“Environmentally related taxes increase the cost of polluting products or activities, which discourages their consumption and production – regardless of the intended purpose of the tax” OECD

Abstract

A major challenge to Uganda's socioeconomic progress is climate change. Public health, infrastructure, and agricultural output have already been impacted by the rising frequency of floods, droughts, and unpredictable weather patterns. There are two benefits to using taxes as a regulatory and development tool: encouraging eco-friendly behavior and generating funds for green projects. Using comparative insights from international best practices in nations, this policy paper investigates how Uganda might implement green tax policy framework.

Introduction 

The need to raise revenue for financing public expenditure while promoting sustainable economic growth and development provides a justification for environmental taxation as well as countries aligning their activities with the International Law requirements on environment protection reflected in, The Addis Ababa Action Agenda, the 2030 Agenda for Sustainable Development, The Paris Agreement, The United Nations Framework Convention on Climate Change concluded in 1992 and the Kyoto Protocol. These Instruments contain principles applied in environmental protection for instance, Polluter pays principle, Prevention, Precautionary Principle and the Principle of Common but Differentiated Responsibility. The Countries have implemented these instruments in their National Laws for instance Uganda under the National Environment Act 2019, this establishes the National Environment Management Authority for supervising and coordinating all activities in relation with the Environment. Despite making a negligible contribution to global greenhouse gas (GHG) emissions, Uganda is one of the nations most at risk from climate change. Through its Nationally Determined Contributions (NDCs) under the Paris Agreement, the government has pledged to take climate action. However, funding is still needed to put mitigation and adaptation plans into action. Taxation can help close this disparity and promote long-term economic growth.

By encouraging sustainable alternatives and punishing detrimental environmental behaviors, taxes have the power to change behavior. Carbon taxes, fuel levies, and green consumption taxes are examples of climate-related levies that can: Internalize environmental costs,  Promote low-carbon technologies, Encourage energy saving and efficiency; Provide funding for public environmental initiatives.

Uganda current green tax policy framework.

Uganda does not have an explicit carbon tax, nor a CO2 emissions trading system. However, it does collect energy taxes, including: Excise taxes on fuels, with the exception of fuels used for fishing and a public lighting charge on electricity consumption. The following are important gaps: No carbon price or emissions-based taxes; Limited tax breaks for green technologies and renewable energy; There is little public knowledge of ecological fiscal policy; environmental tax compliance is not strictly enforced. 

Alternative Green Tax Policy

Environmental taxes. 

Environmental taxation is a source of revenue that taxes behavior that is harmful to planet’s health (ATAF, 2021).  It is important because not only is it a source of revenue, it reduces greenhouse emissions, discourages anti-ecological behavior, motivates innovation, whilst reducing the burden on other taxes (ATAF, 2021).  Various taxes have been created to see this through.  These include; Carbon taxes to curb carbon emissions, energy taxes on energy products such as electricity, fossil fuel taxes on diesel, gasoline, and natural gas, transport taxes on the ownership of motor vehicles, ships, and aircrafts, pollution taxes based on emission of ozone depleting substances, resource taxes to regulate the extraction of natural resources (ATAF, 2021). 

The Theory of Consumer Behavior in economics is to the effect that the actions and reactions of a consumer in the market aims at utility maximization which is subject to an income constraint and taxation as an extrinsic factor.  Taxes curtail consumption of goods which pollute the environment leading to environmental conservation.

The South African government introduced a Carbon dioxide (CO2) levy in September 2010 to encourage the use of energy efficient and environmental friendly motor vehicles but did not introduce CO2 incentives for the purchase of new motor vehicles.  However, the sale of vehicles with high CO2 emissions increased which was paradoxical (ATAF, 2021).

The other countries which succeeded in using CO2 tax were Sweden and Netherlands which used incentives for consumers of energy efficient vehicles, the tax rate was highly noticed by consumers and mass awareness was done notifying the public about the need for the CO2 levy (OECD, 2017).

The solution is to introduce a CO2 levy which is at least 75% of the car value (This per the WHO-FCTC) and the levy charged annually- while the rate increasing as the vehicle becomes old. But the poverty in Africa may limit the purchase of new vehicles which are energy efficient. 

Plastic Bag Tax (Spratt, 2012). This is tax levied on single use ultra-thin plastic bags made from polyethylene. These are littered and endanger marine animals through ingestion. Their prevalence is because they are given to consumers free of charge and their pollution affects both polluters and non-polluters.  This tax was effective in Ireland, Belgium and Denmark but failed in Bulgaria, China and South Africa.  The economists have suggested the use of marginal costing pricing models and elasticity of demand to tax.  The marginal costing approaches leads to lower taxes as the rate is levied on the additional costs above variable costs in total disregard of total cost.  The elasticity of demand means that elastic goods are taxed high as consumers respond to the price changes by reducing consumption and goods with inelastic demand taxed with a lower rate.  This has an exception where there are substitutes goods and high income levels where the response is nil.

The solution is to tax at total cost plus a margin on the manufacture which tax is passed on the consumer to discourage production and taxing polluting goods at 200%-300 to discourage consumption with due respect to employment and investments ranking below individual lives.

The need to use paper reusable bags instead of plastic bags like sisal, offer investment incentives which can be seen as a “win-win” for both the environment and the investors.

FORESTRY TAXATION (THOMAS, 2005). Liberia introduced a forest tax in addition to other levies like export taxes, administrative fees and area tax. The tax failed as concessions were given to companies lumbering trees and these in return could build schools, maintain roads and granted tax credits for these activities. This failed the forestry conservation due to, market failure where deforestation exceeded the limit and the free rider problem as public goods are consumed by everybody. The solution was to tax each tree based on specific rates per number of trees lumbered and the rate to reduce once another tree is replaced.

TOBACCO TAXATION (Arora, 2021). In Sierra Leon, an excise tax of 30% was introduced on tobacco in 2018 this led to a reduction in smuggling and reduction in smoking. However, despite ratifying the WHO-FCTC, it has not made any legislation banning advertisements and campaigns on tobacco. 

In Nigeria, a 20% Ad-Valorem tax is imposed on the unit cost of cigarettes and VAT at 5%. This is low and has not impacted on tobacco control per WHO-FCTC. Uganda under the Excise Duty Act 2014 imposes excise duty on cigarettes in the second schedule at specific rates per 1000 sticks and an ad valorem tax of 200% on smoking tobacco. These rates are low; cigarettes should be taxed at an ad valorem rate of 75% plus a specific tax of UGX 55 per 1000 sticks to meet the WHO-FCTC. Uganda enacted the Tobacco Control Act 2015 and banned advertising of tobacco and ratified the convention. This should be added with intensive control of smuggling cigarettes to make the prices of local products intact hence conservation of the environment and a uniform tier tax structure to prevent companies from manipulating local and imported cigarettes to lower prices and affordability.

Environmentally related taxes. 

This refers to a compulsory, unrequited payment to general government levied on tax bases deemed to be of particular environmental relevance (OECD, 2017). 

Charges. This is where the payer gets something in return.  In Korea, there is a municipal waste charge that is proportional to amount of non-recyclable waste disposal that is refunded on returning products such as bottles, and lead acid batteries.   Tradable permits.  That allocate emission resource exploitation rights.  Case in point is the regional greenhouse initiative in USA.

The fees, tradable permits, payments for biodiversity; especially in Switzerland where the protection of the Swiss landscape is paramount, tradable fishing rights in Iceland,  and charges are in the spectrum of Environmental Related Taxes for instance, where a tax payer gets something in return for more or less in proportion of the payment made can form a charge and fees for the service offered respectively (OECD, 2017).

The OECD Countries introduced Biodiversity conservation and taxes and fees for biodiversity generated revenue of US Dollars 2 Billion which is 0.56% of the total revenue from environmentally relevant taxes in OECD countries in 2015.  The Iceland economy has a transferable fishing quota system which is determined based on what is biologically sustainable and fishmongers given a share of fish sales based on total allowable catch.  

Tax Incentives 

These are tax breaks or credits given to individuals and businesses that engage in environmentally friendly activities, such as investing in energy-efficient technologies or reducing waste generation.  By providing financial incentives for these behaviors, governments can encourage more widespread adoption of sustainable practices.

In addition to direct taxes and incentives, taxation can also be used to fund environmental conservation efforts.  For example, governments can allocate a portion of tax revenue to support the preservation of natural habitats, the protection of endangered species, and the cleanup of polluted areas. By earmarking funds for these purposes, governments can ensure that resources are available to address pressing environmental issues.

Possible challenges and limitations to implementation

One of the main concerns is the regressive nature of some environmental taxes, which can disproportionately impact low-income individuals and households.  For example, a tax on gasoline may place a greater burden on those who rely on their cars for transportation, without providing viable alternatives.  To address this issue, governments can implement measures to offset the impact of environmental taxes on vulnerable populations, such as providing subsidies for public transportation or offering rebates for energy-efficient appliances.

Another challenge is the potential for tax evasion and avoidance, particularly in the case of international environmental taxes.  For example, a carbon tax imposed by one country may lead to businesses relocating to jurisdictions with lower environmental standards to avoid paying the tax.  To address this issue, governments can work together to harmonize environmental tax policies and prevent tax evasion through international cooperation and coordination.

In conclusion, taxation can be a powerful tool for promoting environmental sustainability and addressing pressing environmental challenges.  By implementing environmental taxes, incentives, and funding mechanisms, governments can incentivize individuals and businesses to adopt more sustainable practices and support conservation efforts.  However, it is important to consider the potential challenges and limitations of using taxation as a tool for environmental policy and to implement measures to mitigate any negative impacts on vulnerable populations and prevent tax evasion.  Ultimately, a comprehensive and integrated approach that combines taxation with other policy instruments is needed to achieve meaningful progress towards a more sustainable and environmentally friendly future.