The Fiscal System and the Polluter Pays Principle

A Case Study of Ireland

Alan Barrett, John Lawlor, Sue Scott

• Publisher: Routledge
• Year: 2019
• Print ISBN:
  9780367026981
• eBook ISBN:
  9780429675829
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1997, this volume describes the theoretical underpinning of the Polluter Pays Principle as a means to deliver environmental benefits and reduce perverse incentives. By systematically examining each major sector of the economy to identify environmental issues, it considers how the principle can be applied to the Irish fiscal system and then proposes alterations to the system in an environmentally friendly and socially sensitive direction. Sectors explored include agriculture and forestry, environmental services for wastewater treatment, water supply and for waste disposal, energy, transport, tourism and construction.

1 Introduction

A. Barrett and S. Scott

While much has been written in recent years about so-called 'environmental taxes', less attention has been paid to the environmental implications of the fiscal system in general. In this book, we go some way towards redressing this imbalance by systematically examining the Irish fiscal system in an effort to (a) identify the environmental effects of the system through the incentives it creates and (b) suggest ways of altering the system in an environmentally friendly way.

The issues we explore are of the following types. In many instances, if an activity is polluting, the activity should be taxed and if an activity leads to environmental enhancement it should be subsidised.¹ We consider a range of sectors and ask to what extent is this rule being applied. It will be seen that in some cases polluting activities are actually subsidised. This can arise directly, for example, through tax breaks or grants being given to certain activities. It can also arise indirectly, when agents are not charged for the full costs of their activities. This latter situation can occur when taxes or charges are in place, but when these taxes or charges do not cover the environmental costs about which we are concerned.

Having identified the environmental shortcomings of the fiscal system, we then go on to consider how the shortcomings can be removed and how environmental improvements to the system can be made. In doing this, however, we are mindful that not all environmental problems can be solved by the fiscal system and that regulation must be relied upon in certain circumstances.²

There are several inter-related reasons for undertaking this examination and it is appropriate that we set them out. Our primary concern is with the state of the Irish environment, or perhaps more correctly, possible future changes in state of the Irish environment. Relative to many other areas of the European Union, the environment in Ireland is generally good. However, to a certain extent this situation is the result not so much of conscious policy decisions but of the lower level of development in Ireland relative to other EU countries.

Along with Ireland's economic development in recent years have come some associated environmental pressures. Examples of these are as follows. According to a recent report on the Irish environment (Environmental Protection Agency, 1996) traffic is now the main source of air pollution in the country, especially in urban areas. With continuing rises in income levels, this situation could well become worse.³

Another source of development-related pollution has arisen in agriculture. While reforms to the EU's Common Agricultural Policy have lessened this problem, it has been the case that incentives existed for the intensification of agriculture. The implications of this have been seen in terms of pollution related to fertiliser use and also in terms of environmental degradation related to over-grazing. And while the CAP reforms may have reduced some of the environmental implications of agriculture, the reforms themselves may have generated further environmental problems. In particular, the incentives that have been created for diversification into forestry have lead to rapid afforestation and possible environmental difficulties.⁴

As a final example of environmental pressures we can note that tourist numbers have doubled since the late 1970s. This has led to congestion in certain parts of the country at certain times of year. In addition, proposals have been made regarding the development of facilities to cater for tourists, some of which may lead to construction in sensitive areas.⁵

Given these increasing environmental pressures, it is important that the fiscal system in no way contributes to the problem. But if certain polluting activities are seen as contributing to economic growth, and in particular to job creation, there will be a temptation to steer away from taxing such activities; what is more, there will also be a temptation to subsidise them. The principle of 'sustainable development' has become a guiding principle, at least in the rhetoric if not the reality, of policies aimed at generating economic growth. Therefore, it is important that policy-makers take due account of the environmental implications and costs of certain types of growth.

While concern for the environment is the important motivating factor in this study, the particular approach is motivated by another factor. It could be that whatever incentives are created by the fiscal system, the negative environmental effects could be offset by regulations. Our focus on the fiscal reform option is prompted by the growing international awareness of the advantages of the fiscal approach, that is the use of taxes, charges and subsidies to provide incentives for environmentally positive actions.

A more formal discussion of the advantages of the fiscal approach to environmental protection over the regulatory approach is given in Chapter 3. For now we can simply say that the use of fiscal incentives can generate the same amount of environmental protection at a lower cost to the economy than the use of regulations. The existence of such fiscal measures also generates an on-going incentive for pollution abatement, which is not the case with regulations. Finally, the taxation of polluting activities may generate revenue which in turn may be used to reduce other taxes.

The use of fiscal incentives for environmental protection is being advocated increasingly as part of a general move towards the use of 'economic instruments' in this area.⁶ In documents such as Agenda 21 (UNCED, 1992) and the EU's Fifth Environment Action Programme, calls are made for the greater use of economic instruments. Allied with these calls is the Polluter Pays Principle, a notion first given prominence by the OECD in its 1975 publication The Polluter Pays Principle and now an accepted cornerstone of environmental policy as seen, for example, in the EU Treaty (Commission of the European Community, 1992). In Ireland itself, this policy interest could be seen in the budget speech of the Minister for Finance in 1996 when he asked Departments and relevant agencies to 'examine the strategic impact of taxation on environmental policy and to bring forward specific tax measures for the 1997 Budget'.

As we noted above, this move towards the use of economic instruments for environmental protection has led to much attention being given to the development and implementation of environmental taxes. As part of this general movement, we believe it is important to take a step back and to consider the fiscal system as it currently operates and to assess its environmental implications. In this way the introduction of environmental taxation can be part of a much broader environmental reform of the fiscal system and therefore the environmental benefits can be that much greater.

The remainder of the book is structured as follows. In Chapter 2, we provide three elements of background information which are relevant to any proposals for fiscal change. These are (a) some notes on the Irish fiscal system, (b) a similar piece on the legal framework in which the Irish fiscal system is set and (c) some evidence on the attitudes of Irish people to the types of changes we propose.

In Chapter 3, we outline the arguments in favour of the use of economic instruments for environmental policy. We also show how economic theory can be used to set optimal levels of charges and taxes. Some additional remarks are made regarding when regulation may be preferred over the use of economic instruments. For those familiar with the theory of economic instruments for environmental protection, Chapter 3 can be skipped without any loss.

In Chapter 4, we begin our sector-by-sector analysis with agriculture. We first discuss the environmental effects of the sector; we then discuss the existing fiscal treatment of the sector and relate it to environmental effects; examples of fiscal approaches from elsewhere are considered; finally, some suggestions regarding reforms of the fiscal system, as they relate to the sector, which would be environmentally beneficial are made.

We should specify at this point that the objective implicit in our proposed fiscal reforms will be to ensure that polluters are made to pay the full cost of their actions. In the language of public economics, we suggest reforms whereby the external costs of pollution are internalised.⁷ Taxes and charges can also be used for the achievement of specified targets, such as emission levels or waste volumes, and for raising revenue; these uses, however, are not the basis for our recommendations.

In Chapter 5 we follow this same approach with respect to the use of environmental services by industry and households. Similarly in Chapters 6 through 9, we apply this approach, in broad terms, to energy, transport, tourism and construction.

Finally, in Chapter 10 we draw together our conclusions and suggest priority areas for reform.

Notes

1 A more rigorous discussion of these taxing and subsidising arguments is presented in Chapter 3.

2 Again, this issue will be considered more fully in Chapter 3.

3 Chapter 7 is concerned with transport generally.

4 Both agriculture and forestry are examined in Chapter 4.

5 Tourism is the subject of Chapter 8.

6 Fiscal incentives are part of a set of policy tools that are referred to as market-based or economic instruments. Other tools in this group include tradeable permits and deposit-refund schemes, a discussion of which is contained in Chapter 3.

7 A more formal description of what we mean by the 'internalising of external costs' will be given in Chapter 3.

References

Commission of the European Community (1992), 'Treaty on European Union', Official Journal of the European Community, C224, Vol. 35.

Environmental Protection Agency (1996), State of the Environment in Ireland, Environmental Protection Agency: Wexford.

OECD (1975), The Polluter Pays Principle: Definition, Analysis, Implementation, OECD: Paris.

UNCED (1992), Agenda 21, United Nations Conference on Environment and Development: Conches, Switzerland.

2 Background and scope for change

S. Scott

Before we discuss pollution taxes and other economic instruments in detail in the following chapter, it is important to consider the framework within which decisions on these instruments would be taken. Three aspects will be addressed, namely, (1) the fiscal framework, (2) the legal framework, and (3) attitudes of the public.

The fiscal framework determines the p...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Figures and tables
• Acknowledgements
• 1 Introduction
• 2 Background and scope for change
• 3 Theory of economic instruments
• 4 Agriculture and forestry
• 5 Environmental services
• 6 Energy
• 7 Transport
• 8 Tourism
• 9 Construction
• 10 Conclusions