Are environmental taxes addressing our health concerns? (3)

In this concluding series, we make some recommendations to the government in the design of an effective environmental tax. In brief, an effective environmental tax is a tax that achieves the environmental objectives of the government.

In making recommendations in the design of such a system, we recognise the difficulties in designing an effective tax systems. It is not surprising that the Minister of Finance in the 2013 Budget mentioned that an Environmental Fiscal Reform working group had been formed to look at the various fiscal instruments around the world that could be used to raise revenue to address Ghana’s environmental problems.

Researching what happens in other countries and applying the best case in Ghana is definitely encouraged and we will be making reference to best practices in other countries in making recommendations to government on the design of an effective environmental tax system.

There are several policies for tackling environmental concerns, but we support the position that a pure environmental tax should aim at ensuring that polluters face the true cost of their activities. This can be done by charging polluters for the damage caused to others. It is, therefore, one of the most common policies used to tackle the problem of pollution.

You may recall that in the first series we mentioned that behavioural changes are needed to address environmental problems. We further indicated that some of these changes will involve substantial economic costs that affect labour, product and capital markets and re-emphasised that it is not surprising that economic instruments are used for pollution control and natural resource management.

Following from the above, environmental tax may be defined as a tax placed on a product that damages the environment, or on a complementary product, in an attempt to reduce its production or consumption.

It follows that to address environmental concerns, we should identify what products harm the environment or what the proxies of that product are where it is difficult to impose environmental related taxes on such products. Doing this will contribute to having an effective environmental tax system as suggested by the Organisation for Economic Co-operation and Development (OECD) and the UK.

Designing the system – a useful checklist 

According to the OECD, environmental taxes have had a clear positive impact on the environment – to the extent that such taxes have been applied. Therefore, the importance of the design of an effective tax system cannot be over-emphasised. In a PwC UK study, it was recommended that:

• Environmental taxes should be revenue-neutral;

• The tax rate of an optimal fiscal tax should be set inversely proportional to the price elasticity of demand for the tax base (i.e. the more inelastic the demand, the higher the tax rate);

• The tax should be phased in so businesses and households have time to adjust ways of production and consumption; and

• Revenue and expenditure data should be shared with the general public.

To improve the design and implementation of environmental taxes, the following additional recommendations adapted from “Solving a taxing puzzle making environmental taxes work for business” are adopted:

1. Publish a clear statement of intent. The purpose should be clearly stated and a definition of environmental tax provided.

2. Create and publish an Environmental Tax Impact Assessment (ETIA) report. By this, the government should take strategic fit into account by ensuring new measures complement existing government policies such as industrialisation.

3. The ETIA should show cumulative compliance costs of all relevant policy measures. Simplicity should be at the core of the design of the ETIA to enable average Ghanaians to follow the report.

4. A clear consultative process should be created with relevant participants allowed to ask the right questions.

5. The end goal of each tax and the key milestones should be clear. A tax road map should be published where possible.

6. The national budget should include an environmental tax snapshot and periodic evaluation process for each tax to facilitate review success. This will enable Ghanaians to monitor the performance of the taxes against targets after their introduction.

We hope government in its comprehensive review of the environmental tax regime will use the above list as a checklist in achieving its objectives.

We will end this series by sharing comments following the announcement of the environmental tax definition by the Economic Secretary to the Treasury, Chloe Smith, and hope the Government of Ghana will take such bold steps.

Today’s announcement is an important step in meeting the government’s commitments on environmental tax, and our broader determination to be the greenest government ever.

By setting out a clear, usable definition of what a green tax actually is, people will be able to judge us against the Coalition Agreement pledge. Indeed, through ambitious policies such as the Carbon Price Floor, this government is already on track to double the proportion of environmental tax revenue by the end of the Parliament. We want a clear approach that delivers a positive environmental impact without adding burdens onto business or households.

Please feel free to contact me by sending an email to george.kwatia@gh.pwc.com. To ensure obtaining a quick response in case I’m unavailable, please copy in Abeku Gyan-Quansah (abeku.gyan-quansah@gh.pwc.com).