Policy & RegulationTHE DECENTRALIZATION OF ENVIRONMENTAL TAXES: ENVIRONMENTAL OR ECONOMIC ADVANTAGE?
Summary
Environmental taxes have become an increasingly prevalent tool for governments to address pollution and encourage sustainable practices. Initially, governments relied on mandates, controls, and sanctions. However, due to persistent environmental degradation, there is a shift towards economic instruments like environmental taxes. The effectiveness of these taxes is debated in terms of their centralization versus decentralization. Regional decentralization can be beneficial, as areas with worse environmental problems can impose higher taxes. Yet, some argue that decentralization can lead to destructive fiscal competition and efficiency losses, as regions might lower taxes to attract business without considering environmental impacts. There's a viewpoint that supranational entities like the European Union should manage environmental issues to prioritize ecological well-being. Despite environmental taxes being impactful in theory, they are often seen as revenue-generating tools rather than means of actual environmental protection. The challenge lies in aligning economic incentives with environmental priorities to ensure these taxes serve their intended purpose of safeguarding the environment for current and future generations.
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THE DECENTRALIZATION OF ENVIRONMENTAL TAXES: ENVIRONMENTAL OR ECONOMIC ADVANTAGE?
Until few years ago, the use of environmental taxes was not one of the first options for governments to sanction polluting behaviours, because they had other methods to correct them. Therefore, most governments preferred to employ normative instruments based on mandates, control, and sanctions to protect the environment. However, the continuous environmental deterioration has shown the limitations of traditional regulations, which has led to an increase in efforts to define complementary intervention techniques. In this sense, the focus has turned towards economic instruments, and in particular, towards the original idea of taxes.
The decentralisation of a tax with an environmental impact proves to be effective if each region governs its levies based on the environmental problems that exist in that territory. In this way, those regions where the problems are more serious would impose higher rates on their citizens, while those with a less serious situation could apply a lower rate. As an example, the following ranking of cities with the worst air quality in Belgium. As we can observe, the air quality in Beersel or Brussels is worse than in the rest of the cities.
# | AQI | CITY |
1 | 98 | Beersel |
2 | 61 | Brussels |
3 | 42 | Dilbeek |
4 | 26 | Zwijndrecht |
5 | 26 | Sint-Genesius-Rode |
6 | 25 | Stabroek |
7 | 24 | Harelbeke |
8 | 20 | Heist-op-den-Berg |
(Information taken from aqicn.org where AQI stands for Air Quality Index, and the levels go from (0-50) Good, (51-100) Moderate, and (101-150) Unhealthy for sensitive groups)
Given this situation, although there are experts who defend the decentralisation of environmental taxes and their benefits, others have been against it and defend centralisation. The reason for this is that different levies within the same territory could provoke destructive fiscal competition, resulting in efficiency losses. The temptation for different regions to establish lower rates, or fiscal incentives to attract companies without considering air quality or how much the company pollutes, is often greater than the existing environmental needs.
Other experts in the field claim that environmental problems, such as CO2 emissions, should be managed directly by the European Union with the goal of prioritising the environment over the possible economic benefits they could produce.
Environmental taxes, although conceptually designed to encourage sustainable practices and protect the environment, in practice are often perceived more as economic instruments than as tools for environmental protection. The sad reality is that, as long as the mindset that prioritises economic benefit over ecological well-being prevails, the effectiveness of these taxes as a means to achieve significant environmental change will remain limited. It does not matter whether these taxes are centralised or decentralised; if the underlying approach continues to be to maximise revenue instead of minimising environmental impacts, their potential to contribute to a real improvement in sustainability and the health of the planet will continue to be underestimated. This dilemma reflects the urgent need to reassess our economic and environmental priorities to ensure that environmental taxes fulfil their original purpose of protecting and preserving our natural environment for present and future generations.
