Environmental Policy

I. Basic Concept Regarding Economic Instruments - C. :Utilization of Economic Instruments in Environmental Policies - Taxes and Charges

I. Basic Concept Regarding Economic Instruments

C. Implications In Countries Implementing "Greening" of the Tax System

In recent years, attention has been paid to the concept of the "greening" of the tax system, in other words, promoting effective means to protect the environment. "Greening" involves making effective use of resources and ensuring heightened productivity by taxing activity that is a burden on the environment and bringing about social costs (bads taxation) and lowering taxes for profits gained by economic activity (goods tax reduction). The basic concept underlying "greening" is that distribution of resources is distorted by the existence of exterior diseconomies. The environmental tax, based on Pigouvian taxation, which in one aspect internalizes external diseconomies, corrects such distortion and has the function of effectively distributing resources. On the other hand, taxation on labor, savings, investment, and business, which are deeply related to the productivity of the economy, are indispensable as source of revenue for government activity (i.e. public spending). However, if these taxes did not exist, in theory, productivity and growth will be restrained. Thus, shifting part of the taxation to activities that inflict a burden on the environment can be interpreted as measures that vitalize the economy.

But, tax frameworks and standards of taxation differ among countries, depending on the country's situation, income, consumption, and resources. Therefore, it is important to carefully discuss what kind of tax structure will enable the "greening" of the taxation system.


Among the OECD countries that conducted major revisions in the taxation system, shifting the general structure from excessive taxation on labor to indirect taxes such as value-added tax and other environmental taxes is understood to alleviate the structural problems of the economy. Thus, consideration for the environment when implementing tax revisions is becoming a major trend. (OECD, 1995).

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