Environmental Policy

Summary of Report :Utilization of Economic Instruments in Environmental Policies - Taxes and Charges

Summary of Report

I. Basic Concept Regarding Economic Instruments

A. Why Are Economic Instruments Necessary?
--Integration of the Environment and Economics

The environment and economy are inseparable elements. Economic activity can better human lives only by protecting and preserving the environment. For mankind to maintain a sustainable economic society, we must change the current economic social system to incorporate consideration for environmental preservation.

Today's environmental problems stem from normal socio-economic activity and an increased pressure on the environment caused by our daily lifestyle. The problems are spreading on a global scale, causing concern about the long-term impact on future generations. Problems in which causal relationships are becoming increasingly obscure are also multiplying.

In order to solve these problems, we must abandon the view that the environment is a "free asset" that can be used infinitely, but rather, treat the environment as a finite, precious asset that must be passed on to future generations. Based on this view, we must think of a way to sustain the blessings of the environment, and accept the concept of bearing the burden of preserving the earth and paying the price of using its resources. Furthermore, policy measures are required to heighten awareness of how economic activities impact the environment, and to ensure that this impact is carefully considered when economic activities are conducted. In order to enable such views to be reflected in the decision-making process, against the backdrop of the countless number of daily economic activities, it becomes necessary to use economic instruments that take advantage of the market mechanism. Regulatory measures are not sufficient.

Transformation into a sustainable economic society will force its constituents to bear the burden. However, economic instruments enable everyone to share the burden evenly, and these economic instruments serve as political measures that allow a more efficient transformation of the entire society. Efforts to integrate the environment and the economy will enable us to create a sustainable society that takes into consideration the preservation of the environment, as well as attain improved economic activity.

More concretely, around the world there are methods such as taxation, surcharges, emission permit trade, and deposit-refund systems that are already being carried out, reflecting an awareness of the need for consideration for the environment in the price of goods and services - the basic underlying principle of a market economy.

Economic instruments internalize the cost and preserve the effect of the consideration needed to preserve the environment. They are considered effective instruments to change society as a whole into a sustainable one. It is necessary to take advantage of the effects of such instruments by combining them with the Basic Environment Law and Basic Environment Plan.

B. Effectiveness of Economic Instruments in Environmental Policies

1. Effects of Improving the Environment -- Theoretical Consideration

The Pigouvian Theory on taxation seeks to internalize the social cost created by socioeconomic activity that burdens the environment. It uses the tax system to see to it that this cost is reflected in the prices of goods and services and it takes advantage of the market mechanism for the preservation of the environment.

Economic instruments have the following advantages over direct regulations:

When environmental problems stem from various economic activities, and the cause of the pollution becomes dispersed, it becomes difficult and costly for the government to set targets and monitor the implementation of the various restrictions. Through economic instruments, however, each entity will choose the most economical activity through the market mechanism, thus enabling resource sharing in a fair and low-cost manner.
Through direct regulatory measures, there is no incentive to lower the pollution emission to meet the regulation target. However, through economic instruments, lowering the pollution emission leads to an economic advantage, thereby providing an incentive for producers and creating a long-term positive impact on technological development.
Among economic instruments, taxation and surcharges increase revenue.

It is necessary to come up with effective government policies that combine the advantages of both regulatory and economic instruments.

2. Situations in Countries Employing Economic Instruments

Countries engaged in the use of economic instruments are increasing, particularly among the OECD countries.

Among these examples, various cases proved effective in preserving the environment, thus illustrating the point that the impact of economic instruments is not only a matter of theory but also that of reality.

3. Impact on the Economy
Impact of economic instruments on the entire economy

In order to transform into a sustainable economic society, it is necessary in the long term to develop resources, production, investment, research and development, and consumption activity in ways that are less burdensome to the environment and allow for the sustainable use of natural resources. Economic instruments are believed to contribute to smoothing this adjustment phase by taking advantage of market mechanics.

On the other hand, the short-term impacts on the economy in the transitory process include economic growth, international competitiveness, trade, employment, and regression, changes that are similarly observed when implementing other measures.

Impact on economic growth and international competitiveness

The impact on the economy is often discussed in the context of implementation of a carbon (CO2 ) tax. According to analyses on various economic models, the negative impact on economic growth, while dependent on which level is set as a target for taxation, is estimated somewhere between 0.01-0.5 percentage points.

While this is not a problem distinct to economic instruments, concern for the "hollowing out" of industry due to weakened international competitiveness is affected not only by various regulations and taxes but also by a combination of various elements such as political stability, labor power, pay standards, market access, raw materials, and how well-established social capital is. Therefore, we find it inappropriate to consider only the impact of environmental taxes and surcharges.

With the implementation of environmental taxes and surcharges, some express concern that industries may move overseas where environmental restrictions are less severe and cause increased pollution emission at overseas sites. However, impact on competitive strength, trade, and leakage are issues consisting of various components and cannot be fully predicted at the current stage.

The above argument holds for restrictive measures and other government policies, as well. The various research results have not shown positive proof that current restrictions and criteria have influenced competitive strength.

The impact of environmental taxes and surcharges is also affected by the foreign exchange rate, and there remains room for relieving further influences through the use of border tax adjustments on goods.

Employment, "double dividends"

Regarding the "double dividends" such as increased employment opportunities, and increased gross domestic product (GDP) anticipated through the implementation of environmental taxes and surcharges, it is difficult to specify the impact on society as a whole and should be evaluated individually by country.


With the implementation of environmental tax and surcharges, there is concern over the occurrence of regression, forcing low-income families to take on more burden than high-income families. However, it is inappropriate to argue about a regression tax by examining only one form of tax. Furthermore, it is necessary that more research be done on this subject because there has been no complete study of environmental policies regarding burden sharing among different social strata.


While economic instruments exhibit various impacts on the economy, it is possible to minimize economic impact by appropriately combining the economic instruments with other government policies.

C. Implications in Countries Adopting "Greening" of the Tax System

In recent years, the concept of the "greening" of the tax system, (i.e. promoting effective means to protect the environment) involves making effective use of resources and ensuring productivity. Productivity can be heightened by taxing activity that creates a burden on the environment and brings about social costs (bads taxation), as well as lowering taxes for profits gained by economic activity (goods tax reduction).

To remove part of the taxation on labor and enterprises that serve to limit productivity and growth and shift to activity that burdens the environment is considered an act of stimulating the economy as well. Because the tax framework and standard of taxation differ among countries, depending on the country's situation, income, consumption, and resources, it is important to carefully discuss what kind of tax structure will enable the "greening" of the taxation system.

D. Public Approval of Economic Instruments

In order to increase public approval of economic instruments and to stimulate debate among the public about the actual use of economic instruments, it is necessary to constantly provide information on the effectiveness of economic instruments to a wide range of audiences and aggressively create opportunities to exchange opinions with various interest groups. One useful means of heightening public awareness is to numerically evaluate the social cost (external cost) on the environment caused by socioeconomic activities.

Furthermore, it will be important to create public awareness regarding the linkage between the purpose of environmental conservation policies and instruments such as environmental taxes.

E. Future Considerations on Using Economic Instruments

In the future, we will be active in following and promoting public debate by clarifying the actual economic instruments thought to be appropriate for individual environmental policies.

Detailed consideration of potential problems, necessity, and the applicability of implementing possible economic instruments as part of individual environmental policies.
Because of the necessity to effectively combine economic instruments with regulatory instruments and/or promote voluntary measures, it is necessary to research their effective combinations, as well as their effectiveness, efficiency, and the target of political measures.
Consideration for legalizing economic instruments, and consideration of the implementation of such instruments both on the local and national levels.
Deepening the understanding and stimulating the interest of the public regarding the significance, the problems, the effects, and the impact of economic instruments in order to enable the public to understand the necessity, purpose, and expected effects of individual economic instruments set up to address individual environmental policy areas and problems.

Page top↑

II. Basic Issues Pertaining to Environmental Taxes and Charges

1. Taxation Article and Basis of Assessment

The purpose of taxation is to reduce the environmental load. Therefore, it is important that activities or goods that put a load on the environment are taxed. Regarding global warming, for example, taxation according to the carbon content in fossil fuel for the express purpose of reducing the amount of carbon being emitted in the environment is one possible form of taxation.

Regarding taxation on input, it is more effective for the tax to be in the form of specific duties rather than ad valorem duties when considering clearing the linkage between the tax and environmental load.

2. The Relationship Between New Tax and Existing Tax

In order to put environmental taxes and charges into concrete shape it is possible, along with introduction of new taxes, to consider review existing taxes from the standpoint of environmental conservation. For example, in order to curb the use of fossil fuel, one can think of taxing from the perspective of environmental conservation and relatively reduce taxes on energies that are of less environmental load.

Furthermore, when considering the appropriate taxation based on carbon dioxide content in our country, it will be necessary to discuss it in the context of relation to other taxes on energy.

From the standpoint of administrative costs, restructuring the current tax system can be more cost-effective.

3. Concrete Plan for Taxation

It is effective to levy environmental taxes and charges at the stage when it is least costly in terms of collecting taxes and most effective in order to conserve the environment. For example, there are many who emit carbon, and its emission is directly related to the consumption of fossil fuel. Therefore, it is desirable to tax fossil fuel at the point of production, and import after considering the necessity of minimizing the cost of tax collection and maximizing the tax base.

Regarding the taxation level, it is important to select a level that internalizes the costs on the environment and provides the economic unit with the incentive to change, or at least to consider changing the current economic activities. In setting the actual taxation level, there can be some considerations; while an effect of even relatively low level taxes will be expected if estimating that the taxes greatly heighten the awareness in the economic unit of the cost on the environment, it will be necessary if considering how consumption activities in the market are affected by the change in the overall price, to increase the substantial burden.

When considering the need to address global environment issues, it is not necessary to vary the substance of taxation according to the different localities, rather it is desirable that the country collects the taxes. In resolving domestic environmental issues, one can consider a number of effective units of taxation according to the individual issues faced by the locality.

4. Use of Tax Revenue and Form of Introduction

As levying the environmental tax in itself serves as a means to achieve government policy, revenues can be thought of as the general source of revenue. On the other hand, it is possible to use revenue for environmental conservation and seek impact from both taxation and expenditure.

Some countries move to reduce other taxes based on the principle of revenue neutrality, while other countries use revenues as source of implementing government policies including environmental policies, taking into account the scale and standard of taxation. Each country bases their policies on their unique domestic situation.

Depending on the level of taxation, if there is concern of a remarkable impact on the economy, one could gradually implement new policy by revealing to the public the exact schedule of implementation. It will also become necessary to heighten public awareness on environmental conservation by instruments that impress on consumers the burden of taxes.

5. International Impact and Mitigation Measures

Differing environmental policies of various countries will be adjusted according to exchange rate, along with other factors. Therefore, strict environmental policy does not immediately create trade deficits. Furthermore, it is possible to consider border tax adjustment for goods traded in the international market when dealing with countries that do not implement similar economic instruments to conserve their respective environments.

When implementing environmental taxes and charges, short-term impact on developing countries should also be taken into account.

Page top