Environmental Policy

Report on Auto-Related Environmental Taxes_4. Taxation from the Standpoint of Environmental Conservation

4. Taxation from the Standpoint of Environmental Conservation

4-1 Basic Concept

Present auto-related taxes take into consideration the degree of luxury and possible road damage as criteria for ensuring equity among taxpayers. While there are some measures specifically aimed at environmental conservation incorporated into the current taxation scheme, they are not fully utilized as environmental conservation measures. To promote the utilization of taxes as an effective environmental conservation measure, the present auto-related tax system is being reviewed based on the following basic concepts:

(1) In order to reduce the environmental burden imposed by the use of automobiles, auto-related taxes should be levied according to the amount of pollutants emitted. This principle is based on the idea that those who perform the activity that imposes the burden on the environment should bear the cost corresponding to the degree of that burden.
The degree to which environmental costs can be internalized into taxation depends on the degree to which environmental burden is regarded as taxable. What should be taxed and to what extent must be determined appropriately, in order to reflect the environmental costs associated with air pollution and global warming.

(2) Air pollution and global warming are both important issues for Japan in conserving the environment, as explained in Section 1. Air pollutants and carbon dioxide are both emitted from automobiles as the result of fuel combustion. At the present technology level, it is inevitable that emission reduction efforts may be somewhat traded off by efforts to increase fuel efficiency, and vice versa. Therefore, what is important is to deal with these two issues as a single, combined issue. In re-examining auto-related taxes for the purpose of environmental conservation, it must be kept in mind that auto taxation needs to be such that it addresses both air pollution and global warming.

(3) The approximate amount of burden imposed on the environment by vehicle use can be obtained by multiplying the degree of environmental burden per vehicle by the volume of vehicle traffic. It is hoped that overall auto-related taxation be re-examined in the future from the standpoint of reducing each of the factors in this calculation.

4-2 Short-Term Agenda for the Re-examination of Taxation

The Panel has discussed what can be done to improve auto-related taxes in the short-term, based on the basic concepts given in Subsection 4-1 and taking into account what is feasible.

Areas to be Re-examined
In reducing the per-vehicle emission of gases that cause an environmental burden, it is effective to utilize economic instruments in areas where regulatory measures are already being taken so that efficacy of existing regulations increases even further. The Panel has studied how taxation can be utilized, focusing for the time being on the replacement of heavily polluting automobiles with less polluting ones in order to reduce the average emissions per vehicle.
To reduce per-vehicle emissions, it is also important to increase the use of vehicles with low emissions. For this purpose, the Panel explored how taxation can provide effective incentives for encouraging auto manufacturers to develop, manufacture, and distribute such environmentally friendly alternatives.

For reducing not only the per-vehicle emissions but also the aggregate amount of emissions by automobile traffic, taxes tied to fuel consumption should also be re-examined from the viewpoint of environmental conservation, because increases in distances driven naturally correspond with increases in the total amount of fuel consumed. Fuel taxes, however, must be considered in the context of larger policy issues, in which the levels and structure of overall fuel taxation to prevent global warming and air pollution are addressed. Re-examination of fuel taxation, therefore, is dependent on these larger examinations over the medium to long term.

Taxes to be Re-examined
Taxes that may be re-examined to reduce emissions per vehicle include that levied at the time of acquisition and that levied for possession of an automobile.
When these two taxes are compared, under the present taxation system individuals or companies with automobiles generally pay more on taxes levied during the course of possession, in accumulated amounts, than on taxes levied at the time of acquisition. Moreover, since taxes for possession of an automobile repeatedly remind the owner of the tax burden every time they are collected even long after a vehicle's purchase, announcement effect can be expected. Thus, in addition to the tax levied at the time of acquisition, re-examining the tax for the possession of automobiles from an environmental conservation point of view can be expected to significantly promote car owners to switch to automobiles with less of an environmental burden.
As to the automobile acquisition tax, rates for the environment-friendly vehicles have already been reduced. This tax measure needs to be expanded and improved, grounded in the basic concept explained in Subsection 4-1.

Matters Requiring Consideration
As a general rule in framing tax systems, efforts should be made to make the systems as simple as possible.
When examining what should be taxed and to what extent, it is important to take into account the current recession and the financial difficulties being faced by both the central and local governments. In the short-term, taxation should be designed so as not to impact tax revenues significantly. However, some Panel members suggested that in re-examining taxation from the standpoint of environmental conservation, it might not be necessary for each auto-related tax to be revenue-neutral with regard to mitigation of air pollution nor necessary for each tax to be revenue-neutral with regard to global warming.

Time for Introduction
Prompt action is essential for controlling air pollution and global warming. Replacing automobiles will take several years. The Panel, therefore, decided to re-examine taxation from the areas that are most feasible in order to put them into practice as early as possible.