II. Basic Issues Pertaining to Environmental Taxes and Charges - A. :Utilization of Economic Instruments in Environmental Policies - Taxes and Charges

II. Basic Issues Pertaining to Environmental Taxes and Charges

As discussed in previous chapters, economic measures are effective when used appropriately in target areas based on the purpose of individual government policies, and when they are used as a complementary measure combined with other policies such as restrictions and social capital maintenance. Among the various measures, the most frequently used economic measures among OECD countries are environmental taxes and surcharges, which are believed to be effective due to the use of the various pricing mechanisms.

Our predecessor, the Environment Tax Research Panel, also submitted an interim report "How the Environment Tax should be used" in April 1994. It stated the problems of environment taxes and surcharges when implemented as a system, and presented other points of discussion on the impact upon the actual implementation of the system. Our research panel has also based our discussion on the above report.

A. Taxation Article and Basis of Assessment

The purpose of environmental taxes and surcharges are to lift the burden off the environment. Therefore, it is important that activity and goods that burden the environment are taxed. Regarding the greenhouse effect, taxation according to the carbon content in fossil fuel for reducing the amount of CO2 emitted into the environment is one possible form of taxation. The link is strong between the target of environmental taxes and surcharges and the environmental problem being addressed. The simpler and more apparent the relationship, the larger the understanding toward the measure and greater the impact of the tax. Taxes and surcharges can be categorized based on such linkage in three ways:

• those that are directly related to emission of pollutants (emission taxes such as SOx and NOx surcharges)
• those meant to directly restrain its consumption from the standpoint of resource preservation (natural resource consumption tax such as the oyster tax - Connecticut, USA, etc.)
• those with indirect relation to environmental issues being addressed (input material, goods taxes such as CO2/energy taxes on fossil fuel and surcharges on agricultural chemicals)

The OECD (1993) lists the following cases where "indirect" linkage methods of taxation such as taxation on input material has proved more effective than direct taxation on emission.

• When the cost for evaluating the quantity of emission is high (for example, there are numerous sources of emission or the source of emission is not limited to specific sources)
• When one can find a strong link between the environmental problem addressed in the government policy and the targets of taxation (for example CO2 tax levied on fossil fuels with the purpose of restraining CO2 emissions)
• When one cannot expect any effect on end-of-pipe technology to purify emission (for example CO2 tax)
• When the social cost caused by the emission is not influenced by the degree of concentration, time, and place of emission

Furthermore, when taxing input material, it is found to be more effective for the tax to be in the form of specific duties rather than in the form of ad valorem duties when considering linkage with environmental burden. On this subject, the previously mentioned report states "In general, linkage will be better where the tax is related to quantities than where it is related to values, since normally the pollution associated with the production or use of a particular commodity will be a function of the amount of the commodity rather than its value. However, with the exception of excise taxes on alcohol, tobacco, and mineral oils in most OECD countries, there are relatively few existing taxes based on quantities. VAT and sales taxes are levied on a much wider range of goods and services, but are generally based on transaction values rather than quantities. VAT has the further disadvantage as a basis for environmental taxation that it provides an incentive for consumer purchasers only, since businesses registered for VAT can reclaim the VAT on their inputs, and would thus be indifferent to any environmental tax incentive operated through VAT differentiation." In this manner, it is necessary to clarify the quantitative burden on the economy when considering taxing items, such as fuel, that are input material and base the tax rate on that figure.

Furthermore, concerning products that burden the environment, it is important to clarify the link between taxable items and the problematic burden they inflict on the environment when considering the cycle of production, consumption/use, and disposal of products.