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reduction in their living standards.26 He explains that “people become attached to their current level of prosperity.”27 Psychologists refer to this as ‘loss aversion’28
and this topic will be discussed further in Chapter 6.
Ascertaining the correct level of tax is therefore important, as low tax rates for those not prepared to change their lifestyles can be absorbed.29 For example Turner explains that vehicle fuel tax rates in North America are “glaringly inadequate” since from an
environmental standpoint they have been set too low, to the point where they have “failed to wean enough Canadian and US drivers from their preference for gas-guzzling vehicles…”30
26. SOCI AL POLI CY
26.1 POVERTY CONSIDERATIONS
Nevertheless, policy makers should be minded that the tax can be set at a level that does not penalise the poor, as the danger is that it could drive the poor into increased poverty which would be a more severe social cost than the reduction in perceived living standards in the wealthy.31
26 Rachlinski JJ, ‘The Psychology of Global Climate Change’ (2000) 1 U.Ill.L.Rev. 299-319.
Wiener for example illustrates that common environmental taxes throughout the globe could prove extremely regressive, “taxing billions of poor people in China and India to
27 Ibid, at 303.
28 See e.g. Tversky A & Kahneman D ‘Loss Aversion in Riskless Choice: A Reference-Dependent Model’
(1999) 4 Quart. J. Econ. 107, 1039-1061, at 1039.
29 The challenges of finding an optimum rate are expressed in Slemrod J, ‘Optimal Taxation and Optimal Tax Systems’ (1990) 4 J. Econ. Perspect. 1, 157-178.
30 Turner GS, ‘Gasoline Taxes as Environmental Policy – Time for a Common Canada-US Approach’ (2005) 39 Tax Notes International 8, 711-719, at 711.
31 Distributional concerns will be addressed in Chapter 7.
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confer benefits on wealthier people elsewhere.”32 An energy tax, for example, can be particularly regressive since it is something the poor spend a proportionately high level of their income on.33 Even in the UK, when the Conservative Government in the 1990s
attempted to increase VAT on domestic energy from being zero-rated to a reduced rate of 8%
followed by a full rate of 17.5%, there was strong public opposition arguing the tax would mostly increase poverty for pensioners and the poor. The incoming UK Labour Government in 1997 fulfilled their election pledge to reduce the VAT to 5%.34 CCL also exempts
domestic energy users due to such concerns. Clearly therefore there is a difficult balance to strike between protecting the poor and ensuring that behaviour is changed to the extent necessary to achieve environmental goals. This was recognised by HM Treasury who acknowledged the necessity, when weighing competing priorities concerning distributional impacts, to make “value judgements…about the relative values of costs and benefits falling on different groups.”35
Nevertheless, excluding low-income groups from a requirement to change their
environmental behaviour can have serious negative consequences if it provides a perverse incentive for other income groups to desire to join the exempt group. For instance, those in low-income employment may wish to cease working if the unemployed are exempt and becoming unemployed provides a net economic benefit. This is returned to in Chapter 7, and a potential solution for policymakers is considered at 26.2.
26.2 BASIC NEEDS EXEMPTION
32 Wiener, see chapter 2, n.106, at 721.
33 Recognised by Ligthart, see chapter 4, n.19, at 13.
34 See discussion in Dresner et al, see chapter 3, n.33, at 931.
35 HM Treasury, see chapter 4, n.38 at 16, para. 4.17.
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To set the appropriate level therefore may require a common tax from which some users are excluded. Baranzini et al, in the case of energy use, proposes that the distributional problems can be contained by taxing only above a certain threshold of energy use.36 This would allow some amount of energy to be considered tax-exempt for ‘basic needs’ whilst anything above that would be charged to tax. This would therefore protect those on low-incomes and provide an incentive for all users to keep energy use at a minimum. It would of course require some policy judgement as to what is classed as a ‘basic need’. This system is already in place in The Netherlands with the ‘regulatory tax regime’.37
26.3 FURTHER SOCIAL BENEFITS
By applying environmental tax policy in a more progressive way which attempts to include all polluters but not penalise, policymakers can achieve environmental objectives in a manner which minimises social cost and may even result in net social benefits. Indeed, Whalley explains that an environmental tax to reduce carbon emissions (a carbon tax), applied on a global scale with revenues recycled back to the poorest countries, could increase capital flows to developing countries by three times their current incomes in foreign aid and have huge impacts on development and trade.38
26.4 UNDERVALUATION
36 Baranzini et al, see chapter 4, n.15 at 405.
37 See explanation in DEFRA, ‘Greening the Tax System in the Netherlands’
<http://www.defra.gov.uk/environment/waste/thematicstrat/greeningtaxnetherlands.pdf> Accessed 17/6/2010.
38 Whalley, see chapter 1, n.3 at 122-3.
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The Stern Review advocates the need to establish a price for carbon, either through tax, trading or regulation.39 Governmental efforts to monetise the social cost of carbon performed a series of cost-benefit analyses to emphasise the precarious balance between protecting the environment and protecting the economy.40 Reaching figures of between USD $5-65 per CO2 tonne,41 the report importantly recognised the considerable uncertainties in making such valuations. Analysing the processes involved, Ackerman and Stanton however highlighted that the costs of carbon in the US Government report were consistently understated.42 The Stern Review prices the cost of pollution, set within a range of published estimates, at the higher rate of $85 per tonne of CO2.43 This demonstrates the difficulty in ascertaining a monetary value.
Whilst the method discussed at 26.2 could prove extremely helpful in a range of
environmental issues such as energy use, the problem remains with the undervaluation of many environmental factors. An early American case, Bradstreet v Huntington, regarded any natural wilderness as valueless ‘wasteland’ before it is adapted for use by humans.44 In the past, many economic activities have followed this rationale and ignored environmental value.
Phippslooks at this in the context of wildlife habitats or wetlands being converted for agriculture use and calls it a market failure. 45
39 Stern, see chapter 2, n.57, at 468-490.
His criticism is that the private costs to a farmer in converting land to cropland, for example does, “…not include the costs imposed on
40 US Government Interagency Working Group on Social Cost of Carbon, ‘Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866’(2010) Appendix 15A
<http://www2.eere.energy.gov/buildings/appliance_standards/commercial/pdfs/sem_finalrule_appendix15a.pd>
Accessed 17/6/2010.
41 At 34.
42 Ackerman F and Stanton EA, ‘The Social Cost of Carbon’ (2010)
<http://www.e3network.org/papers/SocialCostOfCarbon_SEI_20100401.pdf> Accessed 17/6/2010.
43 Stern, see chapter 2, n.57 p.xvi.
44 (1831) 30 US (5 Pet.) 402, 448.
45 Phipps TT, ‘Commercial Agriculture and the Environment: An Evolutionary Perspective’ (1991) 20 Northeastern Journal of Agricultural and Resource Economics 2, 143-150, at 147.
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society of reduced wildlife populations and reduced ecological services provided by the land.”46