BIBLIOGRAFÍA

If a product or service is inelastic and is subject to a consumption tax, final incidence tends to fall upon the consumer in the form of higher purchase prices. In passing on the cost, the producer has no incentive to alter any production techniques, and the status quo can lead to potential environmental harm.

If the harm takes place during production, a consumption tax on an inelastic good or service (representing the harm caused during production) may therefore be ineffective in reducing the damage. The only benefit will be to raise revenue (whether or not earmarked for

environmental projects) at the expense of consumers. Even if the producer is charged to tax to represent the harm caused during production, the additional cost is often passed on and final incidence rests with the consumer. Indeed Turner et al argue that the decision of where to place the tax is not a straightforward issue of distributional fairness since, particularly if there is a monopoly, “it is households which ultimately bear the burden of the tax, regardless

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of who makes the tax payments...”⁴¹ The OECD estimate that most environmentally-related taxes in reality are sales taxes related to emissions or pollutions.⁴² As such the burden can frequently fall on the consumer which incites distributive concerns.

Turner et al’s statement is not invariably true. Consumers tend to bear the highest burden when there is high price elasticity of supply and low price elasticity of demand. Where there is low price elasticity of supply and high price elasticity of demand then it is producers who bear the tax burden, potentially via a reduced return on their investment. Incidence of a tax on production can also fall partially on production workers who may receive lower wages.⁴³

36.7 SUBSIDIES

36.7.1 INTRODUCTION

Tax subsidies can provide considerable incentives to private individuals or enterprises to become more environmentally efficient. This can be the most efficient means of achieving environmental goals depending on the circumstances. Notionally, however, it is the Treasury who loses revenue from doing so, and therefore means that the burden for environmental protection falls upon the taxpayer. On the other hand, if environmental objectives can be achieved through private means rather than Government spending then this does not cost the taxpayer. In essence, tax subsidies can be a more efficient expenditure for the taxpayer than direct Government spending, if the environmental objective can be achieved at a lower cost through private enterprise via tax incentives.

41 Turner et al, see chapter 2, n.48 at 123.

42 See chapter 2, n.52, at 18, para. 39.

43 See EC, Commission Staff Working Document accompanying the Green Paper on Market-Based Instruments for Environment and related Policy Purposes (2007) {SEC(2007)388} at 3.

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36.7.2 GUIDELINES:JUSTIFIABLE STATE AID

The EU makes considerable use of tax exemptions and deferrals as a form of aid to various sectors. Between 2002-2004, tax exemptions made up over 32% of EU aid instruments for the manufacturing and services sectors, with tax deferrals adding another 3%.⁴⁴ State aid is discouraged by the EU by virtue of Article 92(1), and the EU generally⁴⁵ discourages use of State aid to align domestic companies with Community standards.⁴⁶ This is in line with the polluter-pays principle since it goes against the idea that the public at large should be made to bear the cost for achieving private companies’ environmental standards.

However not all measures to protect the environment are classified by the EU as State aid,⁴⁷ including tax measures designed to promote environmental objectives which is classed as a

‘general measure’.⁴⁸ Thus around 80% of environmental and energy saving aid to businesses was granted by EU Member States in 2004 through tax exemptions.⁴⁹ The justification given is that “such exemptions are only allowed where the taxes themselves are intended to make a significant contribution to protecting the environment and the exemptions should not

undermine the general objectives pursued.”⁵⁰

44 EC, State Aid Scoreboard (Brussels: Commission of the European Communities, 2005) COM(2005)624, at 26, Graph 2.

45 Allowances are made for SMEs who the EC regard may have ‘special difficulties’ in achieving environmental standards: Regulation (EC) No 70/2001.

46 EC, ‘Community Guidelines on State Aid for Environmental Protection’ (2001) OJ C/37 of 03.02.2001.

47 EC, see n.44, at 37, para. 2.1.5.

48 Commission Notice on the Application of the State Aid Rules to Measures relating to Direct Business Taxation (98/C 384/03), Rule 13.

49 EC, see n.44, at 39.

50 Ibid, at 39.

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This guideline, applied generally, could serve the environmental interest substantially since it would prevent any aid being given to a company which would cancel out the incentive to avoid environmental taxation. Furthermore it would require a high onus of justification; it would need to be shown that the environment could benefit significantly through the tax relief. Making provisions less onerous than this would make it difficult to justify a cost to the taxpayer. The World Bank supports this and warns against using tax subsidies on energy suppliers which would undermine their incentive to produce electricity in an efficient manner.⁵¹ Otherwise it would be inequitable for taxpayers to be required to fund an activity from which they will not benefit.⁵²

36.7.3 PURPOSEFUL DISTRIBUTION

McDaniel considers the equity of tax subsidies and argues that for a tax subsidy of this sort to be equitable, it must be fair to distribute it, which involves identifying whether there is an externality of public importance which the tax expenditure can correct.⁵³ It must also be distributed fairly among deserving recipients which requires ensuring that all of the benefit reaches the desired recipients. This reasserts the principle that the public must benefit from anything they subsidise and consequently they must receive value for money.

36.7.4 CONTRADICTORY SUBSIDIES

51 The World Bank, see chapter 4, n.39 at 95.

52 Research by the GSI (Global Subsidies Initiative) of the ISSD calls for increased transparency in order to identify and remove subsidies for fossil fuel producers which would cancel out incentives for renewable energy:

Laan T, ‘Untold Billions: Fossil Fuel Subsidies, their Impacts, and the path to Reform’ (2010)

<http://www.globalsubsidies.org/files/assets/transparency_ffs.pdf> Accessed 10/5/2010.

53 McDaniel PR, ‘Tax and Spend’ (2002) Unpublished manuscript cited in Mann R, ‘Waiting to Exhale: Global Warming and Tax Policy’ (2002) 51 Am.U.L.Rev. 1135-1222, at 1206, fn. 503.

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The USA has had differing experiences of tax subsidies in this respect, where they have been used as incentives for the domestic energy policy. The US Energy Policy Act 1992⁵⁴

provides production tax credits for qualifying facilities to produce renewable electricity, in order to subsidise and consequently reduce the price of renewable electricity. This is in the public’s financial and environmental interest and as such it can be argued that such tax expenditure can be justified given the guidelines above.

Mann⁵⁵ demonstrates however that the US revenue code allows considerable deductions for investments in oil and gas to the point that such investments can “yield greater proportionate tax benefits than investment in any other type of property.”⁵⁶ This treatment may be

regarded as of national importance as it has benefits for energy independence, employment, and can work to minimise energy prices for consumers. Yet it undermines environmental efforts by favouring non-renewable energy as an investment as well as reducing the cost of non-renewable energy which distorts efforts to reduce the costs of renewable energy.⁵⁷

36.7.5 SUMMARY

As shown, subsidies can work as economically-efficient tax expenditures to achieve

environmental policy objectives. However, since it means that the public bear the tax burden, it is crucial that subsidies are directed to where they can have most effect. This means

54 PL 102-486.

55 Mann, see n.53.

56 Ibid, at 1164-5.

57 GSI research argues for the removal of subsidies for non-renewable energy subsidies, citing grounds of economic, social and environmental interest. See eg. Ellis J, ‘The Effects of Fossil-Fuel Subsidy Reform: A Review of Modelling and Empirical Studies’ (IISD, 2010)

<http://www.globalsubsidies.org/files/assets/effects_ffs.pdf> Accessed 11/5/2010.

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ensuring that non-environmental subsidies do not conflict with the environmental purpose of the tax expenditure, and it targets those recipients who will put it into use beneficial to the environmental interest.