Biografía de Paulo Freire

It has long been recognised that environmental policies in individual countries may raise issues of wider, international, concern. The existence of cross-country environmental spillovers, for example through flows of atmospheric poiiution across nationai frontiers, means that environmentai poiicy measures adopted in one country have significant external environmental effects in other countries, which may not be adequateiy reflected in national policy decisions. International discussion and coordination has become an important dimension of the formulation of environmentai poiicy in a number of areas where environmentai spiliovers are significant, especially policies relating to the global atmosphere, to acid rain, to pollution of certain rivers and seas, transport of dangerous materials, and regulation of economic pressures on endangered species.

In addition to these environmentai spiliovers, international policy discussions have aiso been concerned about possible international economic consequences of environmental policies adopted in individual countries. The extent to which the cross-country economic consequences of national environmental policies shouid be regulated through international agreements is much more contentious than the case for coordination based on environmental spillovers. It has been observed that the economic consequences of environmentai poiicies constitute a "price" that individual countries bear for environmental policy measures, and that wiliingness to bear that price wiii vary between countries. Some of the economic effects of environmental policy, especialiy those relating to the dispiacement of productive activities from countries impiementing stringent environmental regulation to countries with iess restrictive policies, simpiy reflect a mutually-beneficial trade between countries with different relative preferences for environmental quality and higher income. Requiring countries with low environmental standards to increase their standards of environmental protection to prevent this dispiacement wili require these countries to bear the costs of a levei of environmental protection higher than they would wish, and may aiso increase the cost of achieving a given levei of environmentai quaiity in the country with high standards of protection, by preventing it making use of international dispiacement of polluting activities, where this is the least-cost way of reducing its pollution.

Whiist this argument may suggest that there is iittie need for regulating the international economic effects of national environmental policies, there are in fact a number of other aspects of the economic effects of environmental policies which may be important, and which have been the subject of international coordination and reguiation. There are, in particular, a number of ways in which national environmental policies may be seen as giving scope for protectionist policies to be adopted by individual countries in the guise of environmental measures.

4. Tax Expenditures

One, which has been important in the EC context, is the possible use of national standards, regulations and tax provisions to discriminate, indirectly, between national producers and their foreign competitors. In the field of environmental taxation, the European Commission has been concerned that national tax provisions in individual member states to encourage use of returnable bottles, or to encourage the sale of motor vehicles fitted with catalytic converters, could be designed to give domestic producers a competitive advantage over producers from other member states. Similar problems could be envisaged with direct tax incentives for pollution abatement investments. There is a risk that individual countries could draw up the list of qualifying investments so as to include the products of national suppliers of abatement technologies, and to exclude the abatement technologies sold by their foreign competitors.

A second possible use of national environmental policies as disguised trade protection is the possibility that subsidies for environmental protection could be provided at higher levels than warranted by environmental considerations, thus providing a subsidy to domestic production more generally. International agreements on trade policy largely prohibit the use of government subsidies in trade policy. However, one problem in implementing these agreements is in distinguishing subsidies provided for reasons of trade protection from subsidies paid for other, more legitimate, purposes. Given the asymmetry of information (especially regarding the administrative application

of national policies) between the country concerned and its competitors or international monitoring agencies, distinguishing legitimate from illegitimate subsidy will always be difficult.

For this reason, the countries of the OECD agreed in 1974 to implement the Polluter Pays Principle (PPP) in environmental policy. This rule requires that polluters should "bear the costs of carrying out pollution prevention and control measures mandated by government" (OECD, 1974). The precise interpretation of this rule has been extensively debated, and in recent years the interpretation of the PPP has increasingly been seen to provide positive support for the implementation of environmental taxes and other market mechanisms®. Nevertheless, its primary purpose remains in regulating the possible economic conflicts that may arise as a result of the environmental policy measures implemented by OECD members, by placing severe limitations on the use of subsidy measures in environmental policy. A rule of this form - outright prohibition - has the attraction that it is more likely to be verifiable (and, hence, credible) than a rule which draws a distinction between legitimate and illegitimate grounds for subsidy.

The argument in this chapter has suggested that there may, in principle, be a legitimate role for subsidy measures of certain types in environmental policy, where, for a range of possible reasons, "first best" policies based on emissions taxes at the optimal level prove infeasible. Policy packages of the sort advocated in this chapter, in which taxes and tax expenditures are combined to enhance the incentive effects achievable through (constrained) taxes alone, are to some extent a departure from the spirit of the PPP. The significance of this conflict with the PPP should not be downplayed, and may be an important reason for cautious implementation of measures of the sort advocated here, and adequate international monitoring and control of their operation. The PPP plays an

5 To date, tax incentives for abatement measures have generaiiy been on a modest scaie, and have been seen as iittie threat to the no-subsidy principie which the PPP seeks to maintain.

4. Tax Expenditures

important role in preserving the credibility of trade policy institutions, and policy changes which might undermine the clarity of the PPP may have wider economic costs which should be taken into account.

8 Conclusions.

A "first best" environmental policy, able to set pollution taxes at a level equal to the marginal social damage of pollution, would have no role for environmental tax expenditures, such as accelerated depreciation on environmentally-beneficial investments. Such measures would suffer from the general deficiency of subsidy in pollution control, which is that they may fail to lead to the optimal level of rationalisation in polluting industries; pollution-abatement subsidies maintain the profits of polluting firms at a higher level than pollution taxes, and thus tend to encourage an excessive number of firms to remain in the industry. The first-best policy may, on the other hand, be one in which the number of firms in polluting industries is reduced; exit, or bankruptcy, may be one of the processes through which the first-best policy has its desired effect.

There may, however, be difficulties with pursuing a first-best environmental policy of this form. One, of course, is that political constraints (arising, perhaps, from the lobbying power of polluting firms) may prevent governments using policy instruments which lead to significant exit. Another may be a constraint on the level of environmental taxes which may be set. For a variety of reasons, governments may be constrained to set pollution taxes at less than the first-best level. In this context, it is possible to develop a theoretical rationale for the use of pollution abatement investment subsidies, as a possible complement to pollution abatement incentives based on modest, constrained, environmental taxes.

The point of such a combined use of instruments is that the investment subsidies may play a role in increasing the elasticity of response to the limited environmental tax. Since the tax cannot be set at the first-best level, the combination of investment subsidy plus tax may induce greater change in polluting behaviour than could be achieved through the use of the tax alone. (Also, of course, it is possible that the payment of the subsidy could relax the constraint on the level of the tax, although this is not necessary for the argument).

A theoretical case for the use of environmental tax expenditures, in the form of investment incentives for pollution-reducing investments, can thus be made. How cost-effective, in practice, would such a policy be likely to be?

The environmental impact will partly depend on the nature of the pollution control technologies which are available. Where these take the form of "pure" technologies, in which the investment is added to existing production processes, and confers no benefit other than the social benefit of pollution reduction, subsidising part of the cost would not be likely to have any impact on firms' decisions. There are, however, a further group of pollution control investments which reduce private costs or confer private gains, perhaps in the form of materials recovery. Subsidy might, in principle, be effective in increasing the level of such investments; it could be paid either directly, or indirectly in the form of tax incentives for pollution abatement investments. In addition, a combined package.

4. Tax Expenditures

involving both subsidy and emissions taxation, could be effective, even where subsidy alone would fail, since the emissions taxation would provide the firm with a private benefit from reduced emissions.

Evidence from experience with more general investment incentives suggests that the effects might be quite modest. There are major difficulties in the way of empirical investigation of the impact of investment incentives; however studies of incentives paid through the tax system in the US and the UK during the 1970s and 1980s do not suggest that the effects have been large. Some effect, however, has clearly been found of the very large, and temporary, incentive which arose during the reform of the UK corporate tax system in 1984. Not all of this experience may be relevant to the case of tax Incentives for pollution abatement investments: these require closer integration of tax and technology decisions than is usual in existing business practice.

The aspect of experience which gives most reason for caution in the widespread application of environmental investment incentives is the practical difficulty of assessing eligibility for the incentive. The problem Is one of policing the boundary between qualifying and ineligible categories of investment. Even with incentives requiring apparently quite simple eligibility criteria to be applied (such as those limited to manufacturing industry, for example), borderline cases have often proved difficult to handle. In the case of environmental incentives, the difficulties of defining what forms of investment should qualify, and of distinguishing between the qualifying and ineligible components of major investment projects would be formidable, and potentially a source of distortion and inefficiency in firms' poiiution abatement technology choices.

Similarly, careful consideration needs to be given before measures which undermine the role of the Polluter Pays principle are adopted. The PPP plays a valuable role in preventing environmental policy measures being subverted into a process of trade-distorting competitive subsidy. On the other hand, we have argued that there may also be strong arguments for greater use of Investment subsidies in environmental protection, and that politically-feasible policies which rely on environmental taxes alone are unlikely to maximise the incentive for environmental protection.

Chapter 5