연구공간 자유 (www.TheInstituteForLiberty.com)
지속가능한 개발을 위한 해결책으로서의 환경세
Eco-Taxes as a Solution for Sustainable Development
Sang Hyuck LEE
(Ph. D. in International Law / Texas MBA)
(sanghyuckleephd@gmail.com)
[Source: Unsplash]
Introduction
One of the most important guiding principles of the contemporary society is “Sustainable Development” initially proposed by Gro Harlem Brundtland, former Prime Minister of Norway and Chairperson of the Brundtland Commission (officially, World Commission on Environment and Development or WCED). Dr. Brundtland defined “Sustainable Development” as “the kind of development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”[1] Simply put, the term “Sustainable Development” may be understood as a balance between “economic development” and “environmental protection” or, more extensively, a balance among “economic development”, “environmental protection” and “social equity”.[2] These 3 values are called as “three pillars” or “three bottom lines”.
Gro Harlem Brundtland (1939 - ) [Source: United Nations Foundation] / Our Common Future (1987)
In business, there is a trend of arguments that sustainable development provides the basis for “Corporate Social Responsibility” (CSR). Also, there is another trend of arguments that CSR and sustainable development can be used synonymously. Some scholars argue that CSR has to consider all the three dimensions just like the triple-bottom-line of sustainable development.[3] In this context, some people propose “eco-taxes” as an essential tool to achieve environmental protection, consequently leading to sustainable development or even CSR. However, others blame eco-taxes as a disguised trade barrier against free trade, consequently doing damage on the developing countries and poor people. Concerning the debate over eco-taxes, this paper intends to arrive at the conclusion that, in principle, eco-taxes are one of the best policies for environmental protection and sustainable development, by discussing approaches to environmental problems, definition and an example of eco-taxes, and five limits of eco-taxes.
1. Approaches to Environmental Problems
International economic activity or trade liberalization, especially in the field of products and services, has increased at a blinding pace especially since the inauguration of the World Trade Organization (WTO) in 1995. Despite a few different opinions, there seems to be a general consensus over the fact that trade liberalization brings about economic growth.[4] For example, a well-known paper by Jeffrey D. Sachs and Andrew M. Warner found that developing countries with open economies grew by an average of 4.5% per year in the 1970s and the 1980s while those with closed economies grew by only 0.7%.[5] Roberto Azevedo, Director-General of the WTO, also mentioned that “Our statistical data confirmed that trade has continued to support economic growth and development, helping to reduce poverty around the world.”[6]
Jeffrey D. Sachs (1954 - ) [Source: Columbia University] / Roberto Azevedo (1957 - ) [Source: WTO]
However, such growing trade liberalization and global economic growth have some important consequences on the relationship between the global economy and the global environment,[7] more specifically, on the relation between “free trade and the environment.” For example, there is an accusation against free trade or the WTO: i.e. the argument of so-called “race to the bottom”. To be more specific, due to the sharp competition in the global market, a country may relax or fail to enforce environmental standards even though its citizens want a higher level of environmental protection. This phenomenon can be described as a race from the desirable level of environmental standard to the increasingly undesirable level in the face of global competition by trade liberalization.[8]
Economically, there have been numerous studies and researches to search for solutions for the issue over the relation between free trade and the environment. In general, these works are based on the concept of “externalities,” which refers to costs or benefits resulting from economic activity which are not reflected in the price of a product or a service. Especially, when externalities are negative (i.e. costs), the market failure will result in over-consumption, compared with the case when the environmental costs were fully internalized.[9] For example, more energy would be consumed if the environmental costs were not included in the price.
Thus, the Organization for Economic Cooperation and Development (OECD) has published a lot of research papers concerning this issue.[10] In principle, the OECD categorizes environmental measures into two: “regulatory measures” (e.g. trade ban, labelling) and “economic instruments” (e.g. taxes, subsides). In general, the OECD researches recommend that (1) economic instruments are much better than regulatory measures in achieving sustainable development,[11] and (2) among the economic instruments, eco-taxes are more preferable to subsidies for environmental purposes.[12] In principle, the WTO Secretariat also introduced such categorization and recommendations in its note concerning eco-taxes.[13]
2. Definition & an Example of Eco-Taxes
To be simple, the term “eco-taxes” may be understood as “taxes for the purpose of environmental protection”. In addition, the dictionary meaning of the term “tax” can be explained as “a monetary charge imposed by the government on persons, entities, or property to yield public revenue.”[14] For example, the OECD defines the term “eco-taxes” as “any compulsory, unrequited payment to general government levied on tax-bases deemed to be of particular environmental relevance.”[15] The term “compulsory” means that the payment of eco-taxes is not voluntary but mandatory. The term “unrequited” means that benefits provided by the government to taxpayers are not normally in proportion to their payments. In case of trade, tax bases or the targets to be taxed are products or services/service-suppliers. Therefore, “eco-taxes” in this paper can be defined as “any compulsory and unrequited charge imposed by the government on products or services/service-suppliers for the purpose of environmental protection.”
Eco-taxes are a policy to ensure that some of negative environmental externalities or environmental costs are internalized or priced into the decision-making process. Theoretically, eco-taxes are based on the premise that many environmental resources—e.g. non-renewable natural resources such as the air, the water, the soil etc.—are underpaid and thus overused. Therefore, eco-taxes are intended to raise the price of the use of these resources, reflecting true costs including the cost for environmental externalities.[16] To be more specific, the effects intended by eco-taxes can be understood as an implementation of the Principle of Polluter Payment or PPP[17] by encouraging not only consumers to consume those products which create less environmental externalities but also producers to develop alternative products that are more environment-friendly. Consequently, it is expected that imposition of eco-taxes can lead to the adjustments toward and research into more environment-friendly consumption and production.[18]
The UNFCCC (1992) / The Kyoto Protocol (1997) [Source: UNFCCC)
A prominent example of eco-taxes is the so-called “Carbon Tax” proposed under the Kyoto Protocol (1997) and later adopted in domestic laws of many countries all over the world. In order to pursue the ultimate objective of the UNFCCC (United Nations Framework Convention on Climate Change, 1992)—i.e. stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system,[19] the Kyoto Protocol obliges ANNEX I Parties—i.e. developing countries and countries with economies in transition (EITs)—to implement domestic policies and measures to reduce greenhouse gases or GHGs. Taxes imposed on GHGs pursuant to Article 2.1 of the Kyoto Protocol may be simply understood as “Carbon Taxes” because carbon dioxide is considered as the most prominent contributor to global climate change among the 6 GHGs, totaling to about 50% of the overall effect of global warming arising from human activities.[20]
3. Five Limits of Eco-Taxes
First of all, there may be an inherent limit in achieving the purpose of sustainable development and environmental protection by imposing eco-taxes, especially in case of “immediate and serious risks” to human, animal or plant life or health. If there are high risks, emergency situations or synergy reactions between individual emissions, not only eco-taxes but also all the other economic instruments may prove unreliable.[21] In such a case, regulatory measures may be much more immediately effective than economic instruments. In other words, put aside the issue of effectiveness or market-friendliness of a policy, it seems that generally the impact of economic instruments, especially eco-taxes, is less direct and immediate than that of regulatory measures.
In addition, there may be a technical limit in “evaluating price elasticity” of environmental targets and accordingly in determining a relevant tax rate for each environmental target. Price elasticity of a demand indicates that how much consumers respond in their buying decisions to a change in price. Hence, in order to achieve the purpose of environmental protection, there must be an accurate calculation of exact price elasticity of demand for each environmental target beforehand. However, technically, it is not an easy job. Moreover, in an extreme case of around 0 price elasticity of demand for an environmental target or when the demand for the environmental target is inelastic, it would be nearly impossible to achieve the purpose of environmental protection by adopting eco-taxes because there would be no change in the demand or behavior of consumers.
Moreover, there may be a political and philosophical limit in imposing eco-taxes based on “laissez-faire” or “neo-liberalism”. Especially at a time of economic difficulties—e.g. high unemployment or large trade deficits, there would be a strong resistance from the people against any tax increase or any new taxes. This kind of political opposition is philosophically originated from the laissez-faire school of economics which holds a pure or free market view without governmental interventions. However, it is notable to consider how those concerns over eco-taxes can be mitigated in the long run: (1) the revenue effects of eco-taxes which actually achieve enduring adjustment may prove limited because the tax base will dwindle over time, and (2) any significant receipts could be neutralized through tax cuts elsewhere in the tax system.[22] Nevertheless, it is not easy to deny the concerns over eco-taxes in the short term.
Furthermore, there may be an economic limit in levying eco-taxes due to the concern over their economic impacts on “competitiveness”. For example, if Country-A imposes eco-taxes on product “a” and exports it to Country-B where no such domestic mechanism of similar or the same rate of eco-taxes exists, Country-A’s imposition of eco-taxes on product “a” may have a negative impact on the competitiveness of product “a” compared with like product “b” of Country-B. However, empirically speaking, eco-taxes imposed by OECD Members have not been found as causing a negative impact on competitiveness. The OECD explained that this might be in part due to the fact that those OECD Members also had provided total or partial exemptions for energy intensive industries.[23] Moreover, under the WTO system, this concern can be addressed by border tax adjustments (BTAs) pursuant to Article II:2 and III:2, in case of imports, and Article VI:4 and Article XVI, in case of exports, of the GATT 1994.
Lastly, there may be another economic limit in imposing eco-taxes concerning “income distribution” due to their characteristic of, arguably, being “regressive.” According to the OECD, evidence on the distributive implications of eco-taxes still remains mixed and limited. For example, some empirical studies showed that eco-taxes on energy were income-regressive in Denmark, Ireland and the UK. In contrast, some other studies found that eco-taxes on energy were income-progressive in Spain and Italy. Moreover, some studies on the income distribution impacts of eco-taxes on energy/carbon based on the data from 11 EU Members revealed that the distributional impact of those eco-taxes differed by energy use. In some cases, the regressive impact of eco-taxes could be reduced by some mitigation and compensation measures, as shown in the cases of the German energy tax reform and the Netherlands energy tax relief. However, these mitigation measures can reduce the environmental effectiveness of eco-taxes.[24]
Conclusion
Throughout the above discussions over approaches to environmental problems, definition and an example of eco-taxes, and five limits of eco-taxes, this paper reaches a conclusion that eco-taxes are generally considered more preferable to any other economic instruments and regulatory measures. Thus, despite some concerns over eco-taxes being a disguised trade barrier against free trade, it is difficult to deny the importance of eco-taxes as one of the best policies for environmental protection and sustainable development. Of course, there are still some limits such as an inherent limit in case of “immediate and serious risks”, a technical limit in “evaluating price elasticity” of environmental targets, a political/philosophical limit from “laissez-faire” or “neo-liberalism”, an economic limit concerning a negative impact on “competitiveness,” and another economic limit over the regressive “income distribution”. Nevertheless, conversely, such limits clearly show that not in an exceptional but in a general and usual case, eco-taxes can contribute to the objective of sustainable development and environmental protection.
[1] World Commission on Environment and Development, OUR COMMON FUTURE (1987) or United Nations, Report of the World Commissions on Environment and Development (1987).
[2] See Bob Giddings, Bill Hopwood, and Geoff O’Brien, Environment, Economy and Society: Fitting Them Together into Sustainable Development, SUSTAINABLE DEVELOPMENT, VOL. 10, ISSUE 4 (October 30, 2002)
[3] Daniela Ebner and Rupert J. Baumgartner, The Relationship between Sustainable Development and Corporate Social Responsibility (2008), modified from a proceeding at Corporate Responsibility Research Conference 2006, 4-5th September, Dublin, available at
(accessed June 2020).
[4] Aaron Lukas, WTO Report Card III: Globalization and Developing Countries, TRADING BRIEFING PAPER of the CATO Institute, No. 10 (2000).
[5] Jeffrey D. Sachs and Andrew M. Warner, Economic Reform and the Process of Global Integration, BROOKINGS PAPER ON ECONOMIC ACTIVITY, No. 1 (1995).
[7] DAVID HUNTER, JAMES SALZMAN & DURWOOD ZAELKE, INTERNATIONAL ENVIRONMENTAL LAW AND POLICY 1166 (1998).
[8] Richard Revesz, Rehabilitating Interstate Competition: Rethinking the “Race-to-the-Bottom” Rationale for Federal Environmental Regulation, 67 N.Y.U.L. REV, 1210 (1992).
[9] RICHARD A. WESTIN, ENVIORNMENTAL TAX INITIATIVES AND MULTILATERAL TRADE AGREEMENTS: DANGEROUS COLLISIONS 52 (1997).
[10] See OECD, OECD ENVIRONMENTAL OUTLOOK TO 2050 (2012), available at
[11] It is also recommended in Principle 16 of the Rio Declaration (1992).
[12] For a general understanding on the effectiveness of eco-taxes in addressing environmental externalities, see MARTIN ENEVOLDSEN, THE THEORY OF ENVIRONMENTAL AGREEMENTS AND TAXES: CO2 POLICY PERFORMANCE IN COMPARATIVE PERSPECTIVE 100-119 (2005).
[13] The WTO Secretariat categorizes measures into “command-and-control measures” (e.g. prohibition or quantitative control) and “price-based instruments” (e.g. tariffs, taxes or subsidies). WTO, Taxes and Charges for Environmental Purposes—Border Tax Adjustment, WT/CTE/W/47 (2 May 1997), paras. I-VII.
[14] BRYAN A. GARNER (editor in chief), BLACK’S LAW DICTIONARY 1469 (7th ed. 1999).
[15] The OECD uses the term “Environmentally Related Taxes” instead of “eco-taxes.” See OECD, ENVIRONMENTALLY RELATED TAXES IN THE OECD COUNTRIES: ISSUES AND STRATEGIES 15 (2001).
[16] MITSUO MATSUSHITA, THOMAS J. SCHOENBAUM & PETROS C. MAVROIDIS, THE WORLD TRADE ORGANIZATION: LAW, PRACTICE AND POLICY 1 (2003), p. 476.
[17] Principle 16 of the Rio Declaration (1992).
[18] WTO, supra note 13, para. XIV.
[19] Article 2 of the UNFCCC (1992) and Preamble to the Kyoto Protocol (1997).
[20] UNFCCC, CARING FOR CLIMATE: A GUIDE TO THE CLIMATE CHANGE CONVENTION AND THE KYOTO PROTOCOL 1 (2nd ed. 2005), p. 4.
[21] WTO, supra note 13, paras. I-VII.
[22] WTO, supra note 13, para. XV.
[23] OECD, supra note 15.
[24] OECD, supra note 15.
Bibliography
Books
BRYAN A. GARNER (editor in chief), BLACK’S LAW DICTIONARY (7th ed. 1999)
DAVID HUNTER, JAMES SALZMAN & DURWOOD ZAELKE, INTERNATIONAL ENVIRONMENTAL LAW AND POLICY (1998)
MARTIN ENEVOLDSEN, THE THEORY OF ENVIRONMENTAL AGREEMENTS AND TAXES: CO2 POLICY PERFORMANCE IN COMPARATIVE PERSPECTIVE 100-119 (2005).
MITSUO MATSUSHITA, THOMAS J. SCHOENBAUM & PETROS C. MAVROIDIS, THE WORLD TRADE ORGANIZATION: LAW, PRACTICE AND POLICY (2003)
RICHARD A. WESTIN, ENVIORNMENTAL TAX INITIATIVES AND MULTILATERAL TRADE AGREEMENTS: DANGEROUS COLLISIONS (1997)
WCED, OUR COMMON FUTURE (1987)
Articles
Aaron Lukas, WTO Report Card III: Globalization and Developing Countries, TRADING BRIEFING PAPER of the CATO Institute, No. 10 (2000)
Bob Giddings, Bill Hopwood, and Geoff O’Brien, Environment, Economy and Society: Fitting Them Together into Sustainable Development, SUSTAINABLE DEVELOPMENT, VOL. 10, ISSUE 4 (October 30, 2002)
Daniela Ebner and Rupert J. Baumgartner, The Relationship between Sustainable Development and Corporate Social Responsibility (2008), modified from a proceeding at Corporate Responsibility Research Conference 2006, 4-5th September, Dublin, available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.485.5912&rep=rep1&type=pdf (accessed June 2020)
Jeffrey D. Sachs and Andrew M. Warner, Economic Reform and the Process of Global Integration, BROOKINGS PAPER ON ECONOMIC ACTIVITY, No. 1 (1995)
Richard Revesz, Rehabilitating Interstate Competition: Rethinking the “Race-to-the-Bottom” Rationale for Federal Environmental Regulation, 67 N.Y.U.L. REV. (1992)
Reports of IOs
OECD, ENVIRONMENTALLY RELATED TAXES IN THE OECD COUNTRIES: ISSUES AND STRATEGIES (2001)
UNFCCC, CARING FOR CLIMATE: A GUIDE TO THE CLIMATE CHANGE CONVENTION AND THE KYOTO PROTOCOL 1 (2nd ed. 2005)
WTO, Taxes and Charges for Environmental Purposes—Border Tax Adjustment, WT/CTE/W/47 (2 May 1997)
International Law
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