Tax reforms key in Asia-Pacific warming fight

There were more than 300 green business exhibitors from the private sector.

The United Nations Economic and Social Commission for Asia and the Pacific (Unescap) was also there. It brought together government policy-makers, business executives and consumer rights groups in the Third Green Growth Policy Dialogue. "Renewable Energy: Technology, Markets and Policies in Southeast Asia" was the special focus of the dialogue.

With the sustained high oil prices and climate change threatening the global economy, energy taxation could be an important instrument for promoting renewable energy without undermining the competitiveness of Asia-Pacific economies. On the surface, that may seem to fly in the face of conventional economic theory. But the energy taxation that we are referring to is not about a new, additional tax burden. Rather, it is about a shift of the tax base - from income to pollution.

Green tax reform is one of five tracks of the Green Growth approach initiated by Unescap and endorsed by the 62 governments of its membership. Building sustainable infrastructure, encouraging sustainable consumption patterns, and promoting the greening of business are the other broad measures promoted by the Green Growth approach.

Currently, growth is measured in terms of "economic efficiency" or market prices which do not reflect the ecological costs. The Green Growth approach stresses "ecological efficiency" - to maximise resource efficiency and minimise the impact of pollution.

Green tax reform changes the tax base from income to pollution, so that market prices may properly reflect ecological costs.

But does green tax work? The experience of Europe shows that it does. Green taxes aimed at promoting energy conservation and reducing CO2 emission have been implemented in Western Europe since the early 1990s and have been increased progressively. In the case of Germany, energy tax increased by 55 per cent over a span of just five years between 1999 and 2003. Energy taxes now account for about three quarters of environmental tax revenue in the European Union.

The main objective of taxes is to generate revenue for public spending. In a revenue-neutral situation, green tax reforms bring a double dividend - reducing income taxes without cutting public spending. In the German experience, citizens dissatisfied with high pension insurance contributions were delighted that additional tax revenues collected from polluters have significantly offset their pension burden.

But how about the green bit of the tax? In Sweden, it is estimated that 60 per cent of the reduction in CO2 emissions between 1987 and 1994 resulted from the energy tax. A study by the National Environmental Research Institute, University of Aarhus, Denmark, finds that green taxes in six EU countries have contributed to better economic growth, competitiveness and employment.

In comparison, the Asia-Pacific region still has a long way to go. Some countries, such as China, Japan and the Republic of Korea, have made modest inroads towards shifting taxes from income to carbon-generating activities. Some parliamentarians in Japan have been pushing in the last few years for a bill on an environmental consumption tax, against fierce opposition from industrial interest groups. In the Republic of Korea, the petroleum excise tax has been raised at the rate of 30.9 per cent per annum since 2000. China is now considering a 20 per cent to 50 per cent tax on retail gasoline and diesel prices to promote energy conservation.

At the environmental technology trade fair in Bangkok last month, companies vied with each other in showcasing the latest technology on cleaner energy and production. To reduce pollution and emissions and to counter climate change, technology no doubt has an important role to play.

However, it is clear from the European experience that a concerted effort to reform taxation is also crucial to achieve sustainable energy production and consumption. It is possible that energy taxes linked with a reduction in income tax - ie being revenue neutral - could reduce consumption and pollution without negatively affecting industrial competitiveness. In fact, such tax reform would spur further environmental technology innovation. As we declare war on global warming, we should deploy fiscal and physical weaponry that are at our disposal.

Kim Hak-Su

Special to The Nation

Kim Hak-Su is the United Nations under-secretary general and executive secretary of Unescap.