Last month, the most important annual environmental technology trade fair in the Asia-Pacific was held in Bangkok. Around 10,000 people visited Entech Pollutec/Renewable Energy Asia 2007. 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 policymakers, business executives and consumer rights groups in the Third Green Growth Policy Dialogue. “Renewable Energy: Technology, Markets and Policies in South-East Asia” was a 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 the 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 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 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 maximize resource efficiency and minimize 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 Germany, energy tax increased by 55% over a span of just five years between 1999 and 2003. The UK introduced a framework for environmental taxes in 2002 under the “polluter pays” principle. Energy taxes now account for about three quarters of environmental tax revenue in the EU.
The main objective of taxes is, of course, 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 Germany, citizens dissatisfied with high pension insurance contributions were delighted that additional tax revenues collected from polluters have significantly offset their pension burden.
How about the green bit of the tax? In Sweden, an estimated 60% 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 has a long way to go. Some countries, such as China, Japan and the Republic of Korea, have made modest inroads towards shifting taxes 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. The Republic of Korea has raised the petroleum excise tax at the rate of 30.9% per annum since 2000. China is considering a 20-50% tax on retail petrol and diesel prices to promote conservation.
Much more needs to be done, and by more countries. The rapid economic growth of Asia and the Pacific has come at a heavy price. It has been mainly resource-intensive. Changing lifestyles are increasingly energy-intensive and generating more waste. The region is already living beyond its ecological carrying capacity. To reduce our carbon footprint, it needs a paradigm shift—to move away from the “grow fast, clean up later” mentality. We recognize that the Asia-Pacific region is still home to two-thirds of the world’s poor—about 670 million people live on less than a dollar a day. The region has no choice but to continue its rapid economic growth in order to reduce poverty. But, to sustain growth, it has to improve the ecological efficiency of its economic activities and to embrace more resource-efficient production and consumption patterns.
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. It is possible that energy taxes linked with a reduction in income tax could reduce consumption and pollution without negatively affecting industrial competitiveness. In fact, such tax reform would spur further environmental technology innovation.
Kim Hak-Su is United Nations under-secretary general and executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific (Unescap). Comment at email@example.com