Greening the Tax Code

Taiwan’s current tax system already contains some elements that are closely linked to protecting the environment. For example: the commodity tax, vehicle license tax, fuel fee, anti-pollution fees imposed by the Environmental Protection Administration, and fees for mineral exploration and mining, water conservation and compensation. Revenue from these taxes and fees in 2008 exceeded NT$220 billion, representing over 1.75% of GDP. In comparison, environmental taxes among OECD countries range from 2% to 2.5% of GDP, so there is clearly room for greater effort. In to addition to taxes and fees, Taiwan also a number of environmental tax preferences, such as: 50% commodity tax reduction for electric vehicles; accelerated depreciation and investment tax credits for energy-saving or clean/alternative energy-using machinery and equipment; and reduced land value, estate and gift taxes for land in designated watersheds. While green taxes, fees and preferences involve different administrative turfs and budgets, as well as separate policies for environmental protection, industrial development and revenue collection, Taiwan’s government is now pressing ahead with a new round of tax reform, and the Statute for Upgrading Industry is set to expire at the end of the year, so this seems like a good time to offer some humble opinions on building a green tax system and encouraging industrial transformation.

The importance of a green the tax code for industrial development

In modern society, there is a consensus in favour of controlling pollution, protecting the environment and preserving natural ecosystems. Green taxes introduce the price mechanism as a way to get producers and consumers to internalise the cost of pollution in their production and consumption decisions. Their particular significance is that they can help to:

• ensure sustainable economic development: For governments seeking to resolve contradictions between environmental protection and economic development, a green tax system represents an important tool and means for regulating a society’s economic activity, in addition to legal and administrative means of directly governing the behaviour of economic actors;
• promote industrial transformation: Increasing the tax burden on enterprises that pollute or damage the environment internalises the cost to society of pollution and rectifies the behaviour of consumers and producers, inducing them to reduce or cease environmental pollution and damage, and redirecting the economy towards environmentally friendly production.
• meet basic requirements for green production and trade: Under WTO rules, if a product’s production process, methods or location do not meet environmental standards, a trading partner may refuse to import it; industries, production processes and products that do not meet environmental may be taxed appropriately so that Taiwan can keep pace with trends towards globalisation and a greener economy.

Using green taxes to promote industrial transformation

Once environmental taxes have been levied on polluting products or industries, on energy-intensive industries, there are a number of paths firms can take to achieve industrial transformation and thereby lighten their tax burdens:

• major investment decisions: Firms may consider green products, manufacturing processes or industries when making major investment decisions. For example, imposing energy taxes on a company burning coal or oil to generate power increases its tax burden and raises its costs, encouraging it to consider wind power, hydroelectricity, biofuel or other alternatives when it plans new investment;
• better equipment purchases and improved manufacturing processes: Environmental taxes on polluting or energy-intensive industries encourages companies to improve their manufacturing processes, reduce emissions and buy pollution prevention equipment;
• green tax market mechanisms: After environmental taxes are levied on a polluting industry, if the cost of the taxes are less than the cost of pollution abatement, manufacturers will prefer to pay the tax rather than improve their emissions; on the other hand, if the cost of pollution abatement is less than the environmental taxes, they will prefer to reduce emissions. Raising the environmental taxes imposes a greater cost which causes consumers to press polluters to stop polluting or harming the environment.

Creating a green tax code that’s a winner for the environment, industry and tax revenue.

In the past, Taiwan relied to some extent on certain energy-intensive and polluting industries to achieve rapid economic growth, but under growing pressure for environmental protection, these industries must be transformed. By the same token, the government must depend on tax policy and set appropriate environmental taxes that (a) turn consumers towards green consumption, (b) get producers to use pollution-reducing green production methods to make consumer goods, and (c) encourage firms to invest in green industries and guide them towards industrial transformation and upgrading. This will achieve three objectives; namely, industrial development, environmental protection and secure revenue for the government.

Many countries have now instituted “green” tax reforms, and many more are thinking of following suit, as a way to reflect the pollution cost of products and activities and the cost of using natural resources, as well as to boost the share of revenues from green taxes. Establishing a green tax system – which can be viewed as a fourth type alongside income, consumption and property taxes – contributes to environmental protection and industrial development, but it also can provide enough fiscal revenue to meet administrative needs, and thus helps ensure the sustainable development of the economy, society and natural environment.

[This article appeared in the Economic Daily in August, 2009.]

Steven Go is a partner at PricewaterhouseCoopers Taiwan. Please send your comments and questions to: steven.go@tw.pwc.com.