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Environmental taxes, pay to pollute?

Environmental taxes, pay to pollute?


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By Antonio Elio Brailovsky

During the last dictatorship, Argentina had an implausible system whereby companies could choose between purifying their effluents or dumping the poison directly into rivers, upon payment of a modest amount. Popular opinion rejects this conception practically unanimously.
In reality, the only ones who agree are those who think that everything that happens to us in life can be expressed in amounts of money. The point of view of the common people was well expressed by one of those attending a conference in which I explained that in Argentina at that time a fee - or a tax - was charged to give permits to pollute:
- Why do it with this crime only? He said, "We could charge a fee to authorize any crime." How much would we charge for a violation? And for a parricide? While environmental issues cost no one money, they were, almost by definition, outside the economy. The value of goods did not depend on their usefulness, but on their scarcity: water and air are free, even though they are essential for life - it was said - because they are so abundant. On the other hand, gold is useless but it is very expensive, because it is very scarce.

Environmental issues enter the economy precisely when it is verified that water and air, soils and forests, fauna
and energy have become scarce. Because the problem was trying to contemplate things that are not bought or sold in a market economy. Or, at least, include them in an economic theory that focuses all human actions on the market. How to reconcile the idea of ​​the market as the kind center of the world, with the toxins that are thrown into the rivers?

At last, after much searching in the attic of economic theory, the "externalities" appeared.
In the 1930s, Professor Arthur Pigou had started talking about them, and had defined them as the relationships between economic units (people or companies) that do not occur through the formal mechanisms of the market. The theory included two kinds of “externalities”: Pigou called “external economies” the situation in which someone benefited from the action of another, outside the mechanisms of the market. An example is that of lands that are valued when a road is built that passes alongside them. The “external diseconomies”, on the other hand, are the damages suffered by something that someone else does, without going through the market. The classic example given by Pigou is that of a London laundry, which hung the sheets on the terrace and they were soiled by the soot from the chimney of a neighboring factory, forcing them to a new wash. It is clear that it is an economic relationship between the two, although they do not sell or buy anything from each other.

From here, all environmental problems came to be considered as “external diseconomies”, from the point of view of those affected. Actually, old Pigou did not care about ecology at all: he was trying to build a theoretical model that would demonstrate the "general equilibrium" and lo and behold, the equations did not close him. It turns out that he was putting his finger on the sore: the founder of Political Economy, Adam Smith, had claimed in 1776 that selfishness was the source of the wealth of nations and many economists continued to hold the same. They said that if each one cared exclusively for their own interests, together they would be able to build a richer and happier society.


But Pigou's ideas represented a severe blow, coming from someone who spoke from within that current of thought. If someone gets rich by poisoning a river, his happiness will not match that of others. The official economy was discovering the contradictions between individual interest and social interest. And here a debate opens in which the different authors first and the political decision-makers later, try to reconcile the irreconcilable. The first thing is to try to deny the existence or importance of an annoying phenomenon. One of the authors (Tibor Scitovsky) describes and analyzes the subject in detail, considering as “externalities” the smoke, noise, and other annoyances that people suffer. But despite dedicating a scientific article to it, he wonders in the conclusions if the "externalities" will be really relevant. He piously responds that there are different opinions among economists.

Another of the authors (Francis Bator) goes much further, assuming that people are not affected at all by problems of noise, smoke, soot, polluted water, and others. With these data, he builds a neat mathematical model in which environmental problems do not exist. For his part, Guido Di Tella made his contribution to the debate stating that the notion of “externality” is one of “the most elusive concepts in economic thought”. And he added that "the concept of externality is rigorous but of doubtful relevance in the real world." But for a large part of the economists the solution was already on the table: a policy had to be established that would collect taxes from companies that generate “external diseconomies” (such as pollution). The reasoning was as follows: pollution represented a cost that companies were not assuming. You had to get them to compute it. If they didn't, charging them a tax was a way to get pollution into their cost structure. A tongue detrabaler is popularized that speaks of “internalizing externalities”.

This tax was supposed to be a way of correcting market distortions and getting the market itself to push them to clean their effluents. At the same time, subsidies had to be given to companies that generated “external economies” that benefited society (such as, for example, training the workforce), to reward them for doing so. The same concept that generalized taxes on pollution led to tax relief for business foundations. A large body of scholarly literature is beginning to appear discussing the benefits of this policy of bad business taxes and good business subsidies. In the first stage, no one was arguing whether those taxes were going to help clean up the rivers. Really not. The rivers did not matter to anyone. The problem was ideological: the pollution was showing flaws in the theoretical paradise. It was necessary to demonstrate at all costs that the market managed to solve all the problems, if the right signals were sent to it. This is also coupled with another issue: the theory of "externalities" assumes that anything was done with water and air because these goods are free. But, logically, only things of which there is an infinite amount can be free. If, on the other hand, we accept that air and water are scarce resources - and all this is done so as not to get out of the market economy - what we have to do is set a price for them.

The pollution tax would fulfill that function. Once the theoretical premises were in place, the next step was to consider how to land this theory in a concrete environmental policy. Let us first consider - says Pigou - the divergences between social and private costs. These imbalances can be corrected under capitalism by a properly designed system of taxes and subsidies. But the practical difficulty in determining fair rates would be extraordinarily great. The data necessary for a scientific decision is almost completely lacking. For example, how are we to calculate for a manufacturing industry whose smoke increases the public's spending on washing and cleaning? How, on the contrary, are we to estimate the indirect benefits that planting a forest may have on the climate? Of course there is no need to do the precise calculation. These questions are always resolved by trial and error. Why so much insistence on the exact count? Because some authors have an almost religious respect for market mechanisms and fear that any miscalculated alteration will cause catastrophic results. In the same vein, Nicolás Scotti raises the problem of how much to charge for ecological taxes: “Unquestionably - he says - the basic difficulty consists in (setting) a rate that reflects the social cost of environmental degradation. If the tax is less than the social cost of polluting degradation, reduce the desired effect, and if it exceeds it, polluting companies may be compelled to make hasty transformations that are difficult to achieve ”.

Translated into Spanish, this means that we must be very careful not to charge an excessively high tax, lest we harm the polluters too much. “If the contamination is serious enough to be judged that it should be prohibited,” says Jorge Macón, “a high enough tax is equivalent to a prohibition. Tax is as effective a weapon as prohibition and has the additional advantage of being more flexible and allowing the treatment of different cases to be graduated to lower levels of restriction. The real question to be asked is whether such a tax is administratively feasible. If this tax is feasible, the risks of secrecy are as great for the tax as for the prohibitions. As we can see, they are two totally different worlds. On the one hand, there are the neighbors drinking water with arsenic and splashing in the waste every time the sewers overflow. On the other hand, writers are concerned not to alter the complex and subtle mechanisms of the free market. The results of this distancing were seen very clearly when moving from academic debate to concrete legislation. The way you go from the fine for polluting to the pollution tax shows a curious ideological flip. In both cases there is an amount of money at stake. But a fine is supposed to be a sanction that is applied to conduct that society rejects, such as crossing a red light. The tax, on the other hand, is the payment for an activity that the company authorizes. Paying a fee to dump the effluent is the same as paying to park your car next to a parking meter.

This is disguised by a principle that in the 1970s was internationally called “polluter pays”, which in the 1980s was summarized as “polluter-payer principle”. Sounds good, but do polluters really pay? There were many fines for polluting. The amount of the penalties usually varies between small and insignificant. In many cases, the companies preferred to pay the fines rather than make any decontamination investment. But even reaching these multitas was always very difficult due to the absence of an adequate technical control structure. This occurs because each law defines what it means by contamination. In other words, it allows a small amount of effluent to be thrown into the water or into the air, as long as this minimum is not exceeded. To know whether or not companies comply with the established minimums, it is necessary to have measurement equipment and trained personnel that is incorruptible or that is sufficiently controlled. This situation does not happen very often. But in addition, the body in charge of environmental control must have the necessary political power to enforce the law, despite the pressures it suffers. In short, a major polluter is usually an important company that has contributed to the ruling party's electoral campaign or that (in other times) had fluid contact with the higher echelons of military power. This is not just a problem for Argentina. A North American author (Henry Still) states that "no agency, including the federal government, is strong and solvent enough to impose a single policy of the water regime at the scale of a country or a continent."

The pollution tax was incorporated into our legislation during the dictatorship of Jorge Rafael Videla. The tax was initially called "pollution compensation quotas", with these purposes: On the one hand, "to stimulate industries to build their liquid effluent treatment plants." Let's clarify that many of them already had them: the Peronist government had financed them with a tax break. They had them but they weren't using them, as you need to spend some money to make them work. They also wanted to compensate "the higher expenses caused to the company Obras Sanitarias de la Nación by liquid waste effluents from industrial activities." Putting meticulously the accent on the obvious, they clarify that the decree applies to “those industrial establishments that, because they lack treatment facilities for their waste liquids, or because they possess them to an insufficient degree, produce an effluent outside the conditions required by current regulations ”.

The tax was proportional to the daily flow of the effluent, the concentration of polluting substances and the number of years that the factory continued to pour toxins into the rivers. Due to these traps that come as soon as a law is made, many factories simply diluted their effluent with a lot of water to reduce the concentration of polluting substances. In other words, they not only polluted but also wasted water. To stop charging the fee, the company had to build an effluent treatment plant and "no deficiencies in its operation were found." It never occurred to anyone to go see if, in addition to having it, they used it every day. What would have been, on the other hand, a useless concern: during the entire period of validity of the decree not a single effluent treatment plant was built. All the factories preferred to pay their compensation fees on time, rather than decontaminate. The compensation quotas were replaced by a pollution tax during the government of Raúl Alfonsín, with similar results, and finally forgotten. "Perhaps the most powerful instrument to reshape national economies towards an ecological preservation attitude is taxation," says a report by the Worldwatch Institute in Washington. Setting taxes on activities that pollute, deplete or in any way degrade natural systems is one way to ensure that ecological costs are taken into account in private decisions. Faced with a pollution tax, the report continues, “each producer or consumer individually decides how to adjust to higher costs: a tax on atmospheric emissions would cause some factories to incorporate pollution controls, others to change their production processes and others redesign products in order to generate less waste ”. From here, the authors allow themselves to go further, assuming that green taxes could be the basis of tax policy in all countries. In other words, instead of collecting taxes on profits or added value, taxes would be charged almost exclusively on pollution, increased use of water or energy, soil erosion, and others, which would allow the complete redesign of the world economy on a conservationist basis. In 1972, the countries of the Organization for Economic Cooperation and Development (OECD), which groups the most developed, adopted the aforementioned principle that “the polluter pays”.

During the following decades, numerous “green taxes” were tried in those countries, with different tax variants on polluting acts: air and water pollution, noise, the use of polluting products such as gases that affect the ozone layer, certain fertilizers, batteries that contain mercury, or lead from gasoline. Regarding the results of these policies, the World Bank believes that "the polluter pays principle is not useful in situations where it is difficult to identify and monitor polluters." So this principle is valid only in situations where it is easy to identify and monitor polluters, assuming we can find one. "The United States - the World Bank continues - tried to apply the polluter pays principle through the Superhondo program." This program “has the goal of restoring hazardous waste dumps, through the application of taxes on crude oil and the raw materials of petrochemical products, and must be replaced by recovering the cleaning costs of those that contaminated in the past. This attempt has been a failure: a lot has been spent on litigation and little on cleaning up ”. The classic distinction between incentive ecological taxes (in addition to generating income to finance environmental activities, they serve to sensitize those obliged to pay the harmful consequences of their behaviors) and redistributive (they recover the cost of environmental damage from polluters and seek to make it uneconomical to engage in such behaviors).

The same principle, of valorization of “externalities” and their inclusion in the markets, was applied from the Kyoto protocol referring to the emission of greenhouse gases. A pollution quota was assigned to each country, and the idea was that those who polluted less would sell part of their quota to those who polluted more. The value of these gas "emission rights" could be traded on the stock market. From the financial point of view, it closed, but who would be willing to pay to pollute if they could continue polluting for free? What did they do. This sum of failures has a common thread, which makes the very nature of the object we are talking about, that is, the environment. It happens that we came to think about the environmental issue from two very different lines of reasoning, which ended up coming together: One of them is natural resources. It is assumed that air, water, forests, grasslands, soils, waterways, are part of the economy and that, therefore, we can manage them with economic criteria. But the other line refers to human rights. The right of all people to drink clean water, to breathe clean air, to live in uncontaminated places, to enjoy green public spaces, to eat safe food.


We can work with tax policies in those situations in which we intend to save natural resources or energy, or rationalize their use. Applying a tax on excessive consumption of energy can help prevent waste. But in those cases in which industrial conduct affects people's health or lives, the fiscal tool is not possible, because human rights should not enter the markets, due to an ethical imperative. Asbestos or asbestos causes very serious lung diseases, including lung cancers. You do not have to apply a tax to make it more expensive: you have to prohibit it, without leaving the possibility that someone can enter the possibility of using it in your economic calculations.

The confusion is, to a very high degree, interested and has to do with the boundary between economics and ethics. For example, in the European Community there are countries such as Spain that tax lead naphtha higher than those that do not. If it is considered that this additive is harmful to health, it is not appropriate to apply a tax but to withdraw it from the market. Spain also applies a canon for sanitation to discharges to water courses, in a vain attempt to avoid contamination. In European countries, official reports say that the highest incidence of environmental taxes are those levied on fuel and energy consumption. Everything indicates that they are a suitable path to follow. By contrast, in Argentina the treatment of energy as a commodity made its use cheaper by large consumers, while the rest of the world made it more expensive.

The same thing happens with water consumption in industrial processes, where waste should be heavily taxed, based on knowledge of the technical needs of each activity.

In short, there are interesting lines of work in environmental taxation, which can help us make the consumption of materials and energy more rational from the social point of view. But environmental taxation cannot replace the control of the State over those behaviors that affect the health or life of the inhabitants, or violate human rights in some way.

* Published by Voces en el Fénix, the magazine of the Faculty of Economic Sciences of the University of Buenos Aires


Video: Environmental Tax on Pollution (July 2022).


Comments:

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