Thinking like an economist 19: Should we have an environmental levy?

Public funding for environmental and resource management has increased over time, but calls by environmentalists for dramatic further increases are common. Should we do that using an environmental levy?

The possibility of introducing an environmental levy, either on the price of food or on income tax, has had some prominent advocates in recent years. For example, the Prime Minister’s Science, Engineering and Innovation Council (2002) indicated support for the idea. 

While these proposals for a levy are laudable in intent, there are a number of problems with them:

• Some people may be concerned about the regressive nature of a flat levy, and prefer that funds be collected through a more progressive system, such as income tax.

• A hypothecated levy (one whose revenue is allocated to a particular task) may involve greater transaction costs than an approach that makes use of the existing tax system. This would particularly apply to a levy on food purchases.

• “Hypothecation may create inefficiencies because the tax rate can be determined on the basis of revenue required, and not on the costs and benefits of the tax. … Furthermore, it is difficult to determine the appropriate revenue sources for particular expenditures.” (Scrimgeour and Piddington 2002, p.10). The OECD (1997) recommends that hypothecation should be a transitory approach, if used at all, because inefficiency in spending priorities may become locked in.

• Why would the environment, out of all issues in need of public resources, particularly warrant a hypothecated levy? Why not education? The arts? Police? National security? Why not simply use the existing tax system? I am not saying that the environment is not deserving of substantial funding – I think it is – just that it does not warrant special treatment over other calls on the public purse.

The “Wentworth Group of Concerned Scientists” proposes that in order to provide an incentive for change, people who adopt environmentally beneficial practices should have their own levy payments refunded. This might influence adoption of very low-cost measures, but land-management changes to protect or enhance the environment are generally too expensive to be significantly influenced by this measure. If we adopted the Wentworth Group's suggested approach of setting the levy at one percent of income tax, the effectiveness of exemptions as an incentive to farmers would be negatively affected by the low levels of income tax paid by most farmers.

Another idea is to place a levy on food, but this is particularly problematic. It could of course be effective in raising revenue, but its efficiency in encouraging better land management is doubtful, and there are several concerns around issues of equity and practicality.

• Taxing foreign consumers of Australian products is usually not possible. Apart from logistical difficulties, competitive pressures would mean that purchasers would not tolerate any levy on our main rural exports; they would seek alternative suppliers. The result is that the levy would be borne by producers, not consumers. Maybe that's OK, but it's not what advocates for the levy have in mind.

• In practice it is likely that, for simplicity, all food would be taxed equally. If so, food produced with adverse environmental impacts would be treated the same as environmentally friendly products. Environmentally-aware producers would be taxed (via the market) equally with their most environmentally damaging counterparts.

• Most value-adding in the food supply chain occurs post farm gate. Depending on market structures, the levy may be absorbed by segments of the supply chain that do not contribute to environmental damage.

• Would imported foods be levied?

• What about non-food agricultural products, such as wool, cotton, hay or grain for animal feed?

Finally, there are doubts about whether the vastly greater level of funds that would collected under a levy scheme would be spent well. A critical view of the major national environmental programs in Australia does not inspire confidence that they would be.

David Pannell, The University of Western Australia, David.Pannell@uwa.edu.au

Further Reading

Pannell, D.J. (2004). Heathens in the chapel? Application of economics to biodiversity, Pacific Conservation Biology 10(2/3): 88-105. full paper (109K)