Reflections on Budget 2009 (1) - Eco-taxation

I am very sceptical on the way we are dealing with the environmental problems. And the present budget does nothing but increase my scepticism.

But let’s clear some jargon out of the way. The present Government is known of its Newspeak. This has been going on for some years. Some of the words in Newspeak that immediately come to mind are the following:

Adjustment – meaning an increase if it is a tariff or a decrease if it is a benefit
Negative growth – a decrease
Tariff – stealth taxation
Administrative charge – another form of stealth taxation

One of the latest additions has been the word contribution. Thus one does not find the word eco-taxation mentioned in Government publications but eco-contribution. Ask anyone and you will be surprised that for them the word contribution has the connotation of being voluntary. Ask them if they are paying this ‘contribution’ voluntarily and you will understand if this is a contribution or a tax.

Is eco-taxation good? Some would say that since it is based on the polluter pays principle, it should be good. But what are the economic effects and is there an alternative?

One economic effect is that it increases the cost of those products that pollute. It therefore does discourage consumers from purchasing that product. But this is intrinsically negative. Consumers do not buy that product because it becomes more expensive and not because it pollutes. Thus the effect of such a tax re. environment is only temporary. Once the new price becomes affordable, then consumption will resume at the previous level. This is what happened when the Government introduced eco-taxation on plastic bags, some two years ago.

There is, however, another effect. Eco-taxation increases government revenue. Thus under the pretext of being environment friendly, the government would be able to increase its revenue without bother of explaining the need for such revenue. Thus the government would be able to increase its revenue without any hindrance. Everybody knows that one of our main economic problems is unbridled government spending – something which surely increase given this lack of transparency and thus lack of accountability.

Increase in prices would not only have the above effects but it will increase inflation. During these last few years, except for the first six months of last year, there wasn’t any management of inflation. Thus inflation has been one of our main economic problems – a problem which also contributes to our lack of competitiveness. Another effect has been the downward trend in our standard of living as our wage increases are not even equating the increase in inflation.

But on the other hand, is there a way out as surely we cannot continue to tolerate the deterioration of our environment. One way out, is reducing taxation on products which are eco-friendly. This could have easily been applied in the case of light bulbs. The present budget is increasing the price of incandescent bulbs - the older type of bulbs. This will contribute to inflation.

But what if the energy saving bulbs had a decrease in taxation? The effect on consumers will be that they are encouraged to use this type of bulbs as their becoming relatively cheaper than the old type, thus those using these energy saving bulbs will be rewarded. Moreover there is no effect on inflation and government revenue and thus its expenditure is curbed.

But this is only a partial solution. A complete solution would require the following:

• Educating everyone especially adults. I believe that our children are more environmentally sensitive. But even here we must be more creative. People must be shown practical ways of how to save energy while keeping their standard of living. It is useless to expect people to be willing to live in the dark ages.

• Standards. These are a requirement. Higher standards, especially in the area of energy savings equipment, are supported by everyone. This must not be a temporary effort but a continuous one as it will also increase our productivity and competitiveness.