E LAW - MURDOCH UNIVERSITY ELECTRONIC JOURNAL OF LAW
VOLUME 1 NUMBER 4 (DECEMBER 1994)
Copyright E Law and/or authors

Review of Western Australian State Taxes 1994
Chapter 1 ENVIRONMENTAL TAXES

Introduction 
The Rationale Underlying The Use of Economic
Instruments 
The Use of Taxation Instruments as a Response to
Environmental Pollution 
A Tax Policy Evaluation of Environmental Taxes 
Other Environmental Protection Measures 
Legal and Jurisprudential Implications 
Conclusion 
Bibliography 

INTRODUCTION

Economic instruments, including environmental taxes, are increasingly used
for environmental management.[1] In this context, the term "environmental
tax" is used to cover an instrument of environmental fiscal policy which
may have environmental implications as well as normal revenue raising
functions.[2] Western Australia currently does not impose environmental taxes
but has a system of regulation and penalties.[3] It therefore is an area open
to be considered for purposes of raising revenue for either general
purposes or for providing the finances needed to meet the increasing demand
for better environmental management. As an offshoot, the taxes may
inherently provide a mechanism for environmental control.In this chapter,
discussion will be limited to controlling air pollution caused by industry,
using sulphur and carbon emissions as examples. These pollutants are
released into the atmosphere by the burning of fossil fuels which include
coal, petrol, oil and gas. The Environmental Protection Agency in Western
Australia currently monitors sulphur compounds. Australia has considered
the introduction of carbon taxes as a means to reducing greenhouse
gases.[4]An outline of the rationale for using economic instruments for
controlling pollution is considered first. This is followed by a discussion
of taxation instruments including an evaluation of the measures using
taxation policy criteria. As will become apparent, taxes on their own may
not provide a viable solution to the problem of air pollution. Therefore,
two other possible approaches to pollution control, environmental standards
and tradeable rights are outlined. Finally, the legal and jurisdictional
implications for the State in introducing environmental taxes is
considered.

THE RATIONALE UNDERLYING THE USE OF ECONOMIC INSTRUMENTS

One of the basic premises for using economic instruments in pollution
control is to make the polluter pay. In an economic cost benefit analysis,
environmental inputs and outputs and the wider social consequences of
polluting the environment are often not included. Business can disregard
these issues while there are no penalties. According to economists the
market mechanism has "an inherent tendency to shift elements of social
costs onto others, or into the future".[5] These costs are termed "external"
because they fall outside the consideration of the party generating the
pollution. The problem therefore, is to devise a way of making these
parties carry the costs of pollution.

THE USE OF TAXATION INSTRUMENTS AS A RESPONSE TO ENVIRONMENTAL POLLUTION

There are a wide array of taxes that can be imposed in the pursuit of
environmental protection.[6] However, a charge imposed to recover
administrative costs is not a tax if it is paid in return for services
provided. Also, penalties imposed for breaching a set standard are not
taxes.[7] The following section discusses two types of environmental taxes
that can be used to raise revenue for pollution control purposes, namely
emission charges and input taxes. These taxes are then evaluated using the
criteria of equity, efficiency and simplicity.

Emission Charges

Emission charges or pollution taxes are currently used in Europe. Taxes are
imposed against firms for permission to release industrial wastes into air,
water and landfill.[8] The charge is calculated per unit of pollutant
released. For example, in Germany the charge is determined on the basis of
expected discharge concentrations specified by each firm. These
concentrations are converted into "damage" units established by law and
charges are set at a certain fee per damage unit.[9] Pollution standards are
set by industry-government taskforces and emissions from each firm are
metered or monitored to check compliance. If pollution standards are met,
the charges will be discounted by 50%. If standards are exceeded all
charges must be paid in full and a fine is also imposed.[10] For most firms,
charges imposed are less than 2% of sales. Revenue raised is then used for
research into waste treatment technology.[11]It has been suggested that this
concept could be used in Australia in its proposal to comply with
international targets for reduction of greenhouse gas emissions.[12] The same
technique could be applied to sulphur emissions.

Input Taxes

Rather than taxing emissions it would be possible to tax the inputs used in
environmentally damaging processes. For example, some industries in Europe
are being taxed on their consumption of petroleum products. Revenues raised
are then used to subsidise environmental projects.[13] Taxing inputs of a
known quantity rather than outputs means that monitoring costs are
significantly reduced. For example, although it would be possible to tax
carbon dioxide emissions from all power stations, industries and vehicles,
it is more practical to levy a tax on the carbon fuel used.[14] However, in
order for such taxes to provide an incentive for environmentally sound
management, the tax must relate to the input quantity and vary according to
the amount of pollution generated.[15]

A TAX POLICY EVALUATION OF ENVIRONMENTAL TAXES

The Purpose of Environmental Taxes

One aim of an environmental tax is to encourage firms to use the best available technology in pollution control. To achieve this aim, the cost to the firm of paying the tax must be greater than the cost of installing better equipment.[16] Alternatively, the aim of
an environmental tax may be to deter environmentally harmful activities.
The intention of such taxes is to reduce or stop the activity being taxed.
Consequently, the amount of revenue raised will ultimately diminish.

It is suggested that revenue raised from environmental taxes could be
channelled back into pollution control by providing financial assistance in
research and development and purchasing of new equipment.

Experience indicates that most environmental taxes are a means of raising
revenue and do little to alter taxpayer behaviour. For example, studies of
the role carbon taxes play in reducing carbon emissions have shown that an
extremely high tax would be required to cause any significant reduction.
For many industrial consumers, energy is only a small component of their
overall costs with a 10% increase in price leading to only a 2% reduction
in demand.[17] Indeed, it has been suggested that a 421% increase in the
price of fossil fuels would be required to meet a target of 20% reduction
in carbon emissions.[18] The need for tax rates to be accepted by the public
means that it is politically unviable to set very high tax rates.[19]

In this section tax policy criteria are used to evaluate environmental taxes that
are principally intended to raise revenue. In raising revenue, the main
concern of government is to maximise the financial gain while minimising
social inequity, administrative costs, and market disruption.

Equity

The notion of vertical equity is based on the requirement that the greater tax
burden be borne by those with a greater capacity to pay, while horizontal
equity requires that those with equal capacities to pay bear the same tax
burden. The imposition of a carbon tax, if passed onto consumers, would be
vertically inequitable as low income earners spend a greater proportion of
their income on energy than higher income earners.[20] In order for the tax
to be equitable, it would require a progressive rate which would offend the
simplicity criteria.

Simplicity

This criterion requires, inter alia, that the collection costs of a tax to be less than the revenue raised. In imposing a carbon or sulphur tax there are high costs and practical difficulties associated with monitoring emissions and measuring environmental damage.[21]

However, the administrative and monitoring costs of imposing the tax are
low if emissions are already monitored to check for compliance with
standards.[22]

Efficiency

A tax will satisfy this criterion if it does not effect taxpayer behaviour or investment patterns: the introduction of a tax should not lead to unintended distortions in the market. For example, if the carbon or sulphur tax rate was set too high, firms may move to other
jurisdictions. They may also pass the tax on to consumers. As carbon and
sulphur taxes are directed at industries emitting carbon and sulphur
products they would have a relatively narrow tax base. Consequently, there
would be greater potential for market distortion. It therefore appears more
feasible to impose a low tax rate which has the aim of generating funds for
developing technology that produce less carbon and sulphur by-products.[23]
It is important that all revenue raised from such a tax is earmarked for
this purpose.When assessing environmental taxes using tax policy criteria
it is difficult to satisfy all three criteria simultaneously. As
environmental taxes are generally aimed at raising revenue, they must
satisfy the efficiency criteria and not affect taxpayer behaviour. This
inevitably conflicts with any desire to deter environmentally harmful
activities. It is therefore evident that tax instruments alone are a blunt
tool for achieving environmental protection aims.

OTHER ENVIRONMENTAL PROTECTION MEASURES

The inappropriateness of environmental taxes as a single measure for the
achievement of environmental protection requires the consideration of
non-tax alternatives. Two such approaches, the standards approach and
tradeable rights approach are considered below.

Environmental Standards Approach

The environmental standards or command-and-control approach has been the
traditional approach used by governments to limit pollution.[24] It involves
setting a standard representing the level of pollution permissible within a
particular industry. In Western Australia the Environmental Protection
Authority is responsible for pollution control.[25] Maximum discharge
standards are currently incorporated within environmental protection
policies or set down in regulations.[26] Where a licence is required for a
polluting activity, a standard will be specified within the licence and a
penalty imposed for non-compliance. Where no licence is required, the "best
practical means" must be applied to avoid pollution.[27] In contrast to the
taxation approach, which is based on the polluter pays principle, this
approach is a regulatory approach which adopts the prevention principle. It
aims to achieve an actual reduction in pollution.The following is a brief
evaluation of environmental standards.

(i) Incentives 
Firms are provided with an incentive to reduce their overall
level of pollution since failure to comply with the standard attracts a
fine. However, once the standard has been set and complied with there is no
incentive for a firm to further reduce its pollution.[28]

(ii) Cost-Effectiveness
There are high monitoring and enforcement costs
involved in checking compliance with these standards.

(iii) Implementation
There is the possibility of political corruption in ignoring breaches of a
standard. For example, a firm may be pre-warned of scheduled pollution
checks.

(iv) Certainty
The standard set predetermines the overall level of pollution with
certainty.

The Tradeable Rights Approach

Tradeable rights provides a hybrid approach to pollution control by
combining the certainty of environmental standards with the
cost-effectiveness and flexibility of taxation.[29] The maximum level of
pollution permitted is set by environmental standards. The government
issues firms with permits which collectively add up to this level and which
may be traded with other firms carrying out similar activities.[30]This
approach is popular in North America[31] but has not been adopted in Western
Australia.[32] Although economic and political barriers may exist, there are
no apparent legal or constitutional limitations with respect to the
introduction of a tradeable rights system. However, if the rights of
existing firms were abrogated, the system may be subject to legal
challenges.[33]"Dirty" producers would require a greater number of permits.
The cost of the permits may encourage them to upgrade their equipment to
reduce emissions or alternatively force them out of the market. This
approach therefore rewards firms that invest in the development of
pollution control technology.[34] The cost of the permits may be passed onto
consumers in the price of goods. It is the market which therefore
determines the level of tax rather than the government needing to
continually adjust taxes to achieve a set target. From an economic view the
market ensures that the total level of pollution is attained at the least
cost to society.[35]There are a number of disadvantages with the use of the
tradeable rights approach which are described below.

(i) Firm Abuse
Firms may refuse to sell permits to their competitors in order to prevent
them from entering the market.[36] It is therefore essential that in a
tradeable rights system enough firms compete for permits to avoid
monopolistic behaviour.[37]

(ii) Governmental Abuse
Governments may attempt to use this approach as a revenue raising
instrument by creating and selling additional pollution permits. If the
price of such permits is less than the cost of developing technology to
reduce emissions, firms will buy the permits in preference to reducing
pollution. Consequently, the total level of pollution will increase. The
success of the tradeable rights approach thus depends on its proper
implementation by government.[38]

(iii) Geography
The way in which permits will be geographically distributed is
unpredictable. Permits may be traded in such a way that some areas remain
pollution free while others become polluted beyond their carrying capacity.

(iv) Cost-Effectiveness
In order to ensure compliance with permit allocations, the policing of this
approach requires high monitoring and enforcement costs.

LEGAL AND JURISDICTIONAL IMPLICATIONS

The difficulties in restricting pollution to any one jurisdiction makes
State environmental protection goals difficult to achieve. There will be a
resulting conflict between State and Federal governments. State power to
impose taxes to control pollution is limited by section 90 of the
Commonwealth Constitution which gives the Commonwealth Parliament exclusive
power to impose excise duties. However, a recent qualification to the scope
of section 90 may provide the State with the ability to "tax" polluting
activities.

The Nature of Environmental Problems

Some forms of pollution take no notice of jurisdictional boundaries,
particularly air and water pollution. The widespread nature of
environmental problems has lead to calls for the imposition of uniform
national and international standards.[39] There is an increasingly urgent
need for the Commonwealth government to use its constitutional powers for
environmental protection purposes. It is submitted that if the aim of
environmental taxes is to protect the environment then this is best
achieved through the implementation of a national scheme with State
co-operation.The federal government could introduce a tax in its own right
or by an enactment which is uniformly accepted by the States. However, as
States have traditionally been responsible for environmental protection it
is unlikely that at this point in time the Commonwealth will intervene.[40]
Also, not all pollution problems are so widespread and strong arguments
exist for State and local governments having responsibility for localised
problems. States, therefore, do have a responsibility to consider using tax
instruments as a measure to control pollution.

Constitutional Limitations on State Taxing Powers

Section 90 of the Commonwealth Constitution, which gives the Commonwealth
exclusive power to impose excise duties, significantly limits the ability
of the State to impose environmental taxes.[41] An excise "embraces all taxes
upon, or in respect of, a step in the production, manufacture, sale or
distribution of goods".[42] This definition has been qualified to some extent
by Harper v Minister for Sea Fisheries[43] where a fee imposed for a licence
to take abalone was held not to be a tax (and therefore not an excise)[44]
because the fee was for the acquisition of a right analogous to a property
right in the resource. It was held that the fee was for a privilege to use
a scarce public resource and could be compared to the price paid for a
profit a prendre.[45] The Court in Harper held that "what is otherwise a tax
is not converted into something else merely because it serves the purpose
of conserving a public resource".[46] However, the legislation must be
directed at the management of the resource and not merely have the purpose
of raising revenue.[47] Even so, the decision has given States increased
power to protect natural resources from exploitation. In the same way that
"abalone constitute a finite but renewable resource that cannot be
subjected to unrestricted commercial exploitation without endangering its
continued existence"[48] so do other natural resources such as air and
water.

(i) Emission Charges
Although emission charges are usually imposed on
processes that produce goods, it can be argued, using the Harper
qualification, that they are not taxes and therefore not excises. Charges
imposed by the State on industry for pollution of the air, water and land
could be seen as a legitimate royalty for using these public resources as
receptacles for waste.[49] It is submitted that a State carbon tax would not
be an excise as it constitutes a right to exploit air. Legislation
introducing such an emission charge should state explicitly that it is
intended as payment for the use of the environment as a common good.[50]

(ii) Input Taxes
As input taxes are based on the quantity of raw materials used
in a production or manufacturing process they can legitimately be seen as
excises. Therefore, any attempt by the State to introduce such a tax would
contravene section 90, even if its purpose were to protect public
resources.[51]

CONCLUSION

Section 90 significantly limits the State's capacity to impose taxes for
environmental protection purposes. Even with the Harper qualification it
has been stated that the "uncertainties surrounding the broader definition
of excise present real difficulties for the States".[52]

It is submitted that the best approach would be to adopt a mixed solution
using both taxation and tradeable rights as an extension of the
environmental standards approach. The revenue raised could be earmarked and
directed back into protecting the environment.

BIBLIOGRAPHY

"Achieving Sustainable Development" (1990) 67 Business Council Bulletin 6
(Good discussion of State/Commonwealth jurisdictional issues)

BATES, Environmental Law in Australia, 3rd ed., Butterworths, Sydney, 1992
(Very useful assessment of non-taxation instruments).

BUCKLEY R., "Green Taxes: Legal and policy issues in Using Economic
Instruments for Environmental Management", (1991) 2 Revenue Law Journal 27
(Very useful article covering most of the relevant issues).

BUCKLEY R., Perspectives in Environmental Management, Germany, 1991
(Usefully expanded upon his article).

COMMON M., Environmental and Resource Economics: An Introduction, Longman,
London, 1988 (Provided a succinct economic analysis of the topic).

CRAWFORD, "The Constitution and the Environment", (1991) 13 Sydney Law
Review 11 (Relevant to the Constitutional aspects of the paper).

DORFMAN, R. AND DORFMAN, N.S. (eds.), Economics of the Environment:
Selected Readings, 2nd. ed., W W Norton & Co., New York, 1977 (Very
relevant, but brief, economic analysis).

FOWLER, "Powers: Federal Legislative Powers With Respect to Environmental
Protection", Proposal for a Federal Environmental Protection Agency,
Australian Conservation Foundation, Melbourne, 1991 (Dealt with legal
considerations and substantiated Bates).

HELM D., "Who Should Pay for Global Warming?", (1990) 3 New Scientist 30
(Excellent discussion of consumer behaviour issues).

OKE, T.R., Boundary Layer Climates, (2nd ed), Routledge, London, 1987.

OPSCHOOR, J.B. & VOS, H.B., Economic Instruments for Environmental
Protection, OECD Publications Service, Paris, 1989 (Good legal/economic
assessment of the various instruments analysed).

REPORT OF THE HOUSE OF REPRESENTATIVES STANDING COMMITTEE ON ENVIRONMENT
AND CONSERVATION, Fiscal Measures and the Achievement of Environmental
Objectives, Australian Government Publishing Service, Canberra, 1986
(Limited use - adopted different focus to this paper).

VOS J.B., "The Scope for Economic Instruments of Environmental Policy",
(1993) 129 Science of the Total Environment 36 (Useful summary of the OECD
text).

Notes:

[1] Buckley, R., Perspectives in Environmental Management, Springer-Verlag,
Berlin, 1991 at 81.

[2] Buckley R., "Green Taxes: Legal and Policy Issues in Using Economic
Instruments for Environmental Management" (1991) 2 Revenue Law Journal 27
at 28.

[3] Environmental Protection Act 1986 (WA).

[4] The "greenhouse effect" is caused by increased levels of carbon compounds
in the atmosphere. These compounds allow short wave radiation (light) from
the sun to enter the earth's atmosphere but re-radiates long wave radiation
(heat) back to the earth. This gradual heating of the earth's atmosphere or
"global warming" has been caused by the burning of fossil fuels. These
fuels release the major greenhouse gas, carbon dioxide: see Oke, T.R.,
Boundary Layer Climates, (2nd ed), Routledge, London, 1987 at 250.

[5] Opschoor, J.B. & Vos, H.B., Economic Instruments for Environmental
Protection, Paris, OECD, 1989 at 12.

[6] For example environmental damage charges, waste/emission/pollution
charges, environmental protection charges, development charges, rezoning
charges and sliding charges for utilities. Further, certain broad taxes can
indirectly have this effect such as income tax, sales tax, payroll tax and
excise, customs and import duties: See Buckley, supra n 2 at 59-62.

[7] Air Caledonie International v Commonwealth (1988) 165 CLR 462 at 466-467.

[8] Buckley, supra n 2 at 44.

[9] Id.

[10] Id.

[11] Id.

[12] Buckley, supra n 2 at 45.

[13] Buckley, supra n 1 at 84.

[14] Helm, D., "Who Should Pay for Global Warming?" (1990) 3 New Scientist 30
at 32.

[15] Buckley, supra n 1 at 84.

[16] Buckley, supra n 1 at 83.

[17] Helm, supra n 14 at 32.

[18] Id.

[19] For example, the petroleum industry is a powerful lobby group which
provides strong opposition to air pollution charges. See Opschoor, supra n
5 at 36.

[20] Helm, supra n 14 at 32.

[21] Helm, supra n 14 at 32; Opschoor, supra n 5 at 36.

[22] Opschoor, supra n at 45.

[23] Helm, supra n 14 at 32.

[24] Helm, supra n 14 at 30.

[25] Environmental Protection Act 1986 (WA), s.49.

[26] Bates, G.M., Environmental Law in Australia, 3rd ed., Butterworths,
Sydney, 1992 at 291.

[27] Id.

[28] Vos, J.B., "The Scope of Economic Instruments of Environmental Policy"
(1993) 129 Science of the Total Environment at 36.

[29] "Achieving Sustainable Development" (1990) 67 Business Council Bulletin
6 at 19.

[30] Id.

[31] Id.

[32] Buckley, supra n 2 at 52.

[33] Id.

[34] Supra, n 29 at 17.

[35] Helm, supra n 14 at 31.

[36] Buckley, supra n 1 at 86.

[37] Buckley, supra n 2 at 52.

[38] Supra n 29 at 19.

[39] Buckley, supra n 2 at 65.

[40] See supra n 29 at 25.

[41] A further relevant constitutional constraint is section 92 of the
Constitution which guarantees freedom of interstate trade. A tax that
operates to protect state trade will be discriminatory in a protectionist
sense and held invalid: Castlemaine Tooheys Ltd v South Australia (1991)
169 CLR 436.

[42] Hematite Petroleum Pty Ltd v Victoria (1983) 151 C.L.R. 599 at 632.

[43] (1989) 63 A.L.J.R. 687.

[44] The decision in Capital Duplicators v Australian Capital Territory
(1992) 177 C.L.R. 248 confirms that business franchise licence fees are not
excises and can validly be imposed by the State.

[45] Harper v Minister for Sea Fisheries (1989) 63 ALJR 687 at 688.

[46] Ibid at 693.

[47] Crawford, J., "The Constitution and the Environment." (1991) 13 Sydney
Law Review 11 at 19.

[48] Id.

[49] Bates, supra n 26 at 64. See also Fowler, R.J., "Powers: Federal
Legislative Powers with Respect to Environmental Protection" in Proposal
for a Federal Environmental Protection Agency, Australian Conservation
Foundation, Melbourne, 1991.

[50] Buckley, supra n 2 at 46.

[51] Buckley, supra n 2 at 48.

[52] Crawford, supra n 47 at 20.17