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11.1.5.3. Preferential Taxation of Environmentally Friendly Products
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One type of economic incentive similar to product charges is the preferential taxation of environmentally friendly products. For example, Australia, Mexico, New Zealand, Singapore, Taiwan, Thailand, and most European countries have taxed leaded gasoline at a higher rate than unleaded gasoline. Foreign countries appear to have learned from the U.S. experience in this area. Motorists in the U.S. often misfueled their vehicles with leaded fuel because it was cheaper than unleaded. Not only did the use of leaded fuel release lead into the environment, it also caused releases of other emissions by damaging catalytic converters. Preferential taxation measures in other countries have given motorists an incentive to use unleaded fuel, thereby contributing to an increase in its market share. As shown in Table 11-16, the differential is usually limited to 10% of the price of unleaded fuel.
In addition to taxing leaded gasoline at higher rates than unleaded, Sweden has used several other taxation mechanisms in an effort to promote the use of cleaner fuels. In 1991, a tax was imposed on diesel (as well as peat and coal) based on its sulfur content. The tax was set at 27 SEK ($4) per m3 oil for each tenth of percentage weight of sulfur, an amount corresponding to 30 SEK ($4.4) per kg sulfur. Fuels with a sulfur content no higher than 0.1% are exempt. Rebates are also available for facilities that control sulfur emissions. Norway has a similar tax on sulfur in fuel.
The Swedish Environmental Protection Agency credited the sulfur tax with lowering the sulfur content of diesel fuel from 0.15% in 1990 to 0.1% in 1992. In an effort to encourage the use of even cleaner fuels, Sweden classified diesel fuels into three different classes and instituted tax rebates for the two cleanest classes. The tax discount was first set at 350 SEK ($51.6) per cubic meter for class I and 150 SEK ($22.1) per cubic meter for class II in 1991. In 1992, the discounts were increased by an additional 100 SEK ($14.7). The rebates have since been changed several more times. In 1995, they were 490 SEK ($72.2) per m3 for class I and 270 SEK ($40) per m3 for class II.
When the tax rebates were increased in 1992, the standards for the two cleaner fuel classes were also changed. The original standards concerned only sulfur and aromatics content and distillation range. The new standards lowered the sulfur standard for class II fuel to 0.005% and added several parameters. The 1992 standards for the two cleaner fuel classes are shown in Table 11-17.
As shown in Figure 11-6, the percentage of diesel in classes I and II rose from a combined total of under 1% to 60% for class II and 15% for class I after the introduction of this tax differentiation. After initially relying on imports to obtain the cleaner fuels, oil companies then made significant investments to increase their capacities to produce class I and II diesel fuel, partly because of the differential taxation but also because of lower than expected production costs for class I and II. One factor that lowered costs was a downturn in the market for jet oil, which is similar to the cleaner classes of diesel subject to rebates. The downturn freed up capacity for the production of class I and II diesel. Since the extra cost is estimated at 300 SEK ($44.2) per cubic meter for class I and 170 SEK ($25) per cubic meter for class II, producers have a strong interest in producing the cleaner classes. Moreover, the tax differentiation increased public awareness of diesel fuels, leading many consumers to use only I and II and many communities to ban the sale of class III. However, some consumers are skeptical about the cleaner fuels, believing that they may be harmful to engines.
SEPA believes that it is difficult to determine the net benefits or cost-effectiveness of the differential taxation, but that a command-and-control approach would have cost more and taken longer to achieve the desired result and that emissions reductions resulting from the system have led to more health benefits in cities than abatement investments at large point sources. Moreover, administrative costs are low, as the rebate was built into an existing tax.
One problem has been determining appropriate rebate amounts. At their original levels, the rebates had little effect on the diesel fuel market. However, the 1992 rebate increases combined with developments on the oil market caused a rapid rise in cleaner fuel use. At their current level, the rebates might be higher than socially desirable. SEPA maintains that class I is sufficiently expensive to produce that it should be used mainly in urban areas, but it is apparently used in other areas as well. The cleaner fuels have also been employed for other relatively inefficient uses such as domestic heating. However, frequent changes in rebates in response to technological and market developments would create uncertainty for companies making investments necessary to produce the cleaner fuels.
In December 1994, Sweden introduced a similar differentiation system for two classes of unleaded gasoline. The cleanest class (based on its sulfur, lead, benzene, and phosphorus content and vapor pressure) was taxed at 3.22 SEK ($0.47) per liter in 1995, whereas the other class was taxed at 3.28 SEK ($0.48) per liter. OECD (1996), p. 94.
In Belgium, Finland, Germany, Greece, Hungary, Japan, the Netherlands, Norway, and Sweden, motor vehicle taxes have been positively related to pollutant emissions. Austria and Germany base annual vehicle ownership taxes on emissions. Japan imposes lower sales tax on cars powered by methanol, electricity, and solar power than on gasoline-powered cars.
In Belgium, a number of charges designed to reduce waste generation and promote reusable products came into effect on February 1, 1996. These include a 10 BF ($0.33) tax on disposable razors and a 300 BF ($9.9) tax on disposable cameras (if not recycled). Paper and cardboard used in packaging, newspapers, and toilet paper are subject to a tax of 10 BF ($0.33) per kilo unless they contain a certain percentage of recycled fibers by specified dates. For paper and cardboard made from non-chlorine bleached pulp, the tax is 5 BF ($0.16) per kilo. Taxes have also been imposed on pesticides in non-agricultural products and on batteries. A policy advisor for the Belgian Ministry of Environment said that the Ministry did not consider these taxes as revenue-raising measures but rather as incentive mechanisms. IER, February 7, 1996, p. 95.
A 6-7% tax on disposable diapers has been imposed in parts of Canada. OECD (1994a), p. 81 Several countries impose higher charges on disposable beverage containers to encourage the use of refillables. OECD (1995b), pp. 86-9.
In Germany, many manufacturers and distributors participate in a packaging recycling system managed by the company Duales System Deutschland (DSD). To fund DSD's activities, participating companies pay fees on packaging depending on the type and weight of the packaging materials. Fees range from 0.16 DM ($0.11) per kg for glass (an easy material to sort) to 3 DM ($2) per kg for plastics (difficult to sort). Although these fees are not government-imposed product charges, they have a similar effect. Industry set up the DSD system to comply with the German Packaging Ordinance obliging producers to take back and recycle their packaging materials.
German Information Center (1995).