Il Blog di Marco Piazza

Il punto di Amedeo Rizzo* ed Erika Scuderi** 

*Academic Fellow | Bocconi University; Research Fellow | Working Party on Tax & Legal Matters

** Teaching and Research Associate | Institute for Austrian and International Tax Law, WU Vienna; Research Fellow | Working Party on Tax & Legal Matters

We all probably would recall 2019 as a year of climate disaster. To name a few, the catastrophic bushfires in Australia, Typhoons Idai in Africa, Hagibis in Japan and Lekima in China, the destructive Hurricane Dorian, wildfires in California, Cyclone Fani that struck India and Bangladesh, devastating floods in Argentina and Uruguay.

Nevertheless, it has also been the year of climate consciousness. On 28 November 2019, the European Parliament has declared a global climate and environmental emergency. In its declaration, urged the European Commission “to fully assess the climate and environmental impact of all relevant legislative and budgetary proposals, and ensure that they are all fully aligned with the objective of limiting global warming to under 1,5°C and that they are not contributing to biodiversity loss” (European Parliament resolution of 28 November 2019 on the climate and environment emergency (2019/2930(RSP)). As a result, in December 2019, the European Commission issued the “European Green Deal”, and in March 2020 outlined a proposal for a European Climate Law to make the EU climate neutral by 2050.

However, the Covid-19 pandemic, which is affecting the lives of tens of millions of people around the world and having dramatic consequences, seems to have eclipsed the environmental crisis. The health emergency and its economic effects, together with the aim of containing and mitigating the spread of infections, have become a priority on the European political agenda. Moreover, governments are making concerted efforts to support public health systems with unprecedented social and economic response measures.

A further factor seems to have contributed to weakening the sensitivity of politicians to environmental issues. The immediate effect of the widespread virus containment measures was a sharp reduction in global economic activity; this, in turn, led to some unexpected and unintentional environmental improvements, including considerable reductions in local air pollution and greenhouse gas emissions in many countries (particularly in urban areas). Despite these improvements, their related effects are likely to be temporary, as governments have put in place several measures in order to boost economic growth. As a result, the drastic and sudden reduction in polluting economic activities is expected to recover with equal strength and speed.

From the authors’ point of view, although there is no doubt that the objectives of the European Green Deal must take into account the devastating impact of the Covid-19 pandemic (otherwise jeopardizing recovery after the crisis), measures for the relaunch of the economy should move forward at the same pace as environmental protection and be anchored on a more solid sustainable basis. In this direction, and following the call of the European Parliament, the European Commission, proposed a recovery and reconstruction package that aims at creating a greener future and has the European Green Deal at its core.

With this in mind, the post-lockdown seems to be the right time to introduce an environmental tax.

First, adopting a well-designed environmental tax would help to avoid a rebound of pollution to the pre-crisis level. The large fall in oil and gas prices is the prerogative for a strong bounce in surface transport-related pollution instantly after the release of confinement restrictions. Environmental taxation might correct the price decrease. In addition, post-crises economic recovers are generally associated with an even stronger level of pollution, as industrial activities need to be more intensive to resume the ordinary levels. In fact, we might learn a lesson from the Global Financial Crisis of 2008-09, during which the world witnessed a temporary reduction in CO2 levels that was immediately compensated in the following year.

As we all know, the debate on the use of fiscal measures to tackle environmental issues forces us to bear in mind that these measures can often have counter-intuitive consequences. Indeed, behind the “polluters pay” principle, which is the main motto of the advocates of these taxes, lies an important issue. The goods that are targeted by environmental taxes, like fossil fuels, are often fundamental to their consumers, and thus characterized by an inelastic demand. Therefore, producers can easily rebate the burden on their consumers, who will have to use these goods despite the higher prices. In the end, the economic burden can fall upon a disadvantaged slice of the population, which has no alternatives to the use of the polluting good. This would result in a vexatious levy on poorer households, especially when taxation hits bare necessities, such as energy, which is used for basic needs (e.g., cooking, hot water, heating systems).

One of the effects of the lockdown was a complete change in individuals’ habits. This included a drastic reduction in the use of surface transportation, due to the requirement or possibility to work from home. Working from home allows a large number of individuals not to depend on petrol-based cars, for instance, to reach their workplace. Therefore, environmental taxes levied on the use of polluting cars would be fairer in a post-lockdown situation, in which reliance on surface transportation is reduced, because the demand for these cars can be considered more elastic.

Furthermore, well-designed environmental taxes might be more efficient under an economic perspective in the post-lockdown period. This would be due to the fact that individuals are more responsive to changes because of the eradication of their habits. Households are also more elastic to price variations, as they have witnessed a pauperization as a consequence of the lockdown. These conditions allow environmental taxes to reach their objective of reducing the traded amount of the polluting activity they hit more effectively.

In conclusion, it can be argued that the post-pandemic constitutes a suitable moment for introducing environmental taxes, as long as they are levied on goods and activities that have available and affordable green substitutes. This way, corrective taxes would be more efficient in fulfilling their environmental objective, fairer because poorer households could opt for the non-polluting alternative, and they would help avoid the rebound of emission levels in the post-crisis scenario.

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