Submitted to Resources, Conservation and Recycling, 2011
Taxing Virgin Natural Resources:
Lessons from Aggregates Taxation in Europe*
PATRIK SÖDERHOLM
Economics Unit
Luleå University of Technology
971 87 Luleå
Sweden
E-mail: [email protected]
Abstract
The overall objective of this review paper is to analyze the efficiency of environmentally
motivated taxes on virgin raw materials. We analyze both the economic-theoretical
foundations of virgin natural resource taxation, as well as the empirical experiences of
aggregates taxes in three European countries, i.e., taxes on, for instance, gravel, rock, stone
etc. The selected countries include Sweden, Denmark and the United Kingdom. The theoretical analyses indicate that taxing natural resource output or use typically represents a
‘second-best’ policy alternative, which could be used when, for instance, the monitoring of
non-point source emissions and/or efficient property rights regimes are hard to implement.
The empirical analysis shows that low own-price elasticities typically lead to low aggregate
demand responses and limited substitution to alternative (recycled) materials. Some generators of recycled materials have few incentives to enhance their waste sorting activities in the
presence of a tax on virgin materials, and unless additional policies to increase the supply of
such materials are implemented, supply will not increase much even in the presence of a high
demand. Finally, although in some cases second-best taxation schemes may be motivated by
the desire to keep administration costs low, this may come at the cost of improper incentives
and a lack of policy legitimacy.
Key words: Virgin natural resources; environmental taxes; economics; aggregates.
*
The research undertaken in preparation of the paper has formed part of the multi-disciplinary research program
“Towards Sustainable Waste Management”, hosted by the IVL Swedish Environmental Research Institute Ltd.
and funded by the Swedish Environmental Protection Agency. Any remaining errors, however, reside solely with
the author.
1. Introduction
Since the late 1980s environmental policy makers have shown an increased interest in marketbased instruments. This new focus on economic instruments such as taxes, charges, tradable
permit schemes, and deposit refund systems stems partly from the fact that traditional regulations often have failed to provide cost-effective and flexible tools for emission reductions
(Stavins, 2000). Another reason is that contemporary environmental policy has typically piad
increased attention to non-point source emissions (e.g., emissions from road traffic and
products), and these types of pollutants are hard – or at least very costly – to control on a
source-by-source basis.
In the past many market-based instruments have addressed emissions of harmful
substances and waste, but during the past decade increased policy attention has been paid to
the issue of whether it would be desirable to extend the scope of the use of market-based
instruments in environmental policy. Not the least taxes on virgin raw materials such as
minerals, metals, and forest products are put forward as potential candidates. The European
Commission has strongly advocated an increased use of market-based instruments among
Member States; in the EU Thematic Strategy on the Sustainable Use of Natural Resources
(European Commission, 2005) the Commission calls for greater decoupling of material use
from economic growth and increased resource productivity, which could be achieved through,
for instance, properly designed taxes and charges. The Member States has also shown interest
in using market-based policy instruments for these purposes. For instance, the Swedish
Environmental Protection Agency argues that new taxes on virgin natural resources should be
seriously considered (SEPA, 2002); it is stressed in particular that taxes on raw materials
production and use can be compatible with so-called integrated product policies (IPP), which
aim at encouraging the diffusion of environmental management techniques along the entire
supply chain of a product (rather than focusing on end-of-pipe solutions).
Still, before extending the scope of the environmental tax base – with an increased focus
on virgin natural resources – one needs to address at least two important questions. First,
what may motivate the use of such taxes and are there alternative regulatory approaches that
could be more efficient? Most notably, a virgin resource tax may be an appropriate option if it
is not feasible – or too expensive – to provide efficient price incentives at the waste stage, or
if there are other (not waste-related) environmental problems that call for discouraging the use
of the resource (e.g., Oosterhuis et al., 2009). Second, what lessons that can be learnt from the
countries that already have implemented these types of taxes? This question concerns both
2
how the policies have been designed, how they work in practice, but also in what way the
taxes interact with other policy instruments (e.g., waste taxes, recycling regulations etc.). In
this paper we attempt to shed some light on these two questions.
The main purpose of this paper is therefore to review and discuss the efficiency of
environmentally motivated taxes on virgin raw materials. We provide analyses of both the
economic-theoretical foundations of virgin natural resource taxation, as well as the empirical
experiences of aggregates taxes, i.e., taxes on, for instance, gravel, rock, stone etc., in three
European countries. These include Sweden, Denmark and the United Kingdom. Some general
lessons for the future use of virgin natural resource taxes are discussed.
Before proceeding some important limitations of the paper need to be outlined. The use
of taxes is motivated for several reasons. These include: (a) the raising of revenues to finance
public consumption and investment; (b) the redistribution of incomes (e.g., from the poor to
the rich and/or over the lifetime of a person); and (c) the desire to affect behavior in any way
(i.e., incentive taxes). Many taxes on natural resources (in particular in developing and postcommunist countries) can be related to the first of these motives (Söderholm, 2004), but in
this paper we focus on the third motive, and more specifically on environmentally related
taxes that aim at influencing environmentally damaging behavior (e.g., reducing pollution,
waste etc.). 1 Still, the distinction between environmental taxes and revenue-raising (fiscal)
taxes is not always clear-cut. Taxes for which fiscal and environmental objectives are
combined or inseparable are therefore also commented on.
The paper proceeds as follows. In the next section we discuss the economics of taxing
virgin natural resources, and address, for instance, resource scarcity issues, the presence of
environmental externalities as well as some of the interactions with other policy instruments.
Section 3 provides a synthesis of the documented environmental and economic impacts of
aggregate taxes by drawing from the experiences in Sweden, Denmark, and the UK. We
discuss policy motives, tax design issues and the impacts of the tax on both the industry and
the environment. The tax policies pursued in practice are also confronted with some of the
theoretical results discussed in section 2. Finally, a summarizing section provides some
concluding remarks and general implications.
1
It is worth noting that a group of experts from the European Commission, Eurostat and the OECD defines an
environmental tax as: “a tax whose tax base is a physical unit (or proxy of it) that has a proven specific negative
impact on the environment,” (ECOTEC, 2001). However, for the purpose of this paper this definition is too wide
as it refrains from considering the motive behind the tax.
3
2. The Economics of Taxing Virgin Natural Resources
From a public policy perspective the implementation of specific taxes on virgin natural resources can be motivated by both fiscal and environmental arguments. However, as will be
stressed in this section, such a combined motivation may be confusing and misleading. Based
on economic efficiency criteria the designs of fiscal and environmental taxes, respectively,
will typically differ a lot, and an efficient environmental tax may be a very inefficient fiscal
tax. Before proceeding, it is also important to note that natural resources may be taxed in
many ways (e.g., Heaps and Helliwell, 1985); for instance, the land (i.e., property tax) or the
rent may be taxed. Given our prime focus on environmentally related taxes we discuss solely
taxes levied on the production (extraction) or the use of virgin natural resources.
2.1 Taxing Virgin Natural Resources for Non-environmental Reasons
From an economic efficiency point of view the main aim of fiscal taxes is to raise sufficient
revenues without distorting economic activities too much. In practice this implies that goods
for which demand is relatively price inelastic should be taxed higher than goods whose uses
are more sensitive to own-price changes. Quite often natural resources fall into the former
category of goods. The demand for natural resources and virgin materials tends to be ownprice inelastic, especially in the short-run. For instance, empirical studies typically indicate
that the demand for metals and minerals is relatively own-price inelastic (Radetzki, 2008).
This is partly because: (a) few substitutes to the resource exist; and (b) the processing of
natural resources often is very capital intensive (e.g., metal smelting or pulp and paper
production) and substitution to other inputs may therefore be costly and take a considerable
amount of time. In addition, the demand for natural resources is typically a derived demand,
i.e., we seldom demand natural resources directly but instead we demand a very large number
of consumer goods that are produced with the help of these resources. Natural resources form
the basis of economic activity and are likely to continue to do so in the future. As such –
similar to labor inputs – even the long-run price elasticity of demand may be low and natural
resources can thus represent a very stable tax base for the government.
A similar argument can be made for the supply of natural resources. Natural resource
extraction gives rise to so-called Ricardian rents, i.e., a difference between the existing market
price for a resource and its opportunity cost. These rents tend to reflect firm-specific
advantages in terms of lower costs due to, for instance, different qualities of mineral deposits.
Tax measures applied to the extractive industry often act to reduce the rent generated by the
4
industry. The most appealing attribute of rent taxation is its neutrality in terms of resource
allocation (Heaps and Helliwell, 1985). Since no tax is collected unless a normal profit (or
acceptable rate of return) is realized, a tax on rent will not induce any static efficiency losses
since it does not alter production levels. In economic terms, the price elasticity of natural
resource supply may be very low – or even zero – in the short-run. In the longer-term,
however, Ricardian rents motivate firms to explore for new resources and investment
activities should be negatively affected by a tax on the rent in the sense that some projects
become uneconomical. Thus, although a rent-based natural resource tax does normally not
distort economic behavior given existing capital it will give rise to dynamic efficiency losses.
In contrast, a tax on natural resource production (often called royalties) will also cause static
efficiency losses. In many developed countries mineral resource taxation through royalties is a
way of extracting income from multinational mining companies for investment in local
development. See, for instance, Otto (1993) for an overview.
The ultimate purpose of a tax determines how it should be designed. Taxes implemented
for fiscal and/or redistributive reasons should be designed and targeted in a way that secures a
stable inflow of tax revenues, i.e., broad and price inelastic tax bases should be targeted. This
attribute is in contrast with the goal of environmentally motivated taxes: here the aim is to
influence behavior in way that reduces specific environmental damages in the most costeffective way, and this implies above all that an environmental tax should achieve as close
proportionality to damage done as possible.
2.2 Taxing Virgin Natural Resources for Environmental Reasons
In order to understand the basic arguments for environmental taxation in general and the taxation of virgin natural resources in particular, it is useful to outline a simple model illustrating
the relationship between economic activity and the environment. Such a model is presented in
Figure 1, and it shows that the economic system is a subsystem of the environment. Economic
activities cannot exist without the services that the environment provides while, on the other
hand, the environment may well exist even in the absence of human economic activity.
Moreover, the economic system relies on the environment to supply two basic services. The
environment provides natural resources, energy and different ecosystem services, and the
economic system makes use of the environment’s (limited) ability to absorb pollution and
waste products.
5
These two basic functions of the environment are in no way unrelated. According to the
first law of thermodynamics all mass entering the economic system eventually become
emissions to nature, either to air, land or water (e.g., Ayres and Kneese, 1969). In other
words, the more natural resources that are being extracted, the more emissions and waste will
emerge (at least for given technologies). In addition, increased emissions also hamper the
environment’s ability to supply more natural resources. Thus, too much emission into nature
can accumulate in the environment and cause damage both to the absorptive capacity of
nature and to the future supply of natural resources. With these observations in mind Figure 1
also illustrates that recycling of waste and secondary materials can serve two purposes; it can
relieve the demand pressure on virgin materials but it may also be a way of avoiding waste to
accumulate in the environment. The above thus shows that the environment is a valuable
asset, and a major goal of policy must be to prevent undue depreciation of the value of this
asset.
The Environment
Energy
Recycling
The Economic System
Natural
resources
Pollution
Waste
Ecosystem services
Figure 1: The Economic System and the Environment
Source: Based on Tietenberg (2002).
From an economic efficiency point of view the implementation of taxes on natural resources
is motivated if and only if: (a) there exists a market failure, thus a situation in which market
forces alone cannot provide enough of environmental goods and quality; and (b) other
environmental regulations (e.g., technology standards, emissions limits etc.) are less efficient
in addressing the relevant market failure than taxes or charges. Based on the above it is
6
possible to define four different but still closely related environmental motives for taxing
natural resources. In the remainder of this section we briefly discuss each of these and analyze
whether a tax on virgin natural resources can be an efficient policy to address any potential
market failures.
The first motive for natural resource taxation is that of resource depletion. With a tax on
resource extraction, the rate of extraction will decline and the resource will not deplete as fast.
This issue may be a concern for both non-renewable and renewable resources. In both cases
there is a risk of overexploitation of the resource. Nevertheless, taxing virgin materials for
conservation reasons only finds limited support in the economics literature. Under welldefined property rights, the owner(s) will have an incentive to use the resource as efficiently
as possible (e.g., Eggertson, 1990; Radetzki, 2002). Thus, in this case no real market failure
exists; the market is capable of signaling scarcity so that when the resource becomes scarcer
the price of the resource will go up, which in turn encourages substitution to other resources
or factor inputs and leads to lower extraction levels. The higher price also provides increased
incentives to improve resource efficiency (i.e., less use of raw materials per unit produced of
the end product), and to identify new virgin resource deposits.
A majority of all empirical studies on natural resource scarcity applied to minerals (for
which well-defined property rights typically exist) conclude that there is little evidence that
resource availability has been a constraint on mineral supply. In cases where property rights
are not well defined, though, resource taxation may be a second-best policy to address
overexploitation. The introduction of efficient property rights schemes is of course the firstbest policy, but in some instances this may be very difficult. For instance, in fisheries taking
place under open access conditions it may be difficult to establish property rights due to the
mobility of the resource. Instead a landings tax on fish caught may make the open access
fishery behave like an efficient owner (Heaps and Helliwell, 1985).
Other market failures may also exist, which implies that the resource is exploited at a
faster rate than is socially efficient. For instance, in determining the time profile of a nonrenewable natural resource, extraction companies employ a discount rate, which should reflect
the opportunity cost of capital in the industry. The use of discount rates implies that the
weights attached to future costs and benefits are lower than that applied to current costs and
benefits. For this reason the traditional Hotelling model shows that higher discount rates
imply more rapid exhaustion of a non-renewable resource and less would be left for future
generations (Hotelling, 1931). If there are reasons to believe that companies employ a too
7
high discount rate (i.e., they are too “myopic”), resource extraction will be too high and policy
interventions are called for. For instance, the recent research on the existence and the
implications of hyperbolic (time-declining) discount rates shows that the structure of people’s
preferences towards time may have significant impacts on the economic valuation of future
resource flows (Pearce et al., 2003). In such cases the first-best option would be to reform the
capital market, but also here extraction taxes may serve as an appropriate second-best policy.
In addition, some resources have multiple uses and the owner of the resource may not
fully take all these into account in the decision-making process. This implies, for instance,
that in the case of forestry the socially desirable rotation periods may exceed those rotation
periods chosen by private owners (who cares only about timber harvest and not about, say, the
recreational values of the forest). In such a case, a yield tax payable when the crop is
harvested could be used to induce the private owner to choose the socially optimal rotation
period (Heaps and Helliwell, 1985). 2
It is also important to note that what we have considered so far are static efficiency
issues, but one needs also to address dynamic efficiency concerns, i.e., the impact of natural
resource taxes on investment and technical change. As was noted above, from a dynamic
perspective a tax on natural resources may decrease the economic (and, in some case, even
physical) availability of the resource; a tax on minerals production will make exploration
activities less favorable, and a tax on virgin forest materials will reduce the incentive to plant
new forests. This implies also that the substitution of recycled materials for virgin materials
does not necessarily save virgin materials. 3 In sum, the case for taxing natural resources for
conservation reasons may not be particularly strong. It is, at best, a second-best policy tool for
addressing market failures in the natural resource sector. However, the presence of such
market failures is likely to vary a lot across resources, type of owners, geographical location
etc. The efficiency of virgin resource taxes should thus be judged on a case-by-case basis.
The second motive for taxing natural resources is related to the first one, but deserves
some special comments. It also deals with a market failure at the natural resource extraction
stage, namely environmental externalities. Just as in many other production processes, natural
resource extraction tends to give rise to pollution and waste. For instance, mining and
2
It should be noted of course that also in this case a resource extraction tax represents a second-best policy. The
first-best policy would be to internalize directly the recreational values of the forest rather than to address them
indirectly.
3
See, for instance, the seminal article by Darby (1973), who bluntly concludes that: “[…] those who believe in
“saving trees” should, if anything, urge taxes on the paper recycling industry, so as to reduce paper recycling and
increase the number of trees,” (p. 1255).
8
minerals processing may cause air and underground water pollution, and also produces solid
waste (e.g., UNCTAD, 1997). Here the case for policy intervention in the form of pollution
taxes and/or taxes on waste is very strong. With such a tax, the natural resource owner has an
incentive to take these undesirables into account, i.e., the negative externalities become
internalized. Moreover, environmental economists normally recommend the use of pollution
taxes rather than emission standards and/or technology standards since taxes typically achieve
environmental objectives at lower costs and provide stronger incentives for technical change
in the pollution abatement sector (e.g., Baumol and Oates, 1988).
It must be noted, though, that the optimal tax in this specific case is a tax on emissions
(of the waste or the pollutants), not on natural resource extraction (i.e., an output tax). A tax
on output may however be a second-best policy if emissions are hard to monitor and pollution
abatement possibilities are severely limited. 4 Still, the inefficiency of the output tax lies in the
fact that it does not provide any incentives to make the production process more environmentally benign by, for instance, installing pollution abatement equipment or by switching to
less polluting fuels etc. It only provides an incentive to lower production, and thus lower
emissions in this way. Only in the case when no abatement technology exists (which is
unlikely) a tax on output will be an efficient policy.
A third motive for taxing natural resources extends the one just discussed to environmental externalities that arise downstream (i.e., further down the supply chain). Since all
materials extracted eventually become emissions to nature, the current rate of extraction
equals future amounts of emissions or waste. Taxing virgin material inputs can thus be a mean
of preventing the transformation of materials into waste and emissions. In this case one could
think of taxes that are levied on the consumption of different natural resources (and not only
on the extraction). For obvious reasons, the pros and cons of this type of input taxation are
very similar to those outlined above for output taxes. Taxes on resource inputs levied at the
point of distribution are likely to be cheaper from an administrative viewpoint than are
pollution charges. In general there exists a trade-off between reducing transaction costs and
finding a tax that reflects the damage at the margin; “Since it must be more costly to
undertake regulation on dispersed emissions rather than well-demarcated inputs into the
economy, it may be that an input-oriented environmental regime […] is more efficient than an
emission-oriented one,” (Vatn, 1998, pp. 514-515).
4
Sterner (2003) refers to output taxes as “presumptive taxes” since, “in the absence of direct monitoring, the
agent that uses a certain input or produces a certain output is presumed to be polluting,” (p. 99).
9
However, an input tax will “only” provide incentives to substitute one input for another,
but it will not give any incentive to decrease pollution at the emissions stage. If the aim is to
use output or input taxes as a way of reducing emissions and waste disposal downstream one
must also ask the question whether other (non-tax based) regulations are more efficient.
Pollution taxes are generally preferred over technology standards, but it may be more efficient
to employ technology standards at the pollution stage rather than tax inputs earlier in the
supply chain. The main argument against technology standards is that they deny the flexibility
in compliance strategies that may exist. However, as noted above, the same type of critique
can be directed towards input taxes. In other words, both policy options are second-best
strategies to control emissions and waste accumulation. Which strategy is the most efficient
one remains, thus, an empirical question.
The fourth and final motive for implementing taxes on virgin natural resources in a way
represents a combination of the three others; taxes on natural resources may be used as a way
of encouraging the substitution of secondary and recycled materials for virgin materials. We
have already noted that this approach cannot always be motivated on the grounds that it saves
virgin resources. However, in general virgin materials are often associated with more negative
externalities than recycled materials. One commonly cited reason for this is that the
processing of secondary materials tends to be less energy intensive. In addition, recycling is
one way of avoiding the disposal of solid waste. Taxes on virgin materials will change the
relative price between virgin and recycled materials, and in this way influence waste disposal
behavior. Theoretically charges on waste disposal would be the optimal policy in this case,
but, as discussed above, the transaction costs involved in controlling such non-point source
emissions may make second-best policies more attractive. Normally there are few producers
of a chemical compound compared to the numbers of actors downstream in the supply chain,
i.e., manufacturers of products using the chemical. Similarly, there are fewer of these
intermediate producers than there are of the thousands of diverse end-user consumers. In
addition, in several studies it is also argued that direct charges on waste disposals can be
ineffective because of the risk of illegal disposal (e.g., Dinan, 1993; Fullerton and Kinnaman,
1995). Other measures that are easier to implement and that still have desired impacts on the
environment can therefore be motivated.
For the above reasons, many environmental economists promote the use of virgin material taxes as an efficient method to encourage the use of recycled materials (and ultimately
reduce waste and emissions) (e.g., Pearce and Turner, 1993; Conrad, 1999; Miedema, 1983).
10
For instance, Conrad (1999) argues that a tax on virgin materials is a better instrument than a
tax on waste, since in the former case the environmental aspects are integrated at the
beginning of the production process. The results of his theoretical analysis show that the
incentive to recycle and to reduce waste is lower under a marginal increase in waste fees than
under a marginal increase in a tax on virgin material.
Nevertheless, Dinan (1993), Fullerton and Wu (1998), Walls and Palmer (1997, 2001)
and Palmer and Walls (1999) argue that a tax on virgin material can only correct for the
external costs resulting from extracting or harvesting virgin materials, but not for external
costs resulting from waste disposal. These authors find that no single tax can generate the
optimum level of both downstream and upstream waste disposals and that multiple policy
instruments are necessary to fully internalize the externalities (see also Eichner, 2005). Palmer
and Walls (1999) argue that a combination of a tax on intermediate goods (or natural
resources) and recycling subsidy would provide the appropriate incentives. This approach,
they argue, has many virtues:
“[S]ince the tax discourages production, it acts to reduce waste. And if the tax is assessed
per pound of intermediate material produced, it gives producers of those intermediate
goods the incentive to produce lighter-weight products. This further reduces the amount of
materials entering the waste stream. [Moreover], the subsidy for recycling encourages the
use of secondary materials in production by reducing their cost relative to virgin
materials.” (p. 4).
This system is very similar to a deposit-refund system in which the deposit acts like a tax on
the virgin material, while consumers who recycle get the refund back. Some previous studies
present empirical evidence in support of the above theoretical conclusion. Palmer et al. (1997)
compare and evaluate three different waste management policies: (a) deposit/refunds; (b)
advance disposal fees (equivalent to a virgin materials tax); and (c) recycling subsidies. From
the empirical literature they collect demand and supply elasticities for aluminum, glass, paper,
plastic and steel, and employ these in a simple simulation model to analyze the cost of
reducing disposal of municipal solid waste. The conclusion is that a deposit/refund scheme is
more cost effective than the two other policies. Still, when also taking administrative costs
into account this conclusion may change in favor of the advance disposal fee.
A similar approach is adopted in Sigman (1995). She compares four different policies
aimed at achieving reductions in the disposal of lead; these include virgin material taxes,
deposit/refund schemes, recycling subsidies and a recycled content standard. Her model
11
focuses on the cost effectiveness of each of these policies, and uses empirical estimates of
own-price supply and demand elasticities for virgin and secondary lead as model inputs.
Sigman finds that the virgin materials tax and the deposit/refund policies are preferred since
they both encourage the recovery of lead and discourage its consumption.
Finally, although it is typically argued that the use of recycled materials generally is
more environmentally benign than virgin material use, this is no law of nature and needs to be
assessed in each case. Recycling also consumes resources, and could therefore not be seen
upon as a fundamental policy goal in itself (e.g., Baumol, 1977; Berglund and Söderholm,
2003). Most notably, if a natural resource tax encourages substitution away from a virgin
material to some alternative raw material (recycled or not), this shift in use will imply a set of
general equilibrium impacts whose net environmental impacts are a priori ambiguous. 5 The
environmental attributes of the replacement material may be less appealing (and potentially
not well internalized by existing policy instruments). Similarly, the overall material intensity
of the economy may not decrease in the presence of selected taxes on virgin natural resources.
3. Taxing Aggregates: Experiences from European Countries
In this section we analyze the environmental and economic impacts of aggregate taxes by
drawing from the experiences in Sweden, Denmark, and the UK. The specific designs of the
aggregates taxes in these countries differ somewhat. In Sweden only natural gravel is taxed
while in the other two countries the taxes cover a broader range of aggregates (e.g., sand,
gravel, stone etc.). The motives for taxing aggregates are mixed and partly differ between the
countries, but what is common for all three is the desire to encourage the use of alternative
and recycled materials. The three aggregates taxes covered here are the most significant that
exist in Europe. In Belgium (Flanders) aggregates are also taxed, but there exist very limited
information about this tax. Finland has also considered introducing a so-called soil abstraction
fee, which by definition may include sand and gravel (ECOTEC, 2001). Moreover, in Italy a
charge per cubic meter of aggregates extracted exists, although the rates differ across various
regions in the country. The main aim of the Italian charges is to cover the direct and indirect
costs of the land use impacts induced by the quarrying activities. The charges are thus not
aimed at affecting the quantities of aggregates extracted and/or the use of alternative materials
(European Environment Agency, 2008).
5
See also Bruvoll (1998) and Bruvoll and Ibenholt (1998), who employ general equilibrium models of the
Norwegian economy. In the analyses presented in these papers virgin paper and plastic taxes do result in positive
environmental welfare effects, while, however, the total welfare effects are ambiguous.
12
3.1 The Swedish Tax on Natural Gravel 6
Regional inventories of natural gravel and alternative materials have been conducted in
Sweden since 1983. The purpose of these inventories, commissioned by SEPA, has been to
map the supply of natural gravel as well as the existence of alternative materials, primarily
rock that is suitable for producing crushed material. The main motive is the growing scarcity
of natural gravel in the southern and mid-parts of Sweden. The Geological Survey of Sweden
(SGU) has estimated that natural gravel in Sweden, given the 1996 production level, will run
out in 40 municipalities within 20 years. This estimate only includes quarry of gravel that are
suitable to extract from an environmental point of view. In many parts of the country the
occurrence of natural gravel is crucial for providing clean drinking water and constitutes an
important part of the landscape (e.g., so-called gravel ridges) (SEPA, 2000). Conservation of
natural gravel and material substitution to crushed rock and recycled materials such as
concrete are therefore the main motives for introducing the Swedish tax on natural gravel.
Gravel and crushed rock are used primarily in foundations for buildings and civil engineering
works and in the production of concrete and asphalt for roads (SEPA, 1997). The use of
crushed rock also reduces the total amount of material required for a project.
The existing tax on natural gravel in Sweden was introduced in 1996. The intention was
to set the tax rate at a level high enough to close the price gap between gravel and its closest
substitute, crushed rock (SEPA, 2001). The price difference before introduction was SEK 7-8
per ton, and the tax level was initially set at SEK 5 (US$ 0.7) per ton. This level was thus a
compromise and set so that it would provide a clear incentive effect for material substitution
while at the same time avoid the risk of early closedown of already active quarries. This tax
level corresponded roughly to a 10 percent price increase on natural gravel. Estimates by
SEPA indicated that the main part of this initial tax, about SEK 4.5 (US$ 0.6) per ton, was
borne by the consumers (due to the relatively low own-price elasticity of demand) (Ibid.).
This implies that the tax is likely to have had limited economic effects at the producer stage,
but it should have provided an incentive to substitute crushed rock for natural gravel. In 2003
the tax on natural gravel was raised to SEK 10 (US$ 1.4) per ton gravel extracted, primarily to
increase the incentive effects (Ministry of Finance, 2003), and in 2006 a further increase to
SEK 13 (US$ 1.7) per ton was implemented (Swedish Geological Survey, 2009). In real terms
this represents a mere doubling of the tax level compared to the 1996 level. All of the
revenues from the tax are incorporated into the central state budget.
6
Natural gravel is defined as naturally sorted earth materials, which mainly consists of sand, gravel, and cobble
and boulder size fraction (Nordic Council of Ministers, 2002).
13
The Swedish tax on natural gravel is levied on extraction consumed in Sweden, on extraction for export but not on imports. In this way the tax is not designed to address competetive issues; theoretically imports become relatively cheaper and can thus outperform Swedish
production. However, in practice this is unlikely to happen at a large scale since international
gravel trade is limited due to high transportation costs. 7 During the last 10 years the import
penetration of the Swedish aggregates market has been low, sometimes as low as 0.1 percent
(Legg, 2007).
An important goal of the tax has been to reach the proportions 30/70 (percent) between
natural gravel and its substitutes, but there is no time limit for when this should be attained
(SEPA, 2000). In addition to this a goal for the total volume was also added (but later
removed); the extraction of natural gravel should be less than 12 million ton in the year 2010.
Moreover, previously it was also stated that before the year 2010 the use of recycled material
should have reached a 15 percentage share of total use. Below we comment briefly on
whether these policy targets have been (or will be) met, but it should be made clear that from
an economic point of view the above objectives may be very inefficient. It is unclear how they
have been derived, and they tend to neglect the fact that market forces may alter the economic
value of natural gravel. If demand increases and/or new supplies are found the welfare cost of
the 12 million ton target may increase, not the least since the substitution of crushed rock for
gravel is very difficult for some applications (e.g., playgrounds, mortar, tiling etc.). Moreover,
if there really exists a looming shortage of natural gravel in Sweden, why do we not tend to
see producers voluntarily withholding supply in anticipation of higher prices in the future?
Figure 2 shows the development of aggregate deliveries of natural gravel over the time
period 1984-2008. The deliveries of natural gravel have declined substantially since 1984,
both in absolute and in relative terms. In 1984 the natural gravel share out of total aggregates
production in Sweden was 82 percent but in 2008 it had fallen to only 19 percent, while the
share of crushed rock and other materials experienced a corresponding increase. This implies
that the 30/70-goal set up by the government has been fulfilled. The tax’s impact on gravel
use has been assessed to be negative but not very large (Statistics Sweden, 2005), although it
may also have had some important signaling effects (Arell, 2007). The latter implies that it
7
This is, though, an issue of concern for gravel producers located close to international borders. One gravel
company (Dala Norrfrakt AB which is both a producer and a consumer of natural gravel) in Idre, located only 40
kilometers from the Norwegian border, complains about the recent increase in the natural gravel tax. Company
representatives argue that already at the former tax level (5 SEK per ton) there have been imports from Norway,
and these will increase with the new higher tax level. However, the Norwegian Aggregates Producers
Association does not think this is likely to happen. The transport costs are still too high, and most Norwegian
gravel exports go by sea to the continent. Transport of gravel by sea is cheaper than transport over land.
14
has raised producers’ awareness of the government’s intention to gradually phase out the use
of gravel. Even prior to the introduction of the tax the major operators started to review quarry
sites shifting from gravel pits towards more crushed rock quarries.
However, Figure 2 also indicates that other factors than the tax, are likely to having
induced the development. Even before the tax was introduced (and announced) the decrease
in natural gravel extraction was significant. One reason for this is that consumers increasingly
demand high quality materials, tailor-made for the intended use; this has also contributed to
the increased interest in crushed rock. One important example is the National Roads
Administration in Sweden, which since 1994 has raised its quality standards for road
construction materials and provides a bonus to tendering construction firms that use crushed
rock instead of gravel. This has created an incentive for firms submitting tenders to use
crushed rock in their bids. The permit allocations for gravel pits have also been tightened
since the tax was introduced. Clearly these policy changes make it hard to separate the tax’s
impact on gravel use and material substitution from the impacts of other factors. Moreover,
the extraction of aggregates appears also to be heavily influenced by the growth of the overall
economy (e.g., the boom in the period 2004-2008); aggregates are namely often used in those
sectors of the economy, which tend to be particularly affected by fluctuations in the general
business cycle (e.g., construction).
120
100
Mt
80
60
40
20
0
1984
1986
1988
1990
1992
1994
Gravel
1996
1998
Crushed Rock
2000
2002
2004
2006
Others
Figure 2: Deliveries of Aggregates in Sweden by Type of Material (Mt), 1984-2008
Note: “Others” mainly consist of crushed rock from, for instance, separate crushing mills,
scrap stone and excess stone from quarrying industry minerals and ornament stone
Sources: SEPA (2000) and Swedish Geological Survey (2009).
15
2008
The substitution of crushed rock for natural gravel induced by the tax has however also
had some interesting indirect effects. Since the extraction of crushing rock is (1.6-1.8 times)
more energy intensive than natural gravel extraction, energy consumption in the sector has
increased in consequence. Transport distances, on the other hand, have decreased since natural gravel usually is transported over longer distances than crushing rock (the latter being a
more bulky product), although Legg (2007) asserts that this effect probably is small. In
addition, typically more cement is needed to produce concrete based on crushed rock
(compared to natural gravel), and cement production is today a very carbon dioxide intensive
process. These impacts illustrate the important notion that the net environmental impacts of a
(second-best) tax, which does not target explicit environmental problems, may well be
ambiguous.
From Figure 2 it is hard to determine whether the previous goal that by 2010 recycled
materials should make up 15 percent of the total amount of used materials, has the potential to
be fulfilled. If “other materials” is generously interpreted as recycled material, the data
indicate that the goal could be reached by 2010. In 1995 the proportion of “other materials”
was 9 percent and in 2008 it had increased to 13 percent. Still, the Swedish Geological Survey
concludes that the data on recycled materials are very meager and unreliable, and this makes
it difficult to draw any conclusions about whether this goal could be reached or not. It has
therefore been suggested that specific measures should be taken to ensure that the share of
recycled material is increased (Ministry of Finance, 2003). One should note, however, that the
prospects for increased recycling of building and demolition waste are in part limited in
Sweden. Old buildings are rarely pulled down, and in the 1980s Sweden experienced an
expansion in house and road building (Legg, 2007). For this reason the current stock of
infrastructure has a low replacement rate, and policies forcing recycling rates to increase
could be costly. Given the limited scope for substituting recycled aggregates material for
natural gravel (mining waste representing perhaps an exception) as well as the lack of reliable
statistics, the Swedish government has decided to remove the previous 15 percent recycling
target. 8
A third goal of the natural gravel tax was that the extraction of natural gravel should be
less than 12 million tons in the year 2010. Extraction was 44.6 million tons in 1995 and had
declined to 18.8 million tons in 2008. In 2007 the Swedish Geological Survey suggested that
8
A significant share of the increase in recycled aggregates has been generated through a growth in mobile
crushers being used by road building contractors (Legg, 2007). This has reduced the costs of road building
projects by making use of existing material where the road is being built.
16
the 2010 production goal should be replaced by a more general goal for the year 2020 (Arell,
2007). The proposal is that in 2020 the extraction of natural gravel should only take place in
locations where gravel beds are not essential for drinking water supply and where there is few
conflicts with other natural or cultural values. This is to be achieved through changes in the
licensing procedures for quarrying operations (as outlined in the country’s Environmental
Code), thus ensuring that gravel extraction only takes place for purposes where alternative
materials cannot be used. This is likely to be a more efficient way of addressing the importance of gravel as a ground water reservoir material, thus illustrating that often regulatory
measures could provide more apt incentives than economic instruments that are not targeting
the underlying environmental damages. This does not mean that the proposed regulation is
entirely cost-effective. For instance, there is an implicit assumption that maintaining a secure
supply of natural gravel to purify water is cheaper for society than alternative methods (e.g.,
chemical treatments) (Legg, 2007). Moreover, the uniform tax in Sweden does not address
regional differences such as the fact that the availability of natural gravel is much higher in
Northern Sweden, and in spite of the currently stronger emphasis put on regulatory measures,
no proposal to withdraw (or redesign) the tax has been put forward.
3.2 The Danish Tax on Certain Raw Materials
From 1977 to 1990 a tax on raw material extraction existed in Denmark at rates from DKK
0.35 (US$ 0.06) per m³ (1977-83) to DKK 0.5 (US$ 0.08) per m³ (1983-1990). In 1990 a new
tax on raw materials was introduced. The new tax is set at DKK 5 (US$ 0.8) per m³ for
selected extracted raw materials. The Danish tax is levied on raw materials that are comercially extracted and consumed in Denmark or commercially imported (Nordic Council of
Ministers, 2002). These include, among others, sand, gravel, stones, peat, clay and limestone.
The Danish tax is designed so that imports are taxed, while no tax is levied on exports. The
raw materials tax was introduced in close junction with the waste tax. The latter was introduced in 1987, with a tax of DKK 40 (US$ 6) per tonne of waste landfilled or incinerated. In
1993 the tax was differentiated and for landfill it increased substantially to DKK 335 (US$
42) and in 1998 to DKK 375 (US$ 47) (European Environment Agency, 2008). The main
intention of the two taxes in combination is to reduce the use of the above resources and
encourage substitution to recycled materials (e.g., construction and demolition waste). Tax
exemptions do, however, exist. For instance, raw materials extracted for coastal projects to
protect the beaches against erosive action are exempted as are residual products and waste
products that are extracted from already closed deposits.
17
It is difficult to evaluate to what extent the Danish tax on raw materials has lowered
consumption of virgin materials and encouraged substitution to recycled materials. When
introducing the tax in 1990 the Danish government expected the effects on consumption to be
modest. The tax burden is primarily transferred from producers to end consumers with prices
increasing between 3-33 percent depending on material. The tax costs for these consumers
(primarily construction and infrastructure companies) are however small in relative values,
and their raw material demand is highly own-price inelastic. Figure 3, which shows the
development of raw materials extraction in Denmark over the period 1989-2009, confirms this
view. Extraction levels decreased between 1989 and 1993, but then increased during the latter
half of the 1990s. After 1999 the trend was downwards again. Overall total extraction of raw
materials has declined slightly over this twenty-year period. The significant downturn in 2009
can primarily be explained by the economic crises (e.g., implying few construction and
infrastructure projects), and should not be attributed to the raw materials tax. The above
confirms the conclusion made in ECOTEC (2001), namely that the tax has had small impacts
on raw materials extraction in Denmark. The derived demand for raw materials (in
construction activities) combined with a low own-price elasticity of demand most likely
explains this meager effect.
45
40
thousand cubic meters
35
30
25
20
15
10
5
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total raw materials
Sand, gravel and stone
Figure 3: Extraction of Raw Materials in Denmark, 1989-2009
Source: Statistikbanken (2010).
18
ECOTEC (2001) notes that the waste disposal tax provides a much stronger economic
incentive than does the tax on materials and concludes that: “the relative strength of the
incentives is such that one would expect the recycling to be a consequence of the benefits of
having to avoiding disposal as opposed to the avoidance of the raw materials tax,” (p. 196).
Thus, the tax on raw materials combined with the charge on waste disposal provides a strong
incentive for aggregate users in Denmark to employ recycled materials rather than extracting
virgin materials and disposing of old ones.
The two taxes have in combination induced a marked increase in recycling, in particular
of construction and demolition waste. In 1985, 82 percent of the construction and demolition
waste was landfilled and only 12 percent recycled, but in 2004 the recycling rate had
increased to 94 percent (European Environment Agency, 2008). An important precondition
for this increase, though, was a supply-oriented regulatory policy measure. In 1997, a
regulation on the separation of construction and demolition waste was implemented. It
stipulates that waste from demolition works involving more than 1 tonne of such waste should
be separated at source into pure fractions. This has probably increased the ease with which
waste supplies could be utilized in construction works etc.
3.3 The Aggregates Tax in the United Kingdom
The UK tax on aggregates came into effect in 2002, and it is targeted at the extraction of sand,
gravel and crushed rock used for construction purposes. The tax is levied on all extraction and
imports to the UK (with the exemption of recycled aggregates), but it excludes exports (a
typical case of a so-called border tax adjustment). The main objective of the tax is to address
the environmental costs associated with quarrying operations (e.g., noise, dust, visual intrusion, loss of amenity and damages to biodiversity). A secondary objective of the tax has been
to reduce the demand for aggregates and encourage the use of alternative materials, such as
recycled construction materials. All tax revenues are earmarked and thus transferred back to
the business through a 0.1 percent reduction in employer NIC’s (National Insurance Contributions) and through the so-called Aggregates Levy Sustainability Fund (ALSF). The latter aims
at achieving better environmental management at aggregate sites, and at promoting greater
use of recycled aggregates (Winfield and Taylor, 2005).
The UK tax was introduced in 2002 at a rate of GBP 1.6 (US$ 2.4) per tonne, and has
since then been gradually increased. In 2010 it equaled GBP 2.0 (US$ 3.0) per tonne. This is
substantially higher than the Swedish gravel tax, and corresponds to about 20 percent of the
19
price of aggregates (European Environment Agency, 2008). Unlike the Swedish and Danish
aggregate taxes the basis for the UK tax was underpinned by an economic valuation study that
estimated the total external costs of aggregate extraction in the country (London Economics,
1999).
Just as in the Swedish case the extraction of primary aggregates has been declining well
before the introduction of the tax in 2002 (Figure 4). In the UK some of the driving forces
behind this decline have been a general downturn in road-building since 1990 and a more
efficient use of aggregates in construction works (European Environment Agency, 2008).
Figure 4 compares the production of aggregates over the time period 1982-2004 to the
development of construction output over the same period. Aggregates output fell substantially
with the introduction of a landfill tax in 1996 and even further after the UK aggregates tax
was introduced in 2002. Since the mid-1990s the UK has witnessed a clear delinking of
aggregates production and construction output. Earlier studies show that the impact of the
aggregates tax has been most significant in reducing the demand for low quality crushed rock,
and the demand for recycled aggregates has increased slightly (and so has the demand for
other non-taxed minerals such as shale, slate and china clay) (European Environment Agency,
2008). The UK government’s view is that the tax has induced a reduction in aggregates sales
of around 18 million tones between 2001 and 2005 (Seely, 2009). In 2005 the share of
recycled and secondary aggregates accounted for about 25 percent of the UK aggregates
market (a high share compared to many other European countries). The construction and
demolition waste stream accounts for the biggest share (almost 70 percent) of the recycled
aggregates. Still, as displayed above in the Swedish case, there have been limits to the use of
recycled materials also in the UK. For instance, while material reclaimed from road shaving
and demolition works well for foundations, it is of less use for many higher specification jobs.
The competitive impacts of the tax are believed to be small; trade is spatially confined
and only about 1 percent of the market has been made up by imports, which are still taxed to
prevent a shift to foreign supplies instead of recycled materials. Exports are not taxed, in part
because they to 90 percent have come from one major quarry remotely located (causing few
local environmental externalities), and because they leave directly by boat (thus causing few
land transport externalities). Some illegal cross-border trade between Ireland and Northern
Ireland has taken place; no aggregates tax is paid in the former country and in order to avoid
these impacts an 80 percent tax credit was introduced in 2004 for aggregates extracted in
Northern Ireland.
20
No study has so far evaluated the effects of the tax on the environmental costs of
quarrying operations. Some of the alternative (non-taxed) materials (e.g., power station ash
and slag) require comparatively long transport distances with resulting negative impacts on
the environment (e.g., BDS Marketing Research, 2005), but no study has addressed the net
effect on transport externalities of the observed substitution of materials. The main impact on
these negative externalities probably comes through the use of the ALSF funds, although the
revenues have often been used to finance projects that compensate rather than mitigate these
negative impacts (European Environment Agency, 2008). Although this type of earmarking of
tax revenues can be questioned both on political and economic grounds, 9 it can often be
effective in increasing the perceived legitimacy of the tax policy (e.g., Söderholm and
Christiernsson, 2008).
170
160
150
Index
140
130
120
110
100
90
80
1980
1982
1984
1986
1988
1990
1992
Construction output
1994
1996
1998
2000
2002
2004
Aggregate turnover
Figure 4: Construction Output and Aggregate Sales in the UK, 1980-2005 (Index 100=1980)
Source: European Environment Agency (2008).
Although the introduction of the UK aggregates tax was preceded by an economic assessment
of the external costs of quarrying operations, the tax does not provide cost-effective incentives
9
The political problem lies in the fact that earmarking removes funds from parliamentary control, and can thus
lead to reduced democratic influence and even increased corruption. Economically earmarking can be inefficient
since it does not ensure that the tax revenues are used where their utility is the highest and/or where national
priorities currently are the most pressing.
21
to reduce these impacts. This was highlighted by analysts and industry representative already
prior to its introduction. For instance, Humphreys (2000) argued that the UK tax on aggregates is an inefficient and unsuitable policy of addressing environmental externalities in the
quarry industry due to the highly specific and localized nature of the relevant environmental
impacts. 10 The external costs will vary according to geological, technological and socioeconomic factors. As was stressed in section 2, a uniform tax levied across an entire industry
will only be able to achieve environmental improvements by reducing demand for the
extracted product, while it will provide no incentives to ensure that polluting behavior is
changed. This presumes, of course, also that the environmental costs associated with
quarrying are related to the scale of output, but this is very unlikely to be a one-to-one
relationship. The above implies also that the environmental impacts resulting from reductions
in demand can differ significantly depending on the way in which demand reductions occur,
e.g., through marginal decreases in production at each quarry or through reductions in the
number of quarries (ECOTEC, 2001). Although the above deficiencies of the tax design needs
to be balanced against the lower administrative costs associated with a uniform tax rate, it
should be clear that from an environmental point of view the aggregates tax in the UK may be
a comparatively inefficient environmental policy instrument.
4. Concluding Discussion
The European experiences of taxing aggregates are mixed and they display, we argue, a
number of general implications and lessons for the implementation of environmental policies
that rely on taxing the extraction (or the consumption) of virgin natural resources.
In relation to overall construction costs, the cost of aggregate materials is low, and so
demand for aggregates is generally own-price inelastic. This in combination with low tax
levels and sectoral exemptions explain why many of taxes have had only limited impacts on
resource use and recycling behavior. Countries with relatively high tax rates (e.g., the UK)
have higher recycling rates. Still, our review also indicates that the tax is just one factor
among many influencing aggregates use, including other policies and national conditions;
often the separate impact of the tax on the use of recycled materials is often modest. This
suggests that it is important to understand how a wider set of policies, in addition to the tax,
interact with the aggregates market. Most notably perhaps, the analysis highlights the fact that
10
Critique against the tax has also been put forward on the grounds that there is no justification to singling out
quarrying operations over and above all other industries that also create noise, loss of local amenity etc. (Seely,
2009).
22
virgin materials taxes may lead only to limited use of recycled materials since the own-price
elasticity of supply for these alternative materials typically can be very low. This is because
these supplies are heavily dependent on past construction activities, and therefore constitute
an essentially fixed proportion of these. 11 In addition, some generators of waste (e.g.,
households) have very few incentives to increase their waste sorting activities in the presence
of a tax on virgin materials. Thus, unless additional policies to increase the supply of recycled
material are implemented, such as the Danish requirement of sorting construction and
demolition waste at source, supply cannot increase much even in the presence of a high
demand. Moreover, in an international context a tax on virgin raw materials may induce
higher imports of recycled materials from other countries. If policies to increase the
separation recyclable wastes are lacking both in the exporting and the importing country, the
virgin materials tax will only imply a redistribution of recycled material and virgin materials
internationally (Oosterhuis et al., 2009).
An important problem of the European aggregates taxes is that most of these have
multiple objectives; they combine fiscal and environmental goals and they also target a
number of different (potential) market failures at the same time. This not only weakens the
incentive effects of the taxes, it also makes it hard to evaluate the tax impacts ex post. Thus,
there is a strong case for targeting taxes at specific environmental goals (i.e., employ one
policy tool for each policy objective), and to make a clear distinction between fiscal and
environmental taxes. The motives for taxing aggregates for environmental reasons appear to
be mixed, and not all of these motives find strong support in the economics literature. The
virgin material conservation motive (e.g., reduce gravel use) may be valid if a relevant market
failure can be identified, but in the presence of a well-defined owner of the resource, scarcity
of the resource is not a market failure in itself. Moreover, a tax on the extraction of virgin
resources also reduces the incentive to find new deposits thereby limiting the economic
availability of the resource. Taxing virgin natural resources to promote the use of recycled
materials is motivated if the net benefits to society increase as a result. As the Swedish natural
gravel case shows, though, this is not necessarily the case even when evaluated purely on
environmental grounds. The economic and environmental consequences of substituting
recycled materials for virgin materials need to be assessed on a case-by-case basis.
11
In the case of old metal scrap it should be acknowledged that what is recycled from the stock of old scrap in
one period is not available for recycling in the next period. Thus, the constraint imposed by the availability of old
scrap could be more binding in the long-run compared to the short-run, suggesting in turn that the own-price
elasticity of metal supply from old scrap could be even lower in the long-run (Tilton, 1992).
23
Finally, under some circumstances a tax levied on the extraction of aggregates may – like
the UK aggregates tax – be motivated by the presence of environmental externalities at the
extraction stage. Still, such a tax provides no incentive to reduce the targeted externalities
since the only way of avoiding the tax is to reduce production. It also diverts R&D efforts
from reducing the externalities associated with natural resource extraction toward reducing
natural resource consumption in general. The UK tax appears to be particularly inefficient in
this sense; it uses one policy instrument to attain a number of goals (noise, dust, visual
intrusion, loss of amenity and damage to biodiversity), and it is uniform across quarries
although the different environmental externalities are likely to be very site-specific. As a
result, the likelihood that the UK tax provides a cost effective (and fair) way of reducing these
externalities is low. Other policies that more directly target the environmental impacts (be it
taxes or command-and-control regulations) would probably be more efficient in the UK case.
Clearly, in some case second-best taxation schemes may be motivated by the desire to
keep administration costs low but this comes at the cost of improper incentives and higher
costs for other actors in the economy. Environmental taxation that targets damages rather than
extraction and consumption of upstream products tend to promote both cost effectiveness and
(occasionally) policy acceptance, 12 and we believe it is fair to conclude that so far the
attention on such solutions and on how to reduce the associated transaction costs has not been
a policy priority. Although governments are likely to pay attention to this problem, most of
them quickly opt for the easier option to tax upstream. One explanation for this is that
governments may give undue weight to minimizing monitoring and administration costs
(since these are borne directly by government authorities and thus financed by the state
budget) even though the total costs to society may be lower with an alternative policy design.
Moreover, as has been noted above, governments also have incentives to combine fiscal and
environmental motives in their taxation policies, and this tends to call for broad upstream
environmental tax bases. It should also be recognized that taxing close to damage often
requires specific monitoring technologies that can measure pollution levels. The development
of new technologies – which, for instance, facilitates cheap monitoring of emissions and
waste – and innovative policy designs ought to be promoted, but it is unclear who has the
incentive and the willingness to promote and undertake such R&D activities. Private firms
cannot be expected to do this. Governments often spend substantial amounts on funding
12
For instance, Daugbjerg (1998) argues that the closer environmental taxes target the environmental damages
involved, the less prevalent will the political opposition be since the tax then has a better chance of being
perceived as fair.
24
research on pollution abatement technology but less frequently we see government programs
funding research on technology that can facilitate policy enforcement and monitoring.
In sum, the analysis in this paper has illustrated that before specific taxes on natural
resources are introduced for environmental reasons: (a) the relevant market failure that the tax
should correct for must be clearly identified; (b) the impacts of the tax on environmental
quality and economic efficiency should be assessed; and (c) these impacts should be
compared with those resulting from the use of other regulatory approaches. Overall the paper
recognizes that taxing outputs or use typically represents a “second-best” policy alternative,
which can be used when, for instance, the monitoring of non-point source emissions and/or
efficient property rights regimes are hard to implement. For this reason one must also raise the
question whether not an increased attention on first-best solutions and how to reduce the
associated transaction costs would be an important policy priority, not the least through the
development of new technologies and innovative policy designs.
The prospects for introducing taxes on virgin natural resources may also be limited on
the basis of political acceptability. Proposals for such taxes are likely to be challenged by
relatively strong interest groups (e.g., if applied to metals or forest products). The fact that
virgin resource taxes typically address rather diffuse (not to say unimportant) environ-mental
problems also make them hard to promote and relatively easy to argue against.13 In contrast to
the heavy industries, the general public may well perceive taxes on natural resources (and on
energy) as fair and legitimate. The heavy industries are often looked upon as polluting, oldfashioned and dirty, and many people believe that industrial firms squander with our natural
resources in an unsustainable manner. However, natural resources are intermediate goods for
which other firms pay a price, and they are ultimately used to produce final goods. As a
consequence, it is then equally fair (or unfair) to assert that households squander with these
final goods (e.g., furniture, books, milk, diapers, road transport etc.) and that these goods
should be taxed rather than the resources that are used to produce them. Still, as has been
stressed throughout this paper, both these approaches – taxes on either the production or the
consumption of virgin resources – can be questioned from an economic efficiency point of
view. If the extraction of the resources gives rise to negative environmental effects, the tax
13
In Söderholm (2004) the legitimacy of virgin resource taxes are analyzed in somewhat more detail. This study
notes in particular that the prospects for implementing such taxes require that they: (a) gain support from
significant (national and international) organizations; (b) are not in serious conflict with international agreements
(e.g., WTO), and (c) will be pushed forward by strong policy coalitions. See also Sabatier and Jenkins-Smith
(1993).
25
system should address and target these impacts per se but not necessarily resources extraction
and use as such.
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