Increasing the Role of Environmental Taxes and Charges as a Policy Instrument in Developing Countries: Some Conceptual Considerations

Article excerpt

I

Introduction

THE JUDICIOUS USE (United Nations 1997) of natural resources is a crucial prerequisite for sustainable growth not just in developed countries but even more so in the third world. More generally, natural resource use is determined to a substantial degree by the tax structure governing a country's economic activity. When a tax constitution can be designed that stimulates the judicious use of natural resources, an important step toward achieving sustainable growth has been made. Designing such a constitution is not a simple task, however. For third-world countries, the task is further complicated by at least three factors. First, the tax system has to be exceedingly simple, since both number and quality of tax instruments available to third-world governments tend to be limited. Second, the legal system tends to mirror the state of economic development. This limits not only the tax structure an economy can bear; it also limits a government's ability to regulate natural resource use by legal means. Third, the more elaborate a legal system, the more diversity it affords its country for economic activity, including opportunities for the division of labor, that is, international competition and trade.

In trying to develop a perspective for the design of a tax constitution that allows sustainable growth in a third-world scenario, this essay tries to merge insights from three economic subdisciplines that tend to be taught separately: public finance, natural resource economics, and development economics. True to the general theme of this conference, the emphasis will be less on modern and more on classical authors, since these authors tended to emphasize the aspect of development in (public) finance.

The essay has nine sections in addition to this introduction and the conclusion. It starts with the discussion of the use of the environment and the natural resource endowment from the point of view of public finance theory. This point of departure is central, as it serves to identify the net product (le produit net) of economic activity after full consideration of the use of natural resources in the process of production. From this point of view, the question of what constitutes spillover effects or externalities in a market economy can be seen in the broad public finance perspective developed in Section II. Section III discusses some standard problems in designing a tax constitution for a third-world country. Section IV explores possibilities for creating a framework in which the sustainable use of the natural resource endowment can take place. Central to sustainable use is the notion that the environment has to be put to different uses, which raises the issue of the reversal of use, dealt with in Section V. The possibilities of ensuring reversibility of the use of natural resources is discussed in Section VI, and a specific procedure is developed that is designed to ensure that reversibility of use can be achieved with simple administrative means, in other words, means that are available to third-world governing authorities. Finally, Sections VIII and IX deal with the issue of institution building. Clearly, the effective use of environmental taxes and charges as a policy instrument requires the availability of the institutions in which such policies can be conducted. Hence, Section VIII gives an overview of basic institutions of the market economy. Section IX draws implications for an effective use of environmental charges and taxes. The essay ends with some concluding observations.

II

The Use of the Environment in Public Finance Theory: Establishing the Net Product

ONE OF THE CENTRAL ISSUES on which classical public finance theory has focused is the correct establishment of the net product of a national (or, for that matter, local) economy. The difference between gross and net social product is the expense necessary to maintain the source of a particular revenue. …