Application of the principle of subsidiarity to environmentai taxes

2.1 ’’Subsidiarity" and environmentai poiicy

The practical development of EU environmental policy has occurred through a piecemeal accumulation of functions, partly in areas where other EU policies raised environmental issues. As other discussions of the implications of "subsidiarity" have argued (eg Begg et al, 1993), some of the EU’s most significant environmental policy measures, such as the Directives relating to water quality, are difficult to reconcile with subsidiarity. To a large extent, the EU’s involvement in these areas does not reflect a process of considered decision-making about the need for centralisation, so much as political competition between levels of government over individual areas of policy. This inter-tier competition will almost certainly continue to influence the division of responsibilities between the EU and member states, although it has now been constrained by the presence of the subsidiarity criterion in the Treaty. In considering how far the EU will develop new policies on environmental taxation, future developments will be - at least in part - governed by the strength of the "subsidiarity" case for a greater EU role in environmental policy generally, and also with respect to particular environmental taxes.

As with tax policy, the application of subsidiarity to define the EU’s role in environmental policy requires a balance to be drawn between the benefits from retaining discretion over policy at the national level, and the benefits from greater coordination at the EU level. There are two main lines of argument against EU harmonisation of environmental policy, where there are no strong arguments for coordination.

One is, again, that diversity in incomes, preferences and economic conditions between member states will typically call for diversity in policy measures. Assuming environmental quality to be a normal good, demand for environmental quality will tend to rise with higher incomes, and richer member states will then, other things being equal, wish to implement more stringent environmental policies than poorer member states. There may, in addition, be important differences in the need for particular environmental policy measures, reflecting differences in the assimilative capacity of the environment in different member states. Where the environmental effects of national policy are confined to the country concerned, different standards of environmental protection would, in these circumstances, appear desirable.

2. Role o f E U in Environmental Taxation

The second is that there are also some important reasons to prefer the status quo in environmental policy, over the introduction of a new, harmonised, EU-wide approach. Individuals and firms will already have adjusted their behaviour to the requirements of the various existing systems of pollution control and regulation in member states; in some cases these adjustments will have required costly changes in technology, or the sunk costs of industrial relocation. Changing the form of policy, even without any increase in the stringency of policy, could require substantial re-adaptation to the structure of incentives and requirements of the new policy, imposing adjustment costs without necessarily achieving any reduction in pollution.

These arguments amount to a substantial case for avoiding unnecessary harmonisation of environmentai poiicy. Nevertheless, there are a numberof importantenvironmentai policy problems and policy measures where nationai environmental poiicies have either environmental or economic spillover effects affecting other member states, warranting some form of EU intervention. Whilst some of these issues have implications for the coordination of environmentai policies in general, there are also specific considerations relating to the coordination of environmental taxes in particular.

The environmental spillover effects arise where environmental problems cross national boundaries, for example through airflows which transport national sulphur emissions and deposit them as acid rain in other countries, or through the impact of nationai emissions of carbon dioxide on global environmentai problems such as climate change. In these cases, which have been the subject of an extensive literature (eg Barrett, 1991 ; Maler, 1991, and many of the 1994 ilPF congress papers), coordination of national policies is central to achieving efficient environmental poiicies, although it is also, as the literature makes clear, extremely difficult to achieve.

The economic spiilover effects arise where the policy measures adopted at nationai level have economic effects which cross national boundaries, and which may in some cases have negative implications for living standards in other countries, or for the welfare of all countries taken as a group. The significance for policy of these economic spillover effects has been controversial, and two aspects of the economic spiiiovers are distinguished here. Section 2.3 considers economic spillovers from "indirect protection" arising through the formoi poiicy measures adopted at nationai level, whilst Section 2.4 discusses whether economic spillovers arising from the level of protection adopted at national level give rise to a case for internationai coordination or control of national policy-making.

In particular poiicy contexts, the environmental and economic spillovers from nationai environmental tax poiicy are likeiy to vary in relative significance. For certain local environmental problems, the need for EU involvement relates only -if at ail- to the regulation of economic spiiiovers, whilst for regional or global environmental problems it is the cross-country dimension of the environmentai problem which gives rise to the greatest need for coordination of nationai poiicies.

2. Role o f E U in Environmental Taxation

2.2 International environmental spillovers.

International bargaining and negotiation has become a key feature of environmental poiicy, as countries negotiate over how best to reguiate international environmental problems. As far as the EU is concerned, such negotiations have both an externai and an internal dimension.

With regard to the externai dimension, the EU has become a key piayer in the process of international bargaining over giobal environmental problems. How far the EU’s involvement in international negotiations ieads to more efficient bargaining and better outcomes depends, to a iarge extent, on the relationship between the EU and member states in the negotiation. It is possibie that, collectiveiy, the EU may be able to secure a better deal for its members than if each were to participate in internationai negotiations on its own behaif. Indeed, EU involvement may increase the chances of an agreement being reached at all, by reducing the number of independent participants in international negotiations. On the other hand, in practice, the involvement of the EU in international bargaining has introduced further complexity into some aspects of the process. In some cases, where the EU and member states have joint responsibility in internationai environmental negotiations, the involvement of the EU increases the number of actors in international negotiation rather than reduces it. Moreover, even were the EU to have a single seat at the negotiating table, the EU’s position in negotiation could not be formulated without reference, at some stage, to the member states; this introduces a second layer into the process, and may reduce the flexibility of the European position and slow down the process of agreement.

Internally, the EU faces a numberof environmental problems which cross member state boundaries; as in the case of the global environmentai problems, there is a need to coordinate the actions of member states, so as to ensure that the cross-country externality is adequately refiected in nationai policy measures. Whilst such coordination is an important function of the EU, its difficulties should not be under-piayed; the incentive and information problems which arise in reaching agreement on efficient giobal environmental policies apply with equal force to decision-making amongst the member states of the EU.

The form of most such negotiations, both globally and amongst the European countries, has been for countries to negotiate over their contribution to global abatement measures, in terms of the proportionate reduction of emissions from some initial baseline. Environmentai targets are thus set by internationai agreement, whilst the measures for implementation are left to individual countries to decide. This division of functions between target-setting and implementation is reflected, as Haigh (1989) notes, in the use of Directives in EU environmentai policy, which generally set targets, whilst leaving member states discretion over how these are to be implemented in national legislation. Where cross-country environmentai problems are involved, how far is such a division of responsibilities adequate, and consistent with the requirements of subsidiarity? In some circumstances it wouid, in principle, be desirable for international negotiations to go further than simply specifying quantitative targets for emissions reductions in individual countries, and for the EU roie thus to extend to agreeing the form of poiicy, as well as its intended outcome. One is that negotiating over tax rates rather than over quantitative emissions targets may in certain

2. Role o f E U In Environmental Taxation

circumstances achieve a more efficient pattern of abatement across countries. For example, where global pollutants are concerned, agreement on a uniform tax rate to apply in all countries may be more efficient than agreeing that all countries implement the same percentage reduction in pollution. Indeed, in some circumstances involving uniformly-mixed global pollutants a uniform tax rate on emissions across countries would constitute the optimal policy. Hoel (1994a) considers whether a carbon tax, levied to control climate change problems arising from the accumulation of global carbon dioxide emissions, should be uniform across countries. Ideally, he finds, the tax should be uniform. But there are two sets of circumstances in which non-uniformity across countries could be appropriate. One is where side-payments are ruled out; in this case (which Hoel, however, argues is hard to justify), non-uniform carbon taxes could be Pareto-optimal^. Another group of circumstances concerns the availability of other tax instruments which can be deployed to tackle other energy-related externalities®, and to tax energy within a structure of optimal revenue-raising taxes on commodities. Typically, the efficient rates to be set for these energy taxes will vary across countries; in the first case to reflect differences in abatement costs, the assimilative capacity of the national environment, and citizens’ preferences for environmental quality, and in the second case to reflect the range of factors underlying optimal tax structures. If separate taxes on energy were not available, and the carbon tax had to perform these functions as well as reducing carbon emissions, uniformity in the carbon tax rate across countries would be unlikely to be optimal. However, since all countries already levy substantial taxes on at least some types of energy, the case for uniformity across countries in a new coordinated carbon tax would appear to be strong. Another reason for specifying the form of policy, rather than simply emission reduction targets, may be the credibility of any agreement; agreeing to introduce a tax at a particular rate may make it easier for countries to verify that the bargain was being implemented, than where the agreement was simply to undertake unspecified measures to achieve a quantitative target for emissions reduction at some future date.

In some cases, therefore, the distinction between the EU’s role in target-setting and the role of the member states in choosing how to meet the targets, is unsustainable. For a number of reasons, including the "credibility" issues raised in section 1, the EU should have a substantial and legitimate interest in the form of environmental policy (eg in the choice between environmental taxes and regulation) as well as in its targets and objectives.

In addition, although the limited administrative resources available to the EU will frequently dictate a substantial role for national governments in administrative implementation of policies (including both conventional tax policies and environmental policies), even where the EU has primary responsibility for the determination of policy targets, there will be a need for this to be accompanied by facilities for monitoring and audit at the EU level, in order to ensure the credibility of policy.

4 See also Chlchilnlsky and Heal (1993), who reach a similar result when side payments are not available.