Taxing Environmental Abuse

Current Tax Matters
By JEYAPALAN KASIPILLAI

A significant problem associated with economic development is environmental abuse and its unforeseen disastrous effects.

Environmental degradation such as air and water pollution, deforestation, overuse and misuse of pesticides, shrinking of the ozone layer and global warming pose new challenges to most countries. Such problems are not alien to Malaysia.

Environmental abuse leads to the social cost of economic activities exceeding the social benefits they generate.

Environmental tax

Environmental taxes and subsidies are ways of sending proper signals to industry and consumers. These are necessary steps towards achieving sustainable patterns of consumption and production. For example, carbon tax will lower the consumption of fossil fuels while boosting the attractiveness of non-fossil-based renewable energy sources.

There is a range of possible fiscal changes in the existing tax structure that could be used to pursue environmental sustainability. Among others, two pertinent environmental objectives facing the Government revolve around improving air quality and sustainable waste management.

Haze is a constant threat and it can adversely affect tourism and the well being of the general public.

Spiralling economic activity and increased incomes have generated higher demand for personal travel and a hive of transport activity. Road transportation is recognised as the most air polluting industry in Malaysia and vehicles account for over 80% of the country’s air pollution.

Carbon dioxide represents a large part of all greenhouse gases emitted; hence, most policy objectives focus on carbon taxes. Advanced countries that have implemented some form of carbon taxes are Finland, in 1991; Norway and Sweden, 1991; and Denmark, 1992.

In Malaysia, there is no carbon tax but the Government provides incentives in the form of subsidies for the use of unleaded petrol. Hydrogen has the potential to lead to zero-emission transportation and will be an important fuel in the future. The Government should, therefore, exempt hydrogen from fuel duty, at least for a limited period.

Air pollution sources

Uncontrolled human activities result in deteriorating air quality. Human activities such as smoke emissions from motor vehicles, forest fires and electric power generation, lead to the emission of various pollutants into the atmosphere.

Fossil fuel combustion emitted by motor vehicle exhausts as well as industrial processes produce carbon monoxide (CO), a hazardous gas. According to the Statistics Department (2006), the concentration of CO is the highest in Port Klang, Petaling Jaya, Shah Alam and Kuala Lumpur compared with other parts of the country.

The main contributor to air pollution (82.3%) is mobile sources, and this is primarily due to a surge in the number of motor vehicles on the road. The remaining sources are industrial sectors and power stations.

The Government provides numerous incentives to promote the use of natural gas by motor vehicle owners. For example, local vehicle assemblers are given import duty exemption on chassis fitted with engines for natural gas vehicles (NGV), monogas buses and motor vehicles for transportation of goods. They are also given import duty exemption on NGV engines replacing diesel engines for buses and motor vehicles. Excise duty on motor vehicles should be reviewed to provide incentives to motorists who purchase less polluting vehicles.

The use of an indirect tax system provides an alternative to the introduction of market-based incentives for pollution control. The cost of implementation will be lower because it can use the existing administrative procedures available to the Royal Customs and Excise Department Malaysia.

Conclusion

The success (or failure) of remedial measures initiated by the Government to compensate for the abuse of the environment does not depend on isolated factors but on a complex combination of circumstances.

While full voluntary effort by each and every citizen to preserve the environment remains an elusive dream of every government, it is nevertheless prudent to take every practical measure to encourage its practice.

The Ninth Malaysia Plan reiterates the Government’s commitment to mitigating and minimising pollution and addressing other adverse environmental impact arising from development activities.

Among the efforts under way to achieve this are the Clean Air Action Plan, National Strategic Plan for Solid Waste Management and Integrated Coastal Zone Management Policy. The author welcomes these efforts but urges the Government to go a step further by formulating a comprehensive transport taxation policy to address some of the environmental sustainability objectives.




The writer is Professor and Chair of Malaysian Business at the School of Business, Monash University, Sunway Campus. He also serves as a member of the Taxation Law and Policy Research Institute, Monash University, Melbourne.