How can environmental taxes increase the sustainability of economic growth in low-income countries?

Environmental taxes can be defined as any tax imposed on a base with a proven negative impact on the environment – examples include import tariffs on plastic material, charges on traffic congestion, or excises on fertiliser. They have been widely promoted as a way to reduce environmental damage while at the same time raising revenue from polluters. Because they are typically calculated on tangible commodities and volumes, they are also often seen as harder to evade than some other taxes that are based on more abstract concepts, making them attractive instruments for low-income countries.

The environmental tax which has been discussed the most is undoubtedly the carbon tax, which is levied on the carbon content of different goods, strongly correlated with the amount of fossil fuels required in their production. Carbon taxes are seen as an essential tool to reduce greenhouse gases, and there is an almost universal support for their introduction across the globe. This includes Sub-Saharan Africa, with the United Nation, the International Monetary Fund, and the OECD all promoting their implementation in various countries in the region at different points in time.


Carbon taxation to the rescue: but is it really?

However, there is limited evidence that African governments see them as a domestic priority. According to the World Bank Carbon Pricing Dashboard, only Gabon and Senegal are currently considering their introduction, following the introduction on one in South Africa in 2019, which arguably has not achieved much to date. In itself, this is not surprising, as Africa has the lowest per capita emission in the world. Although sectoral emissions from energy and transportation have been on the risethe majority originates from land use change and deforestation, which are usually outside the scope of carbon taxation. While one could argue that carbon taxes can still play a significant role in making investments in fossil fuel generation less attractive, renewable energy generation is already cheaper across most of the continent. What is holding back investments is a lack of financing solutions, high perceived risk and extensive fossil fuel subsidies. Indeed, finding a politically acceptable way to reduce fossil fuel subsidies and to increasing renewable energy deployment, which in Africa lags behind other regions, will be key to ensuring sustainable development across the continent.

This will require a combination of things, two of which stand out. First, high-income countries should finally meet their pledge to direct USD100 billion per year to climate finance, something they are still falling awfully short of. But they also need to operationalise the loss and damage fund which was agreed to at COP27, whose ground set-up is proving contentious. Both of these will be necessary to meet the current financing need of adaptation, mitigation and renewable energy generation across much of Sub-Saharan Africa. But just as importantly, this is also the only morally justifiable course of action given that the countries bearing the brunt of climate change damage are those which least contributed to it, as only South Africa appears as one of the top-20 historical emitters of greenhouse gases. Second, the revenue currently channelled towards fossil fuel subsidies, which predominantly favour richer household, must be redirected to increasing affordable access to modern energy for low-income households – something which might be renownedly hard, but also achievable.

While carbon taxes might still play a role in the medium term in Sub-Saharan Africa, they do not contribute to addressing either of these obstacles, and African governments should not use the scarce political capital at their disposal for fiscal reform to pursue policies which lack immediate environmental or revenue benefits. This seems to have been implicitly recognised at the recent Africa Climate Summit in Nairobi, where the final declaration calls for a global carbon taxation – augmented by a financial transaction tax – rather than committing to introducing carbon taxes domestically. This is a far more logical approach, and is also why measures such as the carbon border adjustment mechanism recently introduced by the European Union should carefully consider their treatment of least developed countries.

While existing evidence is still scarce due to the novelty of the scheme, early analysis suggests that some low-income countries, such as Mozambique, while suffer significantly from its introduction. Furthermore, it is highly doubtful that this approach will create the particular goodwill across impacted countries required to push through reforms as complex as a carbon tax – it might in fact just do the opposite. If the European Union does not take action to exempt least developed countries, or decides to redirect the revenue collected from this group of countries to where the export originated, the carbon border adjustment mechanism will increase rather than reduce international inequalities.


So, is there nothing that environmental taxes can do?

This does not mean that fiscal policies cannot contribute to addressing developmental and environmental issues across Sub-Saharan Africa, but rather than the issues they can contribute to are not those currently receiving the most attention. For example, tax policies can be used to tackle urban pollution originating from poor waste management and ageing vehicle fleets, as well as being part of the policy mix used to address unsustainable forest management. These are all pressing issues across the continent. Air pollution is one of the major causes of premature death in the continent and it is strongly connected to the prevalence of biomasses in the energy mix of low-income households, in itself a cause of deforestation, while ageing vehicle fleet lead to frequent road fatalities. Similarly, poor waste management is connected to a variety of health issues in urban areas, with the roadside burning of waste, or animals consuming waste, both of which in turn potentially introduce waste back into the food system.

Indeed, recently completed work indicates that these are all areas in which African policymakers themselves think that fiscal policies could help. For example, remodulating import tariffs to disincentivise the acquisition of second hand vehicles could be relatively easy and will not likely be regressive in a region in which car ownership is still seen as a luxury good. This can be combined with vehicle ownership taxes, which remain virtually absent on the continent, whose revenue can be earmarked for the provision of public transport to the many urban poor.

Taxes have also been the main source of funding for waste disposal across high income countries, but remain incredibly scarce across the continent. When present, they tend to be flat-rate charges, which makes them inherently regressive, further exacerbating the impact on lower-income household which are already more likely to suffer the health consequences of poor disposal. A more progressive way to improve waste management would be to link them with the often-progressive rate of property taxation, or with surcharges on water and electricity bills, although low collection rates amongst African power utilities and issues with property tax systems coverage and equity must be kept into account.

The quest for the rationalisation of the fiscal treatment of forests in tropical areas has been long and not very successful, but new approaches are still being proposed. Available evidence indicates that reducing elite capacity to extract illegal rent from the sector will be a key component in this process, as well as the conceptualisation of forests as assets with a long term value, rather than a source of quick government revenue. However, expanding access to modern energy use and affordability of food staples for lower income households will be just as important as fixing forestry tax systems, considering how charcoal production and expansion of agricultural land remain key drivers of deforestation in the continent.


Just environmental taxation domestically and internationally

The tax system can and should be used to address environmental issues, but it is important to ensure that this is not done at the expense of its progressivity. Given the high reliance of lower-income households on natural resources, combined with the often-limited capacity of providing direct support of African governments, environmental and revenue considerations should be carefully balanced with socio-economic ones in the policy process. Some of the examples provided above demonstrates that there are various theoretical instances in which fiscal policies can play a role in reducing environmental damages ensuring that wealthier citizens shoulder the appropriate burden. This is for example the case with taxation of privately owned vehicles whose revenue is earmarked for funding public transport, or for waste-management taxes which increase progressively with property values or energy and water consumption.

A similar approach should also be applied in the international arena. High-income countries will do well to remember that they are the cause of the climate crisis, and should not unfairly burden low-income countries with facing its consequences, including by forcing them to adopt policies not fit for their context.


This blog was original published by Tax Justice Network.

Giovanni Occhiali

Dr Giovanni Occhiali is a Development Economist based at the Institute of Development Studies, where he works on a number of projects related to Tax Administration and Compliance, Tax and Governance and co-leads ICTD’s capacity building programme together with Dr Max Gallien. His research focuses on Sub-Saharan Africa, and outside of the field of taxation his main interests are energy economics and industrial policies. He holds a PhD from the University of Birmingham and prior to joining ICTD, he was a Researcher at the Fondazione Eni Enrico Mattei and an Overseas Development Institute Fellow at the National Revenue Authority of Sierra Leone.