A working paper (WP) released by International Monetary Fund (IMF) has concluded that there is substantial scope for undertaking reforms in the emerging area of environmental taxation.
The WP dated July 2012 observes: “a quick look at existing environmental tax system in selected countries suggests that there is much scope for policy reforms, in terms of leveling taxes across emissions sources causing the same damage, better aligning taxes with external damages, and scaling back redundant energy taxes.”
It has recommended a system of upstream taxation of fossil fuels with a provision for tax refund to downstream industries for capturing emissions and thus reducing carbon and local pollution emissions.
Automobile fuel taxes should also account for congestion and other externalities associated with vehicle use, at until mileage-based taxes are widely introduced, it adds.
The paper captioned ‘Environmental Tax Reform: Principles from Theory and Practice to Date' suggests that emission taxes or their cap-and-trade equivalents with allowance auctions should form the centerpiece of efforts to promote greener economies.
It notes: “We have a reasonable sense of where, ideally, environmental taxes should be levied, and where they should not; of how revenues should best be used; and of pitfalls to avoid in tax design, like notches and differentiated treatment of the same emissions across different fuels or end users.”
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