Nearly 14 months since it was first announced, a Carbon Tax has been put into effect in Sri Lanka w.e.f. 1st January 2019. The tax first made its appearance in the Budget 2018 speech of the Minister of Finance Mangala Samaraweera in November 2017. The Finance Minister has announced this week, that the tax would come into effect from 1st January 2019, but payable from 2020 onwards. Presumably, the move is to shore up Treasury revenues amidst challenging budget deficit targets and gains from income tax reforms that are yet to fully materialize, but no doubt also to encourage greater environmentally-conscious behaviour by citizens. But, like many policies in Sri Lanka, policymakers and bureaucrats spend little time on getting the design right, and weak design is often the achilles heel of good policy ideas in this country. Here are five reasons why I think the design of this tax is flawed:
- Unless revenue from this Carbon Tax is earmarked and ring-fenced specifically for green initiatives (staying true to the laudable objectives stated in the Budget speech in 2017), this new tax would not achieve the intended goals and is nothing but another revenue raising measure for the general Treasury to support the ever-widening Government expenditure. The Ministry of Finance (or the Department of Motor Traffic) should set up a special fund to ring-fence the revenue from this tax and have it spent specifically on meaningful green initiatives.
- There is no point in having a Carbon Tax that exempts electric vehicles when the incentives are not properly aligned for electric vehicle purchase – specifically, the unfavorable and frequently changing import duty regime for electric vehicles. According to the latest available vehicle registration data (courtesy JB Securities), monthly electric car registrations recorded just 6 units in November 2018, down from 5 units in October 2018 and 5 units 12 months ago. This is the same trend seen over the past couple of years, because buyers don’t see the duty regime as attractive. If we are to substantially increase EV usage, then the duty structure on EV should be substantially more favorable too.
- There is no point in having a Carbon Tax – that is purported to have been introduced on environmental considerations – that exempts electric vehicles when the electricity generation in Sri Lanka is dominated by fossil-fuel burning sources. According to the CEB’s generation data from 2017, nearly 70% of Sri Lanka’s electricity generation was with thermal oil (34%) and thermal coal (35%). Only 27% was generated by hydro (major + mini) and 4$ by other renewable energy (solar, wind, dendro, biomass etc.) Unless the design of the tax specifically incentives households using rooftop solar to charge their EVs, rather than pulling from the general grid, then the design of the Carbon Tax is flawed given the high fossil-fuel burning thermal generation of electricity in the country.
- The design of the Carbon Tax shouldn’t really be based on engine capacity, but instead of usage. Take a simple example of Mr. Silva vs. Mr. Wijewardena. Mr. Silva owns a car, but uses it only on weekends – to take the family around, to go and do weekly shopping, etc. During weekdays, for office etc., he travels by public transport. His car burns less than 10 litres of fuel every week. Mr. Wijewardena also owns a car, but he uses it every day and to travel everywhere. He never uses public transport, and burns nearly 40 litres of fuel every week. So, by not taxing based on usage, both Mr. Silva and Mr. Wijewardena both pay the same amount of Carbon Tax, even though logically they have very different environmental impacts. At a time when a fuel price formula has been introduced, it would have been better to tag on a small percentage of Carbon Tax on at-the-pump fuel, in order to link it to usage.
- The current design of the tax that penalizes older vehicles in favour of newer vehicles (presumably using vehicle age as a proxy for emissions content) is unnecessary and flawed since all vehicles have to undergo a compulsory annual emissions test to check if the vehicles emissions are below the permissible levels. To elaborate this point, I borrow from the excellent article on Economynext on the subject:
“In another peculiar basis, cars newer than 5 years are charged 50 cents per cubic centimetre of engine capacity while cars between 5 and 10 years are charged twice that. Cars over 10 years are charged three times. But all cars – except classic cars – have to pass an emission test, making a mockery of the basis. Cars that do not pass the test have to tune the engine or repair it. Older cars are generally owned by poorer and older people, who hardly use it, making Sri Lanka’s carbon tax peculiarly iniquitous. Many retirees keep an older car for weekend shopping or to go the doctor. Arguably new cars are bought by richer people. Arguably they would go around more.”
– Economynext, 9th Jan 2019, ‘Sri Lanka defends feel-the-pain carbon tax as eco-tax trigger riots in France’
Having said all this about its flawed design, the beauty about public policies are that they can be adjusted according to user feedback and sensibility. I hope the implementers will consider tweaking the design if they see that any of the above design issues merit attention. Ultimately, I am sure we all do care about placing Sri Lanka on a more green-growth and sustainable development trajectory, and so any intervention that is well designed and truly and genuinely helps us achieve that must be welcomed.
Disclaimer: Views expressed in this post are entirely personal and not to be associated with my official roles. Also, I have not touched on (as I am not expert in) the impact of a carbon tax on the usage of fossil fuels or vehicles, and for that, do read widely, since the jury is still out on the empirical evidence.