Carbon tax: an unjustified levy

The imposition of carbon surcharge by the government, in the place of the petroleum development levy (PDL), in the Budget 2009-10 on POL products has evoked a sharp reaction from almost all sections of society, as it will further push up POL prices, and trigger higher inflation.
In an intriguing development, the country representative of the IMF for Pakistan, Paul Ross has said that the decision to impose the carbon tax, at a fixed rate, was a decision by the Pakistan government, and that the IMF had nothing to do with it. The government is likely to collect Rs 122 billion under the carbon surcharge on POL products and Rs 12 billion from the carbon surcharge on CNG in FY2009-10.
According to the rates given in the Finance Bill 2009, Rs 8 per litre CSR will be charged on HSDO, Rs 10 on petrol, Rs 6 on kerosene, Rs 3 on light diesel oil and Rs 6 per kg on CNG. (The government is reported to have meanwhile withdrawn the carbon surcharge on CNG). Some analysts believe that a major reason why this "unique" levy has been imposed, in place of the petroleum development levy, is that it could yield a higher tax collection as compared to the existing collection of the PDL.
The government had two options: either to notify the collection of PDL or introduce yet another tax. It has gone for the latter option. There is a perception, that even otherwise, imposition of a fixed carbon levy might have been reckoned by the economic managers as an easier option, because it could be introduced through a Finance Bill.
Meanwhile, an amount of Rs 178 billion is expected to be received through the Friends of Pakistan Consortium, while the fiscal deficit is expected to be 4.9 percent of GDP for the next financial year. Globally, the reason for levying carbon tax is to generate additional revenue for containing environmental pollution in the country.
Technically speaking, the carbon tax is thus an environment tax on the emissions of carbon dioxide and other greenhouse gases. The purpose of the tax is to protect the environment by reducing the emissions of carbon dioxide, and thereby resisting climate change. Carbon tax is implemented by taxing the burning of fossil fuels - coal, petroleum products, such as gasoline and aviation fuel, and natural gas - though only in proportion to their respective carbon-content and the release of carbon dioxide into the atmosphere.
However, as the carbon tax is likely to hinder growth, it has been termed as an anti-growth tax, which will further burden the economy. Pakistan's economy is currently facing challenges in terms of materialising promises of $2 billion made by the Friends of Democratic Pakistan, during the Tokyo conference for FY2009-10. As Ross has said, the key challenge for Pakistan today is to reduce vulnerability to external shocks, which have increased manifold due to low revenue generation.
And the lowest tax-to-GDP ratio of 9-10 percent has resulted in the shrinking of liquidity for spending on development projects, especially in the social sector. Cuts have already been proposed in social sector allocations in PSDP, due to the economic crunch faced by the country. Macroeconomic instability, over the last few years, because of fuel and food shocks has created fiscal imbalances.
There are said to be as many as 21 types of taxes and levies on POL products in Pakistan, which has fuelled inflation, as experts maintain that every 10 percent increase in fuel cost adds one percentage point to the inflationary pressure. This has adversely impacted social stability - an essential requirement for attracting investment, and achieving a higher growth rate.
Instead of levying such taxes on general consumers, the government needs to broaden the tax base by bringing under the tax net the sectors that have hitherto remained either untaxed or partially taxed. Secondly, it should further streamline the tax collection system to generate higher revenue. Thirdly, it should cut down the expenditure incurred on the running of the day-to-day administration.
All inessential perks and privileges enjoyed by the political and other heavyweights should be withdrawn, to reduce an unnecessary drain on the national exchequer. Judicious utilisation of loans and grants received from foreign governments and international-lending institutions is absolutely essential. Such measures can also help us break our begging bowl and enable us to be a respectable and responsible member of the international community. By the way, the "miracle" is not hard to achieve, as many countries attaining independence after us have already done it.