Preliminary considerations on the usability of custom duties as environmental taxes

Di Francesco Farri -

Abstract

The article takes inspiration from the requests of environmental activists regarding the need to reduce Co2 emissions and examines the possibilities offered by tax law to take them into consideration. Given that most emissions come from countries other than those most likely to apply ecotaxes, the conclusion proposed is to use customs duties for environmental purposes, i.e. as tools to induce less environmentally conscious States to reduce their own Co2 emissions.

Considerazioni preliminari sull’utilizzabilità dei dazi doganali come ecotasse. – L’articolo prende ispirazione dalle richieste degli attivisti ambientalisti in merito alla necessità di ridurre le emissioni di anidride carbonica ed esamina le possibilità che il diritto tributario offre di tenerne conto. Considerato che la maggior parte delle emissioni proviene da Paesi diversi da quelli maggiormente propensi all’applicazione di ecotasse, si propone la conclusione di utilizzare i dazi doganali con finalità ambientali, ossia come strumenti per indurre gli Stati meno attenti all’ambiente a ridurre le proprie emissioni di anidride carbonica.

Summary: 1. Environmental matters and the role of law. 2. The possible environmental function of tax law. 3. The limits of environmental effectiveness of tax law: national powers and global problems. 4. The non-existence of binding international law obligations on the matter. 5. The key to giving global effectiveness to national tax authorities: the use of customs duties as environmental taxes. 6. Conclusions

1. “Any plan or policy of yours that doesn’t include radical emission cuts at the source starting today is completely insufficient for meeting the 1.5- or well below 2-degree commitments of the Paris Agreement“. With these words, Greta Thunberg warned Davos World Economic Forum on January 21, 2020. These are words that make you think. In fact, there is no doubt that many Western countries, starting with the Member States of the European Union, have adopted multiple measures aimed, directly or indirectly, at reducing carbon dioxide emissions. The words and data brought by the environmental protection associations, and effectively summarized by the Swedish activist, therefore, highlight not only the inertia of the States but also the fact that the measures adopted so far failed to produce the expected results on climate changes. The reason for this can be twofold. On the one hand, in the trend that climate changes seem to have to be independent of human habits: some authoritative scientists support this theory (see the European Climate Declaration signed by 500 scientists and delivered to the General Secretary of the UN on the 23rd of Sept., 2019). On the other hand, it could consist of the ineffectiveness of the measures taken so far to identify and conveniently combat the problem.

Law experts must leave the assessment of the first profile to scientists and focus on the second.

The second profile can also be the subject of diversified theories and methods. A famous author of science fiction novels, as an example, came up with a very well known theory by which a possible solution to the excessive production of greenhouse gases would be to raise and eat fewer animals to reduce the emissions of gas from mammals (see Foer J.S., We are the weather. Saving the Planet begins at breakfast, New York 2019). This approach is completely irrelevant from a legal standpoint. Along the same line, some also concluded that it would be good to limit the number of births, in order not to overpopulate the planet (see Wynes S., Nicholas K.A., The climate mitigation gap: education and government recommendations miss the most effective individual actions, 12 Environ. Res. Lett., n. 7, 2017.07.12). This thesis also has no juridical relevance however, unlike the first one, it is assessable with the tools of law: since law is a tool aimed at the fulfillment of man, considering the value of environment protection at a higher level than that of the development of Humanity, to the point of limiting the latter to favor the former, is a juridically aberrant thesis, as it is radically contradictory, as well as in contrast with the legal values upon which many current legal systems are based.

The juridical approach is, therefore, different from the ones mentioned above. It must: (i) draw from science an indication of which elements are likely to have a causal impact on the problem to be solved; (ii) verify which are the possible appropriate tools to intervene effectively on these elements; and (iii) configure these tools in such a way as to balance them with the rights and powers of the various parties involved.

2. Unfortunately, all three of the previous steps are characterized, to some extent, by evident margins of uncertainty. Assuming as a premise a scientific indication over another of a different sign, choosing one possible instrument of juridical reaction instead of another, constitute, indeed, largely discretionary choices.

Let’s focus our attention, for a moment, on Greta Thunberg’s words reported at the beginning of this paper: they undoubtedly constitute the translation of a position that many scientists support, namely that one of the elements that have the greatest causal impact on global warming is the production of carbon dioxide. Let’s consider this assumption to be correct. The question now is to identify possible tools to deal with the excessive production of carbon dioxide. And it is here that legal reflection must be expressed to the best of its possibilities and creativity in the various areas in which it has an impact. If environmental protection is considered an essential value, and if one of the main threats to it is the emission of carbon dioxide, a coherent legal reaction could involve the application of criminal law: criminalize those who produce carbon dioxide. It is easy to understand, however, how such a solution should be circumscribed: even the breathing of members of parliament that approves such a law produces, in fact, carbon dioxide. And this is how, in the setup phase, the possible criminal reaction will necessarily have to be limited to specific emission limits and specific activities. Excluded, by its own nature, the maximalist criminal option (criminalizing those who produce carbon dioxide), administrative law can take on central relevance: it provides, in fact, the appropriate legal tools to control and fix emission quotas.

It is important to ask ourselves the question of whether tax law can also offer tools to reduce the excessive production of carbon dioxide, that is, to help remove what – in the hypothesis now considered – represents one of the main causes of global warming.

The function of the taxes is truly that of making available to the community that adopts them, an income aimed at financing their common expenses. In order for it to be defined as a tribute, and not, for example, a sanction or a simple fee, this income must be related to economic events brought about by the taxpayer and be free of a synallagmatic link with public services provided to the taxpayer. The connection of the tax with economic events, however, means that it can also be used to incentivize or discourage economic events. And it is precisely to this extra-tax function of the tax that is linked to the possibility of establishing taxes with the function of promoting the environment, i.e., the so-called eco-taxes.

3. Anyone wishing to take up the cry of environmental associations and translate it into legal norms with the help of taxation law has, therefore, the possibility of doing so. It is just a matter of completing the passage referred to in point (iii) of the previous par. 1: configure the tax instrument, the ecotax, in such a way as to match the tax for environmental purposes with the rights and powers of the various parties involved.

From this point of view, a very important coordination problem arises right away: while the problem of global warming is, precisely, a problem by global definition, the application of taxes is a question closely linked to the sovereign power of each community and, in particular, the sovereignty of individual States. There may, therefore, be state communities that, in their free decision, decide not to discourage the economic activities which are harmful to the environment. As it’s easily understandable, this possibility greatly reduces the effectiveness that the tax system may have to effectively tackle the problem of global warming. Among other things, the data show that the vast majority of carbon dioxide emissions are caused by countries different from the ones where environmental issues are traditionally most highly perceived and valued, also from a legal point of view. Thus, it is fundamentally useless, at a global level, to reduce emissions in Europe if, for example, they continue to increase in Asia.

4. More in detail, there are no instruments to legally oblige a State to make specific tax decisions in taxation law matters since in this environment do not exist either (i) a customary law, or (ii) general principles recognized by civilized nations along the lines of article 38 of ICJ Statute.

(i) Under the first profile, there is authoritative doctrine (Avi-Yonah R.S., The structure of international taxation: A proposal for simplification, in 74 Texas Law Review, 1996, 1304; Id., Does customary international law exist?, in Law and Economics Working Papers, 2019, n. 161) that claims that the body of the many conventions against double taxation based on the OECD model gives birth to customary international law. In this regard, it is necessary to be clear. If we focus on the requirement of the general and consistent practice of the State, there is no doubt that the principles of conventions against double taxation meet this requirement. If instead, we look at the requirement of opinion iuris ac necessitatis, it is far more doubtful that it subsists for principles of conventions against double taxation. As is known, in fact, not all States adopt these conventions without relevant consequences under the profile of international law. Avi-Yonah R.S. himself, The structure of international taxation: A proposal for simplification, cit., 1304 note 5,  raises the problem whether a taxpayer can rely on customary international law in a national law that contravenes the agreed-upon consensus, and this problem, as is well known, has a negative solution. Neither Tomazela Santos R. – Rocha S.A., Tax Sovereignty and Digital Economy in Post-BEPS Times, in Rocha S.A. – Christians A., eds., Tax Sovereignty in the BEPS Era, Alphen aan der Rijn 2017, 34-36 bring decisive reasons to demonstrate that territoriality and the ability to pay can be considered international customary law in tax matters. Actually, the observation that States deviate with impunity from these criteria when they are in need, conclusively demonstrates, together with the observation that international law serves precisely to bind States even when they find themselves in the most critical moments, that they lack the requirements to consider these principles in such tax matters as international customary law (after all, the jurisprudence-related precedents of international law courts that Tomazela Santos R. – Rocha S.A. cited as support do not pertain to fiscal matters but to other fields). It, therefore, appears correct to conclude (with Brauner Y., An essay on BEPS, Sovereignty, and Taxation, in Christians A., ed., Tax Sovereignty in the BEPS Era, cit., 79.) that the corpus of international tax law stipulates a conventional practice rather than a true habit able to give birth to international customary law.

(ii) Under the second profile, the question of the general principles recognized by civilized nations in taxation law arose with particular regard to the subject of the international cogency of the principle of “reasonable link” in tax matters between taxation powers and the territory of the State. Even under this point of view, however, the answer must be negative: in fact, there are no precedents on the matter, and also the so-called Lotus case, which is often referred to on the subject (see Qureshi, A.H., The freedom of a state to legislate in fiscal matters under general international law, 41 in Bulletin of International Fiscal Documentation, 1987, 14-21; Schoueri L.E., Princípios no Direito Tributário Internacional: Territorialidade, Fonte e Universalidade, in Ferraz R., ed., Princípios e limited da tributação, São Paulo 2005, 334 ff.; Kokott J., The genuine link requirement for source taxation in public international law, in Haslehner W. – Kofler G. – Pantazatou K. – Rust A., eds., Tax and the digital economy: challenges and proposals for reform, Alphen aan der Rijn 2019, 10), is not about the tax point of view. A fortiori, it must be excluded that there are, at present, general principles recognized by civilized nations in the field of environmental taxation.

5. If current international law does not offer instruments to bind States to adopt specific tax measures, the tax systems of the various States are instead equipped with an instrument of factual persuasion towards other States. It is the ancient but always new instrument of customs duties.

Duties can typically be used to raise the internal price of goods whose consumption is to be discouraged and, therefore, to direct the internal market towards goods different from the ones coming from other countries. The purposes for which we may want to discourage the consumption of certain goods or goods coming from certain given countries can be many and are not always noble: however, there is no doubt that thee can also be noble ones and in particular those aimed at inducing the community of origin of the goods to behave more consistently along the lines of some values ​​which are important for the importing country. In this perspective, communities attentive to environmental problems could legitimately, and indeed should impose duties on goods coming from other communities where environmental protection is not respected. And if the scientific assumption mentioned at the beginning of this paper is assumed to be correct, namely that one of the main causes of damage to the environment is carbon dioxide emissions, States that care about environmental protection could, indeed should, impose customs duties on goods produced in states that do not do enough to reduce their emissions.

On the technical level, the use of duties as an eco-tax requires, on the one hand, to identify the products to be subject to the duty and, on the other hand, to establish the relative tariff.  If the duty is to be set up as compensation, the products to be subject to the tax will essentially be those related to productions with greater environmental impact; moreover, the tariff will have to be aimed, in fact, at increasing the price of the imported goods to compensate for the higher price of the same goods produced domestically due to the higher costs imposed on internal producers to meet environmental policy needs and restore, thus, a condition of equal competitiveness. On this point, there are important studies by the OECD. These studies have demonstrated the trend of compatibility of a Border Tax Adjustments system (BTAs) configured with the system of WTO treaties (see OECD, The political economy of environmentally related taxes, Paris 2006, 89 ff.): this is true especially under the general exceptions provisions referred to in lett. b and g of art. XX of the GATT. And it is in this direction that the Carbon Border Tax proposed by the newly established European Commission chaired by Ursula Von Der Leyen seems to be going ahead (see Von Der Leyen U., A Union that strives for more. My political agenda. Political guidelines for the next European Commission 2019-2024, paragraph 1).

However, the duty as an eco-tax doesn’t necessarily need to be structured as a compensation duty. The “persuasion” effect caused by the duty on States that do not respect the environment will, in fact, be even greater there where the products are subject to the duty for the sole fact of coming from a non-environmentally friendly country, even if they belong to a different segment than those having greater environmental impact. It is all about identifying the criteria according to which a product, possibly manufactured by assembling pieces produced in different countries or marketed through companies resident in countries other than the manufacturing one, may be considered as originating from a non-environmentally friendly legal system: but this is, essentially, a technicality, a definition problem, typical of customs law, and to which the existing regulations on the country of origin can provide good general guidelines. And the effect of “persuasion” caused by the duty on States that do not respect the environment will be even greater where the amount of it will not be aimed at restoring a condition of equal competitiveness on the domestic market of the prices of goods imported from non-environment friendly countries compared to those of the goods produced domestically but is aimed at making domestic-made goods more convenient than imported ones. In this perspective, paradoxically, the application of tariffs to products of Chinese origin, proposed by Donald Trump, lends itself to producing a substantially more significant eco-tax effect than the application of further limits on carbon dioxide emissions to domestic operators: in fact, carbon dioxide emissions from China are twice as high as those from the USA (see the data of the Global Carbon Project of 2018.12.05, according to which China has produced 10,3 Gt of Co2 in 2018 against 5,4 produced by the United States).

The exemptions under art. XX of the GATT lend themselves to find application also in case of duty configuration according to these modalities. Otherwise, moreover, we would be faced with a situation in which a system of treaties such as the WTO would prevent the full use of the duty for environmental protection purposes. This would pose an antinomy problem between such binding international treaties as the WTO ones: in this case, the WTO would prevent taking the necessary measures to effectively pursue, for example, the reduction goals on carbon dioxide emissions envisaged by the COP21 Paris Agreements of September 2015. And in this antinomy, it is clear that the value of protecting the environment prevails vis a vis to that of economic globalization. The WTO treaties are not Gospels: they can be modified, and even non applied, there where they are no longer up to speed with the needs of humanity.

6. In conclusion, as global warming is a global problem, we take seriously the use of the tax system to protect the global environment. This today means, above all, placing customs duties at the center of the fiscal policy agenda. Greta Thunberg, in her opening speech in Davos, recalled that “no political ideology or economic structure has been able to tackle the climate and environmental emergency and create a cohesive and sustainable world”: an environmentally oriented application of customs duties, by the States that care about environmental protection, towards the products originating from non-environment friendly States, can be the answer we are seeking to persuade everyone to respect the environment. Everyone, including those who have so far carefully dodged the issue.

Bibliography

 

Von Der Leyen U., A Union that strives for more. My political agenda. Political guidelines for the next European Commission 2019-2024; Haslehner W. – Kofler G. – Pantazatou K. – Rust A. (eds.), Tax and the digital economy: challenges and proposals for reform, Alphen aan der Rijn 2019; Kokott J., The genuine link requirement for source taxation in public international law, in Haslehner W. – Kofler G. – Pantazatou K. – Rust A. (eds.), Tax and the digital economy: challenges and proposals for reform, Alphen aan der Rijn 2019; Avi-Yonah R.S., Does customary international law exist?, in Law and Economics Working Papers, 2019, n. 161; Rocha S.A. – Christians A. (eds.), Tax Sovereignty in the BEPS Era, Alphen aan der Rijn 2017; Tomazela Santos R. – Rocha S.A., Tax Sovereignty and Digital Economy in Post-BEPS Times, in Rocha S.A. – Christians A. (eds.), Tax Sovereignty in the BEPS Era, Alphen aan der Rijn 2017; Brauner Y., An essay on BEPS, Sovereignty, and Taxation, in Christians A. (ed.), Tax Sovereignty in the BEPS Era, Alphen aan der Rijn 2017; Milne J.E. (ed.), Environmental Taxation and the Law, Cheltenham 2017; Pistone P., Global Co2 Taxes, in Intertax, 2013, 2-14 and in Milne J.E. (ed.), Environmental Taxation and the Law, Cheltenham 2017, 210-222; Milne J.E. – Andersen M.S. (eds.), Handobook of research on environmental taxation, Cheltenhem 2012; Thalman P., Global environmental taxes, in Milne J.E. – Andersen M.S. (eds.), Handobook of research on environmental taxation, Cheltenhem 2012, 456-477; Avi Yonah R.S. – Uhlmann D.M., Combating Global Climate Change: Why a Carbon Tax is a Better Response to Global Warming than Cap and Trade, in Stanford Environmental Law Journal, Vol. 28, No. 3, 2009, 2-50; OECD, The political economy of environmentally related taxes, Paris 2006;  Ferraz R. (ed.), Princípios e limites da tributação, São Paulo 2005; Schoueri L.E., Princípios no Direito Tributário Internacional: Territorialidade, Fonte e Universalidade, in Ferraz R. (ed.), Princípios e limites da tributação, São Paulo 2005, 334 ff.; Avi-Yonah R.S., The structure of international taxation: A proposal for simplification, in 74 Texas Law Review, 1996, 1304 ff.; Qureshi, A.H., The freedom of a state to legislate in fiscal matters under general international law, 41 in Bulletin of International Fiscal Documentation, 1987, 14 ff.

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