Chapter VI

Environment-Related Taxes in Vietnam



Chapter VI.

Environment-Related Taxes in Vietnam 169

Environment-Related Taxes in Vietnam
Takuji Yano* and Nguyen Van Phung**
1.

Introduction

Sustainable growth is a basic, significant and long term goal for every country,
and environmental protection is becoming a major issue, of equal importance to
economic growth. For developing countries, especially transitional economies like
Vietnam, environmental protection policy should be established and implemented
alongside other relevant policies, such as those restructuring the economy, enhancing
economic growth, eradicating poverty and creating jobs.
After 20 years of renovation, Vietnam has recorded encouraging achievements
in economic growth, national security and social order, poverty alleviation, urban and
rural planning, development investment in infrastructure, development of industrial
parks, removing industrial factories from urban and densely populated areas in order to
further facilitate economic development and, at the same time, tackling pressing
environmental problems. These measures have been carried out extensively nationwide.
Nowadays, environmental impact assessments are a must and have become a standard
and a tool to appraise investment projects from environmental and natural resource
protection perspectives. However, the prevention and minimization of environmental

pollution, control of environmental degradation, and reduction in the intensity at which
resources are used has recently not met expectations.
In addition to propaganda and education to increase community knowledge of
the community on environmental protection, and the adoption and application of cleaner
technology in production operations etc., Vietnam is studying the application of
economic tools for use in environmental management. Of these tools, taxes and
environment-related charges are drawing the attention of policy makers, and economic
entities, especially businesses. Recently issued legal documents concerning tax and
charges have incorporated provisions on the rights and obligations of organizations and
individuals toward the environment from two aspects. Firstly, provisions that provide
guidelines to encourage and provide incentives for environmentally friendly behavior,
preventive and treatment measures; secondly, provision on financial obligations of
objects that involve actions of exploitation and use of the environment, and emission of
polluted matters in order to partially compensate for the cost of the social welfare loss
on the environment.

*

Takuji Yano is Deputy Director, Mutual Assistance Insurance Division, Budget Bureau, Ministry of
Finance, Japan.
**
Nguyen Van Phung is Deputy General Director at Tax Policy Department, Ministry of Finance,
Vietnam. This paper is written in the framework of the joint research project on tax policies between
Policy Research Institute of Japanese Ministry of Finance and Vietnamese Ministry of Finance.
Issues addressed in this paper are the authors’ personal views, nothing reflecting official positions of
Japanese Ministry of Finance and Vietnamese Ministry of Finance. The authors wish to acknowledge
their thanks for Japanese and Vietnamese researchers participated in the project and former and
present staff of Office of International Research and Cooperation, Policy Research Institute,
Japanese Ministry of Finance to help this project, especially to Mr. Toshihiro Nakanishi and Mr.
Katsutoshi Sakaji.



170

According to the proposal as part of tax system reform strategy with the year
2010 in mind, approved by the Prime Minister in the form of Decision No.
201/2004/QD-TTg, dated December 06, 2004; the environmental protection tax law
shall be promulgated in 2008. In addition to currently existing taxes relating to the use
and exploitation of environmental resources and factors (land and natural resources),
certain new taxes shall be studied and submitted for adoption at appropriate times.
Under the common title “Environmental Protection Tax”, they shall be issued initially in
form of an Ordinance and target polluting objects, so as to generate financial revenue
for environmental protection and ecology, and contribute to preventing the transfer of
“dirty” technology into Vietnam. Nevertheless, in order to implement effective taxes
that satisfy the specified objectives and requirements, a number of tasks should be
performed from the stage of study, the formulation of alternatives and outlines,
submission for adoption, in accordance with the procedures of drafting legal documents,
to the stage of preparing the necessary conditions for implementation.
Within the framework of the joint research project between VMOF and PRI of
JMOF, part of the technical assistance content on policies involves studying, and
proposing certain types of taxes and charges relating to environmental protection for
adoption in the near future. This paper explains some content and initial research results
acquired by Vietnamese researchers, based on the key structure of the research subject
agreed with Japanese researchers.
This paper has five parts. Part One discusses the situation of applying taxes and
charges relating to environmental protection in Vietnam, and some suggested
recommendations for further consultation with Japanese researchers. Part Two discusses
the introduction of government measures related to the environment and introduces a
policy mix approach. This part intends to clarify that environment tax is one of the
policy options and careful note must be taken of existing environment regulations. Part

Three discusses the most basic theoretical contents of environment-related tax and
narrates practical issues drawn from relevant literature. Part Four describes the
experience of applying environment taxes in several developed countries and
summarizes the current intermediate discussion of environment-related taxes in Japan.
Part Five offers some hints for further improvements during the implementation process
of introducing environment-related taxes in Vietnam. This part suggests some
milestones which are shown relative to current problems and the discussion in Part One.
2.

Current Situation of Environment-Related Taxes in Vietnam

Before considering the current situation of environment-related taxes in Vietnam,
we must make reference here to legal regulations on the environment and its protection,
and those in other areas relating to the environment. Subsequently, the main details of
current policies on environment related taxes and fees will be presented.
2.1. Concept of Environment and Legal Framework on the Environment in Vietnam
The term ‘environment’ is a wide ranging concept with different definitions
concerning different fields. For example, natural environment, social environment,
business environment, legal environment… Generally, the concept of environment
implies both social and natural elements; however, that used in this context is closer to
nature than society, and alongside current legal regulations on the environment.


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The Environmental Protection law in Vietnam was approved by the National
Assembly IX in the 4th Section on 27 December 1993 and came into force from 1
January 2004, onwards. According to this Law, the environment consists of both natural

and artificial material elements, closely related to each other, around humans, and
affecting the living, production, existence and development of nature and human beings
alike. The environment comprises multiple elements, including air, land, sound, light,
underground, mountains, forests, rivers, lakes, the sea, creatures, ecological systems,
living areas, production areas, natural preservation areas, natural views, landscapes,
historical traces, and other material forms.
Vietnam intends to build a system of legal documents on environmental
protection in parallel with laws on natural resources. However, for historical reasons, a
system of legal documents on natural resources was established earlier than one
concerning legal documents on the environment. Since the government pursued a
reform policy, adhering to the spirit of the 6th General Congress’ Resolution of
Communist Party (1986), social perceptions concerning natural resources and
environmental values has radically changed. Beside economic values, relating to rights
over assets, natural resources are also objectives focused on by the State and society,
reflecting their environment values (ecology values). Therefore, in recent years,
Vietnam has had many legal documents on protecting and developing natural resources,
such as the law on protecting and developing forest (1991), the law on land (1993,
revised in 2003), the law on minerals, the law on oils and gases (1993, revised in 2000),
the law on natural water resources (1998), the ordinance on protecting and developing
aquatic resources (1989),... Regarding the environment, legal documents also exist in
other fields, such as the civil code, the criminal code, the law on enterprises, some tax
laws, and the ordinance on fees and charges...
Because of the wide scope of the environment, there are many duplicate legal
documents when the Environmental Protection law is compared to specific laws on
environment elements. In many cases, the regulations of this law usually quote other
laws’ regulations on the same issue. However, distinctive points in the system of legal
documents on the environment might be abstracted as follows:
- Specific laws (for example, the laws on land, on protecting and developing forest...)
mainly deal with civil relations concerning the exploitation and use of environmental
elements; regulate rights and responsibilities of organizations and individuals in

protecting and developing environment elements; regulate measures to protect and
prevent uneconomical use or exhausting/damaging environment elements.
Meanwhile, the Environmental Protection law regulates general rules in terms of
public environmental administration, relations concerned with preserving the quality
of environmental elements (for example, protecting the land’s ecological values,
diversifying the biological system, ecological system, and the quality of water
resources...).
- Specific laws on non-renewable environmental elements (for example, those on oils
and gases and minerals), not only have regulations adjusting the activities of
exploitation and utilization, but also have those encouraging the development of
exploiting and processing industries for economical profits. Regulations on
responsibilities to contribute financial obligations for objectives using environment
elements, covering burdens on behavior resulting in pollution or environmental risks.
- The Environmental Protection law and the law on enterprises have common


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regulations concerning enterprises’ responsibilities to abide by legal environmental
requirements, with restrictions or prohibitions in certain industries or fields, where
there is a risk of adverse effects on the environment (explosives, retroactive elements,
highly toxic substances) and conditioned industries (environmental sanitary
standards and foodstuff safety...).
However, the law on enterprises abolished many kinds of licenses (including those
environment related), transferring to a system of self-registration for enterprises with
a post checking system. Because no reasonable mechanism of post checking still
exists despite the continuing inadequacy of the current investigative and checking
mechanism, violations of legal environmental regulations have been on the increase,
especially by enterprises. This could be considered as one of the measures to
compensate society for their acquired benefits and the costs born by the society.

2.2. Environment-Related Taxes and Fees Policies
The system of tax policies in Vietnam is designed and gradually accomplished
through two phases, of which there are proposals to apply environmental taxes.
However, since many major issues remain unresolved during the restructuring period
(including the tolerance capacity of the economy, the adaptability of enterprises, the
collecting organization capacity...), it has been impossible to promptly promulgate laws
on environment taxes. Many also believe that in practice, the current taxation system in
Vietnam also includes some taxes on the environment. They are: (i) Taxes on using
environment elements, as the natural resources tax, land use tax; (ii) Taxes and fees on
petroleum and oils; and (iii) Environment related fees and charges regulated in the
ordinance on fees and charges. The argument behind this view is that these taxes and
fees impose on organizations and individuals actually exploiting or using environment
elements or engaging in activities that harm the environment. This can be considered as
one of the measures compensating for society, due to their benefits and social costs born
by society.
2.2.1. Land Use Taxes
Vietnam imposes land use taxes through the Law on Agricultural Land Use Tax
and the Land and Housing Tax Ordinance. This means organizations and individuals
having received land from the State for agricultural productive activities (cultivation,
livestock, and fishery) are subject to the Agricultural Land Use Tax. On the other hand,
objectively received land for the purposes of building construction projects and housing
is subject to the Land and Housing Tax. When renting land from the State, they need not
pay taxes but rental, based on signed contracts. The contents and results of
implementation of levying land use taxes are dealt with in the document concerning
taxes on land use and assets. In this paper, we focus on analyzing the environmental
aspect of these taxes in order to clearly determine the scope and border between
environmental and land use taxes.
First of all, although land is one of the environmental components, it is
necessary to confirm that current land use taxes are not classifiable as environmental
taxes because they do not concern activities causing environmental pollution or harming

the environment. Besides, the main contents and policy stance of land use taxes are also
needed to analyze the following: (i) the purpose of land use taxes is to encourage land
use economically and effectively, and simultaneously, to ensure equity and reasonability
in the contributions of organizations and individuals using land to the State Budget; (ii)


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tax rates are levied in kg paddy in area units, in monetary terms based on the paddy
price, which is based on the profitability of the use of the land (presented by land
categories used for agricultural land use purposes) and the convenience in using the land,
such as the land site and infrastructures (for the same land category, the level of land
and housing tax is 1 to 32 times higher than the level of agricultural land use tax); (iii)
regulations concerning exemptions and reductions in land use taxes are applied in the
cases of natural calamities, difficulties affecting living standards, and social policy
objectives. Recently, the National Assembly promulgated the Resolution on the
exemption and reduction in land use taxes for the farmer’s agricultural land area, as well
as the exemption of land use taxes for minorities in difficult remote communes. With
these issues in mind, it is clear that Vietnamese land use taxes are closer to income tax
or asset tax than the environment tax.
2.2.2. Natural Resource Taxes
The Ordinance on natural resources tax was promulgated in 1990 and revised in
1998 by the National Assembly’s Standing Committee. This Ordinance imposes tax on
using or exploring natural resources, such as minerals, oils and gases, natural forest
resources, natural marine products, natural water, and other natural resources. Elements
used to determine the tax payable are the amount of explored resources, the price of the
same at the exploration site; and the tax rate at a certain percentage on the taxable price.
Tax rates are state regulated for each kind of natural resource, based on the following

rule: Non-renewable or valuable natural resources would be taxed higher than
renewable ones. For example, tax rate of 40% is applied to natural forest resources; tax
rate of 1% is applied to land used as raw materials. The table of natural resources tax
rates is in the Appendix 1.
The purposes of enacting the natural resources tax ordinance are: (i) to ensure
budget revenue; to contribute to protecting, exploring and using natural resources
economically, reasonably, and effectively; and, (iii) to contribute to protecting the
environment. The natural resources tax revenue and its percentage ratio of total budget
revenues from taxes and fees are gradually increasing (see Appendix 2). However,
looking at the structure, we see that over 90% of the natural resources tax revenue
comes from oils and gases. Many argue that, in accordance with the Constitution 1992,
land and minerals, including territories under Vietnamese sovereignty, belong either to
the people or the state. Therefore, organizations and individuals permitted to explore
natural resources have to pay charges to buy natural resources from the State. This is the
reason why other global countries apply systems of "Royalties on natural resources",
rather than the natural resource tax system. Many also say that, in accordance with the
1992 Constitution, land and minerals in the territories of Vietnam belong to the state or
the people, meaning organizations and individuals permitted to explore natural
resources have to pay charges to purchase natural resources from the State. This is why
many global countries introduce a policy of imposing "royalty of natural resources",
rather than the natural resource tax.
2.2.3. Petroleum and Oils’ Taxes and Fees
Taxes and fees from petroleum and oils are relatively large revenue generators,
for developing, as well as developed countries. However, based on the assessments of
IMF experts (June 2004), these revenues remain modest in Vietnam; and, this is
considered as an unusual phenomenon. Currently, taxes and fees from petroleum and
oils in Vietnam include the import tariff (20%), special consumption tax (10%), VAT


174


(10%), and petroleum and oils’ fees1 (petroleum: 500 VND/liter, diesel: 300 VND/liter,
others: not levied). Total taxes and fees from the above sources go into the Stage Budget,
within which the revenues from petroleum and oils are used as one of the factors for
allocating budget capital expenditure into transportation infrastructures.
As mentioned in section 2.2.2. above, taxes and fees on petroleum and oils in
Vietnam are deemed to be indirect environment taxes (IETs) because they are included
in the selling prices of petroleum and gases. Therefore, their effects on the environment
are not clear, although they have effects on the demand-supply relation and the
reduction in consumption at the time of increasing prices. The issue of environment
pollution caused by the use of petroleum and oils (depending on factors as: total
consumption amount, transportation means’ quality, fuel using proficiency,
infrastructures...) has not been still adjusted through petroleum and oils’ taxes and fees.
This is one of the issues requiring further attention when designing future environment
tax policy.
2.2.4. Fees and Charges in the Environment Field
The basic legal document to enact and implement regulations on fees and
charges concerning the environment and environmental protection is the environmental
protection law (2003). This law regulates that organizations and individuals using
environment elements, if engaged in activities causing environment pollution or
breakdown, must be responsible for contributing money to resolve the pollution and
improve environment.2 Based on the article 34, Decree 175/CP dated November 18,
1994, regulating details and guiding the implementation of the environmental protection
law, every organization and individual is responsible for contributing money to
environmental protection activities when engaging in the following activities: (i)
Exploration for oils, gases, and other natural resources; (ii) Airports, ports, automobiles,
and railways stations; (iii) Motorcycles and other transportation means; and (iv),
Participating in business activities causing pollution. Financial contributions of
organizations and individuals are made in the form of fees, charges or fines paid due to
administrative breaches, dependent on the nature of their behaviors concerning the

environment.
1

The initial point of petroleum and oils’ fees is the transportation fee. Previously, Vietnam imposed
road fees per transportation means, the fee level being dependent on the type of transportation,
cylindrical capacity, or loading capacity, and annually; this was changed to a system of charging fees
based on petroleum and oil prices. However, after many projects constructing, revising and
upgrading bridges and roads by using loans were accomplished, fees had to be charged to ensure
sufficient funds to repay loans and finance operation and maintenance (O&M) costs for these
projects. The government permitted the project investors to charge fees on the means of
transportation during each use. At that time, imposing the transportation fee through petroleum and
oil prices was thought to be unreasonable, as it was doubly imposed, and unequal, because these
fuels are not only used in transportation but also for other purposes, such as electricity generators,
and pump motors for irrigation. Therefore, in the year 2000, the government promulgated Decree
78/2000 regulating petroleum and oils’ fees, and abolishing the transportation fee based on
petroleum and oils’ prices. Many believed that petroleum and oils’ fees should come under one type
of environment tax, imposed on activities causing environment pollution by using petroleum and oils,
but should be indirectly collected through petroleum and oils’ prices.
2
According to the program of revising the legal system, the National Assembly will ratify the Law
of revising and supplementing the Environment Law. Accordingly, the presence of economic
instruments for restricting pollution, and protecting the environment mean investment for improving
the environment would be more focused.


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The Ordinance on fees and charges, promulgated by the National Assembly’

Standing Committee on August 28, 2001, regulates the responsibility for paying
environmental fees and charges including: (a) Fees and charges on issuing licenses,
certificates for meeting or being eligible to environment standards for businesses
involving environmental conditions, fees for making reports assessing environmental
effects; and (b) Environmental protection fees for each field of businesses, of which
items coming under category (a) are distinctly revenues covering the costs of public
services providing the objectives needed to assess. Revenues under group (b) are
regulated in detail by Decree 57/2002/ND-CP, dated June 03, 2002, which guides the
implementation of the Ordinance. Then, there are the following environmental
protection fees:
- Environmental protection fee for waste water;
- Environmental protection fee for petroleum, oils, waste gases from using coal and
other fuels;
- Environmental protection fee for solid waste;
- Environmental protection fee for noise pollution;
- Environmental protection fee for airports, stations, and ports;
- Environmental protection fee for exploring for oils, gases, and other minerals.
However, to date, the government has only established regulations on levying
two items of environmental protection fees for petroleum and oils (petroleum and oils’
fee) and an environmental protection fee for waste water respectively.3 The remaining
fees are still under study and the necessary conditions are being prepared to enact and
implement them, following the program involving building legal state documents.
As presented in section 2.2.2. above, the revenue from the environment
protection fee for petroleum and oils may be considered as IETs tax, although it is not
only used for environmental purposes. With an average revenue amount within the
period 2000-2003 of VND 2,750 billion, the petroleum and oils fee generates a
considerable proportion of the total revenues from taxes and fees (approx. 2.5%). For
the environment fee for waste water, provinces have currently been regulating detailed
levels for living waste water, and implementing assessments of the reported and
calculated results on the concentration and number of waste from enterprises in order to

determine the monthly payable amount of fees. Although still without detailed results
concerning this revenue, some remarks can be made on this fee as follows:
- First, the objective to bear the fee and the element used to determine the fee amount
are the regulatory poisons/toxics in the waste water (currently, only 7 kinds of main
poisons/ toxics, as stated in Appendix 3). This indicates that the environment fee for
waste water in Vietnam is similarly one type of Pigouvian tax; meaning there would
be many difficulties in the process of implementation, although the level of fee
determined during this period remains quite low.
- Fee levels are separated between living and industrial waste water, due to the
consideration of costs incurred by the collection organization and the feasibility of
the implementation process, because it is impossible to measure and to determine the
poisons/toxics in the living waste water of each household. Hence, equity need not
3

The petroleum and oils fee is regulated in Decree 78/2000/N§-CP, dated December 26, 2000, while
the environment fee for waste water is regulated in Decree 67/2003/N§-CP dated June 13, 2003, and
effective from the year 2004. In the 4th quarter of 2005, the government plans to introduce the
Decree on the environment protection fee for exploring minerals.


176

necessarily be taken into consideration, at least for the initial few years of
implementation, with the main purpose to create a fee paying custom for enterprises
and people.
- The collected money, after deducting the costs of the fee collecting organization,
would be collected in the environmental protection fund (at both central and local
levels, 50% for each) to be used exclusively for environmental protection activities:
processing and remedying pollution, improving the environment, investing in
projects protecting the environment by improving the drainage system, waste water

processing system,… For other environmental protection fees, this rule would also
be applied.
It could be said that establishing regulations on collecting environmental
protection fees represents a transitional stage to make a cornerstone for applying
environment taxes in future, because they have various effects on enterprises’
production and businesses, which used to operate in the centrally planned mechanism
unfamiliar with the payment of environmental costs. Presently, it would be advisable to
test under the form of each environmental protection fee in order to ensure it is familiar
to enterprises; and also, in that way, administration agencies may also have good
experiences in the process of implementation to design the environment tax in future.
2.2.5. Other Environmental Taxes
In addition to the above environment taxes and fees, the Vietnamese government
has already grafted environment purposes into other taxes in the system, briefly as
follows:
- Import tax: although not regulated in the law on export, import duties, goods that
burden the environment are also considered in the table of import tariffs. Besides,
other administrative or trade restrictive measures are also laid out to implement the
purposes of preventing pollution and protecting the environment; for example:
prohibiting imports of certain used machinery and equipment, constraints on
technical standards and the rule of origin for certain imported goods.
- Enterprise income tax: the government encourages enterprises to focus on the
environmental purpose, which is regulated under enterprise income tax law in two
aspects. Firstly, enterprises are permitted to deduct all costs concerning investment
made to prevent and remedy environmental pollution; machinery and equipment
used in the process of processing waste water are classified into groups of fixed
assets entitled to be classed as having fast depreciation mechanisms. Secondly,
preferential treatment for enterprise income tax is proposed to encourage enterprises
to enhance investment on upgrading machinery and equipment in order to reduce
pollution; and to encourage enterprises to move to industrial parks from living areas.
- Land-related policies are also promulgated to encourage reductions in environment

pollution at urban and residential areas. In particular, money received from
transferring land use rights related to the sale of assets located in the land of state
owned enterprises is given in totality to enterprises if these activities involve moving
production units from urban or residential areas in line of approved plans, instead of
being going into the state budget.


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The contents in the second part of this paper concern the environment-related
tax, which has been applied in Vietnam and of which certain points still need to be
further revised and accomplished when analyzing and comparing theoretical
frameworks and practical experiences from other countries, as mentioned in the first
part of the paper.
2.3. Future Issues Concerning Environment Taxes
The Prime Minister Decision on December 6th, 2004 deals with Environmental
Protection Taxes in the following expression:
“An Environment-Related Tax Law will be summated to the diet before the end
of 2008, which imposes taxes on goods and services polluting the environment. The tax
base will be decided on each product and service which pollutes the environment. The
revenue of this tax is used only for special purposes of environmental protection, and
not approved to cover any other needs of the state budget. “
Based on the Prime Minister’s Decision, the Ministry of Finance has built the
proposal on the strategy of reforming the tax system within the period 2001-2010.
Although the drafted proposal is still not officially approved, it could be said to be one
of the bases to study and prepare the necessary conditions in future. The work involving
the design of environment- related taxes has been regarded in the proposal in the
following directions:

- First, confirming that promulgation of the land use law is to replace the current
agricultural land use tax and land and housing tax. Taxes are calculated based on
land prices and tax rates as percentages on taxable land price following market rules.
This is not a type of environment tax, as some opinions argued.
- Checking the table of natural resources tax rates in the process of comprehensively
assessing the results of implementing the Ordinance on natural resources tax in order
to submit the new Law on natural resources tax to promulgate, to contribute toward
environmental protection and encourage the use of natural resources economically
and reasonably. The natural resources tax will be calculated based on explored
amounts with a wider tax base. Tax rates will be designed following the direction of
setting up high tax rates for precious and rare natural resources and non-renewable
natural resources. It is also necessary to limit, as much as possible, advances toward
the elimination of the natural resources tax exemption and reduction, in order to
ensure the neutrality of the tax.
- Based on the results of assessing the implementation of the Government Decrees on
environmental protection fees, promulgating the ordinance on environmental
protection taxes, including taxes imposing on objectives causing environment
pollutions. They include all activities of production and businesses causing
environment pollution within permitted levels, as regulated in the Vietnamese
environment standards. Tax rates would be calculated as a percentage of turnover or
production costs. Besides, it is also necessary to impose an indirect environment tax
(IETs) on certain produced or imported products that harm the environment when
being used.


178

3.

Introduction of Government Measures and Policy Mix Approach


Part THREE deals with two issues. The first session shows government
measures to protect the environment, especially including the differences between tax
measures and other measures. The second session shows a brief summary of a
theoretical approach for a policy mix on environmental policy, which summarizes and
closely scrutinizes the discussion at the Tokyo Seminar on June 2004.
3.1. Government Measures to Protect the Environment
Environmental protection measures have several categories: regulatory measures,
voluntary measures, and economic measures. Tax is just one policy tool used as an
economic measure within this categorization, but the taxation measure is potentially one
of the most powerful policy instruments available for environmental protection This
section introduces several measures for environmental protection and a theoretical
framework for combining these tools.
3.1.1. Regulatory Measures (Environment Related Agency and Implementation)
The regulatory measure is a simple concept, also known as “command and
control” in environmental economics. Setting standards for the emission of polluted
goods is one of the easy examples. This measure is often combined with penalties for
violation to enhance the effectiveness of the policy as an economic measure.
The advantage of regulatory measures is that this method makes it relatively
easy to establish a consensus in related actors. The Polluter Pays Principle (PPP) is very
easily connected to this method. Also, it may provide greater certainty as to the amount
of pollution that will be emitted. Economically speaking, corporations will be only
required to bear the costs of reducing the pollution level. From an implementation
perspective, regulatory measures will be very effective if the penalties are enforceable.
Enforcement procedures are typically implemented in the form of penalty fees by the
environment-related agency and sometimes, a failure to accept government procurement
is related to this penalty. The announcement by the authority, made via mass
communication, will be “factual” penalty, because this announcement affects the brand
image of the polluters.
However, there are also some negative points associated with this regulatory

measure. If the emission sources are dispersed, it is quite costly to set and enforce
standards. In other words, this measure is much more costly than efficient alternatives in
an economic sense. The primary reason is that it is more costly and difficult for the
equimarginal principal to hold. Another reason why this method involves high costs is
the lack of incentive for companies to go beyond the regulated level. This situation
indicates non-optimal resource allocation in the economy.
3.1.2. Voluntary Measures (by Private Sectors)
Voluntary measure means that the private sector, like corporations, will establish
some environment standards voluntarily. In this context, ‘private sector’ typically means
industry groups, which take the incentive to establish some standards by themselves.
The advantage of this method is that it is easier to make a consensus compared
to regulatory measures, as far as industry groups have some effective function. However,


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some cons were also apparent regarding this method. The standards set by the industry
group may not necessarily achieve a socially desirable level of pollution. Differences
could exist in the level of standards set by the governmental authority and that of the
standards set by the industrial group. The free rider problem will be the second problem
associated with voluntary measures. Because this method is a voluntary measure, an
incentive may result in that if one of the corporations in an industrial group ignores the
standard, the corporation may establish a favorable position in terms of the industrial
power of that industry. This free rider problem is often taken on board in international
trade-related forums like the WTO.
3.1.3. Economic Measure(s)
Economic measures fall into four main categories: environment taxes, subsidy,
marketable emission permits, and deposits. Overall speaking, economic measures have

the advantages of placing decision making for pollution control in the hands of those
most familiar with pollution control options-the polluter. These measures work to keep
costs low and also spur innovation.
3.1.3.1. Tax Measure(s)
Tax measures are the focus of this paper. The main focus on this method is the
fact that taxes are designed to reduce the burden on the environment. General
Theoretical Issues on Environment Taxes will be discussed in detail in PART Three.
3.1.3.2. Subsidy
Subsidy indicates that the government gives an incentive which is consistent
with reducing the burden on the environment. From an economic perspective, the effect
of a subsidy would be the same as with tax measures. The measure will help achieve
optimized social resource allocation via interaction with market price changes made by
introducing the subsidy, provided each economic actor engages in reasonable actions.
This optimal resource allocation will also be achieved in an environmental context,
while politically speaking, the measure will make it relatively easy to establish a
consensus compared to introducing new environment-related taxes.
However, certain questions arise concerning the introduction of
environment-related subsidies. Discussion reveals that it would not necessarily be
rational to provide subsidies to those who pollute the environment and this kind of
subsidy may not be designated as PPP.
3.1.3.3. Marketable Emission Permits
Marketable emission permits involve the government issuing (selling or giving
away) permits to pollute, which may then be traded among polluting firms. This
measure is discussed not only domestically but also internationally to achieve the most
appropriate resource allocation in economical and environmental contexts. Marketable
emission permits are significantly more difficult to implement than the above methods.
However, in the United States, doubt concerning the ability of the environmental
authority makes marketable emission permits more popular. This method requires a less
active regulatory authority to set and adjust environmental standards.



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3.1.3.4. Deposits
Deposits may also be termed liabilities in this context. This includes holding
polluters liable for any damage they may cause. This method will be useful for
regulating risky activities that lead to occasional accidents.
3.2. Policy Mix Approach on Environment Policy
3.2.1. Why A Policy Mix on Environment Policy Is Needed
Several important factors should be discussed before discussing tax measures.
Firstly, the fact that the environment tax measure is not the only method available to
solve the environment problem. This point leads to consideration as to which is better to
achieve environmental targets, to use economic measures or regulatory methods.
Economic measures have the advantages of placing decision making for pollution
control in the hands of those most familiar with pollution control options-the polluter.
These measures work to minimize costs and also spur innovation; hence the
policymakers should examine their potential benefit. One complication of
environmental regulations, however, is how to deal with space and time. Because of the
difficulty in designing efficient regulations, regulations sometimes take the approach of
specifying environmental targets and then pondering the cheapest way of reaching them.
In addition to the theoretical approach, the effectiveness of the policy measure
should be assessed. This assessment should lead to feedback in the shape of
improvement to achieve the forecast target by policymakers.
In this session, environmental policy will be analyzed from “Public Choice
Theory”. Section 2.2 will analyze the problem of which method is superior, between
regulatory methods or economic measures. Subsequently, we will discuss the economic
method mixed in with economic measures. Section 2.3 will examine the theorem against
the policy mix approach in order to enhance policy choice, while Section 2.4. will
enhance future discussion on this policy mix approach.
3.2.2. Theorem on Public Choice-Environmental Policy Context

Economic measures have three superior features to regulatory measures: 1)
Cost-Effectivity (static efficiency), 2) Incentives for research and development
(dynamic efficiency), and 3) Information cost for policy implementation (information
efficiency).
Baumol and Oates (1971) proved that economic measures can be used to realize
final environmental targets at minimum cost in case of environment tax, while
Montgomery (1972), proved the same logic in the case of marketable emission permits.
Static efficiency could be examined among economic measures. The comparison
is implemented in the form of economic measures-environment tax, marketable
emission permits, and subsidies. These policy measures have an equivalent effect in the
context of the short term context and in a static sense. In other words, these three
measures are equivalent in the world of static efficiency. However, subsidies and the
other two measures make a difference in the context of resource allocation. Subsidies
have a separate impact on the profits of a polluting company, than the discrepancy
caused by PPP (OECD 1975). This discussion leads to the conclusion that subsidies


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Environment-Related Taxes in Vietnam 181

represent the last resort of environmental policy.
The next question concerns the nature of the difference between environmental
tax and marketable emission permits. These two policies are equivalent in terms of cost
and resource allocation, although there are four areas that differ between environmental
tax and marketable emission permits.
Firstly, environment tax does not always realize the intended polluted level,
while marketable emission permits can do so. Policymakers are unable to set an
appropriate Baumol-Oates tax level, if they can obtain accurate information from the
cost-curve and hence can determine the tax rate only by trial-and-error.

Secondly, an environment tax may trigger a change in the environmental
standards to be met, because inflation may affect the effective tax rate in the civil
society. However, marketable emission permits can afford to ignore the effect of CPI
change, since reasonable regulation of total emissions may be adjusted.
Thirdly, the environmental tax could show the prices of goods in the form of the
tax rate, while with marketable emission permits, it is impossible to control the price of
the permit itself. In a perfect market, this lack of control would not be an issue; however,
market imperfections will trigger strategic or speculative actions from market
participants concerning emission permits.
Fourthly, the method of initial allocation is the area of greatest difference
between the two measures. Environment tax will not allow the burden of polluters to be
adjusted; whereas this is possible with market emission permits. If policymakers sell the
permits at a competitive price, the polluter’s position will be the same as that in the case
of environment tax. However, the burdens of polluters will be initially reduced if
permits are distributed for free, which will result in unfairness, because newcomers have
to buy the permits at a higher price, as in the level of the environment tax case. This
difference in the initial cost allocation will lead to a difference not only in the cost
burden but also in dynamic efficiency.
The discussion on dynamic efficiency is based on the fact that polluters have an
incentive to innovate in order to reduce the economic burden acting against them. In
other words, the greater their economic burden, the bigger the incentive against
technical innovation (Bohm and Russel, 1985, p. 417). This discussion may often be
cited to show how economic measures are superior to regulatory measures. In addition,
it could be used to show how the discussion environmental tax is superior to marketable
emission permits in the context of dynamic efficiency, because the burdens of
environment tax polluters will be bigger than those of marketable emission permits.
3.2.3. Policy Mix Approach on Environmental Policy
3.2.3.1. Public Choice under Uncertainty
A Pigovian Fee is a charge per unit of pollution generated, set equal to the
marginal damage of the pollution caused, at an efficient level of pollution generation.

This fee is levied by the government, which collects the revenue, and generally induces
the provision of an efficient amount of pollution. This fee is often discussed in the same
manner as environment tax.


182

However, the difficulty in implementing a Pigovian Fee is plainly evident. There
is insufficient information to establish an eternal cost curve and emission-reduction
curve. The second best approach is to realize an environmental target with minimum
emission-reduction costs. This target is based on scientific examination of each
environmental item.
The Weitzman Theory may show the answer to the same problem from a
different perspective, when cost functions are associated with uncertainty. (Weitzman,
1974). Weitzman shows how the policy should be designed to minimize the damage of
welfare if it is impossible for a policymaker to gain sufficient information concerning
eternal cost and emission-reduction curves respectively. In this approach, there are only
two alternative policy choices; namely price regulation or amount regulation
respectively.
In reference to the public choice problem, Roberts and Spence proposed a
policy-mix approach, including a mixture of marketable emission permits, environment
tax and subsidy. This approach minimizes the welfare cost by the policy mix, because
the failure of a single policy might be covered by the merit of other policy measures,
based on the correlation of each effect (Roberts and Spence 1976).
Baumol and Oates proposed that the public authority should impose a system of
charges that would, in effect, constitute a set of prices for the private use of social
resources (e.g. air and water). Charges (prices) would be set to achieve a specific
standard rather than attempt to base the level on an unknown value of marginal net
damage. This scheme could be combined with a “minimum safety standard”. The
advantages of the Baumol-Oates tax would be: 1) Taxes/charges make use of market

mechanisms by charging a price for hitherto unpriced but valuable services provided by
nature (Pearce & Turner 1990, pp. 96) and 2) and are a way to avoid the use of direct
controls and use the pricing system to control externalities. 3) A standard of an
acceptable environment would have to be determined. Setting a non-optimal tax has a
degree of arbitrariness as it would entail giving up on the true social optimum. (Baumol
& Oates 1988, pp. 155). However, taxes/charges are difficult to change at short notice
and are poor at dealing with short term crisis periods of severe environmental distress.
In these cases, it may be necessary to regulate activities beyond the level normally
applied, e.g., a total ban on motor vehicle travel at certain times. (Baumol & Oates 1988,
pp. 192).
3.2.3.2. Limitation for Single Policy Approach
In the real world, the single policy approach will not work as expected. When a
certain environmental problem occurs, the regulatory measure is the first candidate to
introduce environmental controls because of its ease of implementation. However the
full replacement of regulations by economic measures is infeasible in the real world.
Examination for economic measure may begin only after the case, i.e. regulatory
measures are not effective enough to maintain the environment; or the cost of such
regulatory measures is prohibitive. This situation will cause frictions with the resource
allocation problem and during this procedure, economic measures are often distorted
with losing the cost-efficiency for that measure.
The policy mix approach is one of the theoretical approaches used to fix the
imperfection of the single-policy approach. The policy mix approach is the approach
whereby environmental policy, composed of the policy mix of several policies,


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Environment-Related Taxes in Vietnam 183

measures ongoing feedback from experiences of economic measures against economic

theory.
For example, environment policy in Japan contains numerous regulatory
measures. Such regulatory measures do not refer only to what we call “command and
control”, namely, typical regulatory measures. These measures also contain several
elements of economic measures, and if we conduct a detailed analysis of Vietnamese
environment policy, implementation should be designed with analysis of the role of
each measure, with discrepancy made between theory and reality.
3.2.3.3. Categorization for Policy Mix
The first general question is why are economic measures difficult to introduce
based on purely theoretical concepts? The real policy measure involves a manner of
combinations of multiple economic measures and there are three potential answers to
this problem.
Firstly, it will be difficult for policymakers to obtain all the information to set
the tax rate level in order to establish equilibrium between marginal external costs and
emission-reduction costs. Secondly, the rule making process will also be the reason. The
policy cosmos is initially designed in the form of regulatory measures before
introducing economic measures. For example, it is not possible to include an
independent role of resource allocation within environment tax if the regulatory
measure is fully abandoned. Thirdly, the distribution problem will be the issue. The
introduction for economic measures will be subject to political pressures from interest
groups, because the measure will impose more significant burdens on polluters
compared to that of regulatory measures in the law-making process.
Gawel proposes two active reasons for implementing a policy mix approach.
Firstly, this latter may present us with a feasible answer to solve multiple policy targets. It
may be difficult to accomplish the above results by using “single policy approach”.
Secondly, the policy mix approach may work to minimize political pressure/friction when
introducing new policy measures.
The above discussion suggests that the superiority of economic over regulatory
measures will not be always apparent, therefore, the cost-efficiency of economic
measures may be reduced when they are implemented in the form of a policy mix with

regulatory measure. In other words, regulatory measures may be more efficient than
imagined, provided they are used within a policy mix alongside economic measures.
3.2.4. Future Discussion on the Policy Mix Approach
Marketable emission permits are introduced in the United States, Germany and
other several developed countries and the Acid Rain Program (ACP) in the US
represents one of the most advanced programs in this context. ACP is different from
other marketable emission permits in that the program includes no restriction against
sources of pollution. (Bohi and Butraw 1991, 1992; Hahn and May 1994 pp. 33-35;
Kete 1992, pp. 84-86)
This program will suggest several general points for future discussion. Firstly,
even if marketable emission permits are introduced in an advanced manner, every
scheme involving this measure represents a policy mix approach. Secondly, the role of


184

regulatory measures should be revalued in an effective manner.
Under the discussion for Baumol-Oates taxes, discharging the water surcharge
(DWS) in EU countries is a good example. The Germany DWS regime was at first
clearly designed to emulate Baumol-Oates taxes, and the incentive effect and dynamic
efficiency were clearly of concern in this regime. Andersen (1994) makes a comparative
analysis of such aspects including France, Holland and Germany. OECD also analyzes
the experience in China in developed countries (OECD 1997).
In summary, there are two important lessons when decision making on
environment policy. Firstly, cost efficiency is not the sole standard criterion to assess
policy measures. In the real world, in addition to the problem of costs, accomplishing
environmental targets and/or preventing non-reversible damage via regulation will be
the issue. The resource distribution problem is also a candidate for a policy decision.
These multiple targets of the environment policy framework should be discussed.
Secondly, the existing theory framework involves an undervaluation of the effect

of the distribution problem in the case of policymaking. The awarding of subsidies, an
unreasonable measure in the context of environmental economics, has become a role of
genuine importance in the real world. This discrepancy leads to the unrealistic aspect of
the theory framework in explaining existing environment policy. Therefore, the
distribution problem must be discussed in the policy mix approach to set feasible and
desirable environmental policy.
4. General Theoretical Issues on Environment Taxes
The introduction of environment-related taxes seems to climbing in many global
nations, especially developed nations. The general trend in recent times shows that
environment–related taxes are introduced through tax reforms, which aim to construct a
neutral tax system, enlarging the tax base and reducing tax rates. In contrast to general
trends in the tax reform process, environment-related taxes do alter the prices of goods,
which are inputs of production, as well as business activities or consumer goods that
exert a harmful impact on the environment. It is noteworthy that carbon or gasoline
taxes are imposed on motor vehicles in order to generate the required revenue to cover
the cost of protecting the environment. This part discusses the following key points in
detail: (i) The rationale to impose environment tax; (ii) Narration of the types of
environment taxes; (iii) Considerations of the design of environment–related taxes.
4.1. Environmental Protection Objective
According to the common concepts of economists, environmental damage
occurs when the social cost of each activity involving environmental factors exceeds the
benefits generated by the same.4 The divergence between social loss and benefits may
arise owing to one or both of market and policy failure respectively. The former can
arise when there are poorly defined property rights concerning forest use or waste
emissions into rivers or the atmosphere, whereas the latter may occur when undesirable
policies are used, for example a microeconomic policy that changes relative prices so as
to encourage the excessive use of natural resources. For example, chemical pesticides
are used on a vast scale with government subsidies.
4


There are a number of definitions concerning the concept of environmental loss, but in this paper,
the author uses the traditional concept of economics.


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Environment-Related Taxes in Vietnam 185

A variety of policy instruments are available to address such environmental
problems. In the cases of market failure, structural measures, regulatory policies or
tradable permits could be appropriate. In the case of policy–induced environmental
problems, removal of the policy or modification thereof may be the best solution.
However, in other cases, taxes may provide a solution to environmental problems,
whether they are caused by market failure or policy failure. Economic instruments that
use a price mechanism, such as taxes and tradable permits, are often preferred by
economists because they do not require any costly regulatory apparatus and encourage a
reduction in environmental damage by the least costly means.
The choice of policy instruments (regulatory or tradable permits versus tax) may
depend on the source of uncertainty. When we have good information relating to an
efficient level of consumption or the production of a good, but are unsure about the
appropriate tax rate to achieve the expected level of production or consumption,
tradable permits or regulation would be a preferable solution. From an economic
perspective, the issue here is what will create the greatest cost if the wrong policy is
adopted. Only when the cause of failure is found, can a solution be set forth.
4.2. Tax Policy Objective
Environmental taxes allow us to raise a given level of revenue with a lower
efficiency cost than would otherwise be possible. It is noteworthy that they provide
double benefits because they reduce the social cost of environmental damage and the
rates of other socially costly taxes, thereby contributing to an overall reduction in the
social cost of the tax system. Environmental objectives are met by raising the tax rate on

emissions until the marginal social cost of using environmental resources is equal to the
marginal social benefits of using the same. From a revenue perspective, the tax rate
should be set such that the marginal social cost of that tax rate is equal across alternative
tax instruments. The attractiveness of having double benefits should not be
underestimated. Many estimates suggest that the marginal welfare cost of taxation is
about one third or higher, meaning taxes, such as carbon taxes, could dramatically
improve efficiency while still allowing revenue to be raised. When we pick up the tax
measure, announcement of effects against taxpayers will be one of the key issues to
examine in future.
4.2.1. Environment-Related Taxes
A variety of taxes may be related to the environment and four related categories
may be illustrated. The first two categories are Pigouvian taxes or indirect
environment–targeted taxes. These taxes can reduce environmental problems by
changing the relative prices of activities, thus discouraging various activities that cause
environmental damage. The third category is taxes that have unintended environmental
implications (favorable or unfavorable). These taxes, such as income taxes, which have
incentives encouraging certain forms of economic activities, have played an important
role in environmental damage in some developing countries. The four categories of
taxes are those known as environmental taxes and the revenue they generate is often
spent on environmental protection.
4.2.2. Pigouvian and Baumol Oates Taxes
Pigouvian taxes are the classic solution to resolving environmental problems.
These taxes are specific rate taxes levied on units of emissions or of damage caused by


186

the activity. The tax rate per unit is set such that the marginal social cost of an activity is
equivalent to its marginal benefit. The tax rate is specific because the rate is set
according to the damage generated by an activity rather than the price of the same.

Pigouvian taxes are viewed as efficient solutions to many environmental
problems because they use the price mechanism to encourage modification to economic
activities which, in an ideal world, is less costly to administer, and encourages an
efficient reduction in damage compared with a regulatory mechanism. Taxes induce
efficient allocation of pollution reduction across consumers and also in the composition
of that adjustment, such as in terms of the scale of the activity, technological change and
factor substitution. There are, however, a number of practical difficulties in
implementing Pigouvian taxes. The difficulty in determining the marginal social cost
required to set the correct tax rate is a major impediment to the use of these taxes. In
addition, there are also difficulties in monitoring, measurement and compliance.
Baumol and Oates proposed that the public authority should impose a system of
charges that would, in effect, constitute a set of prices for the private use of social
resources (e.g. air and water). Charges (prices) would be set to achieve a specific
standard rather than attempts to base the level on an unknown value of marginal net
damage. This scheme could be combined with a “minimum safety standard”. The
advantages of the Baumol-Oates tax would be: 1) Taxes/charges make use of market
mechanisms by charging a price for a hitherto unpriced but valuable service provided by
nature (Pearce & Turner 1990, pp. 96) and 2) are a way to avoid the use of direct
controls and use the pricing system to control externalities. 3) A standard of an
acceptable environment would have to be determined. Setting a non-optimal tax has a
degree of arbitrariness as it would entail giving up on the true social optimum. (Baumol
& Oates 1989, pp. 155). However, taxes/Charges are difficult to change at short notice
and not good at dealing with short term crisis periods of severe environmental distress.
In such cases, it may be necessary to regulate activities beyond what is normally applied,
e.g., a total ban on motor vehicle travel at certain times. (Baumol & Oates 1989, pp.
192).
4.2.3. Indirect Environmental Taxes
With regard to practical difficulties in imposing Pigouvian taxes, we can employ
other taxes to achieve environmental objectives. These taxes - called indirect
environmental taxes - are levied on the use of productive inputs or consumption goods,

where the use of those goods is related to emissions causing environmental damage.
Indirect environmental taxes do change the relative prices and their efficiency is
dependent on the nature of the link between the tax base and the environmental damage.
An indirect environment tax is equally as efficient as a Pigouvian tax if it is levied on a
tax base that is linked by a definable functional relationship to that damage. The less
well defined the relationship between the use of the consumption of taxed goods and the
environmental damage caused, the less effective are these taxes. The relationship
between the use of taxes and their effectiveness in securing environmental objectives
can be illustrated by two indirect environment taxes: namely carbon tax and petroleum
tax.
A carbon tax is equally efficient as a Pigouvian tax because there is a fixed
relationship between the tax base (fuel) and the environmental damage. A carbon tax is
intended to address global warming concerns arising from the emission of carbon
dioxide that results from the combustion of fuels. A Pigouvian tax is levied on the


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Environment-Related Taxes in Vietnam 187

emission of unit of carbon dioxide. However, there is no end-of-pipe technology that
permits a change in the relationship between the combustion of fuels and emissions of
carbon dioxide; hence a tax on the fuel is equivalent to a Pigouvian tax, meaning there
is a fixed proportional relationship between the use of the fuel and the emission it
causes.
Petroleum taxes intended to address local air quality concerns are not as efficient
as Pigouvian taxes on emissions or damage. There is no fixed relationship between the
use of petroleum and environmental damage. A tax on petroleum is not related to the
emission of pollutants because the pollutants are also a function of the vehicle’s
operating efficiency, driving speed, and the road quality… In this case, although a tax

on petroleum may reduce pollution, it is not an efficient policy from a theoretical
perspective. An efficient tax on vehicle emissions would likely result in a reduction in
emissions from a variety of reactions to the increased cost of emissions, depending on
the least-cost means of reducing the latter. For example, emissions could be reduced by
reducing overall mileage, improved vehicle maintenance, and technological adjustments,
such as the use of catalytic converters. Indirect environment taxes, such as petroleum
taxes, do not encourage adjustment of all these criteria and actually may discourage the
use of certain means of emission adjustment, such as changes in the use of catalytic
converters.
4.2.4. Taxes with Unintended Environmental Implications
Some taxes have unintended implications on the environment. The excise levied
on various energy products is often viewed as environmentally favorable when it
discourages environmentally harmful activities. Taxes could unintentionally have
environmentally harmful consequences by creating distortions that cause environmental
damage. For example, an income tax may favor agricultural investment that encourages
capital intensive activities in areas unsuited to that form of agriculture.
4.2.5. Earmarked Taxes
Some taxes, although labeled as environmental taxes, but actually those that
raise revenue earmarked for environmental purposes rather than those that change the
relative price of using environmental resources. There are sound fiscal arguments
against the use of earmarked taxes. They imply a coincidence between the level of
increase in revenue and the expenditure requirement, and discourage effective
evaluation of expenditure alternatives. In some countries, tax measures have been
legitimized by identifying the importance of the environmental expenditure to which
they are put.
4.3. Factors Influencing the Scope and Design of Environment-Related Taxes
In considering tax reforms that may meet environmental objectives, the
policymakers have two general consideration. First, in reviewing all taxes, consideration
can be given as to whether or not there are special incentives or tax rates preferences
which might unintentionally result in environmental damage. Second, the policymaker

can consider what role Pigouvian and indirect taxes can play. In the following text, the
focus is on the scope and design of environment-targeted taxes.
Pigouvian taxes are difficult to define and administer. Efficient setting of a
Pigouvian tax firstly requires the tax base of emissions or damage to be determined,


188

followed by a tax rate set such that the marginal social cost of environmental damage is
equal to the marginal cost of abatement. Determining the shape and nature of these
damage and cost functions, even to within a reasonable degrees of accuracy, is a
considerable challenge. Many of these difficulties - specific to environmental taxes,
such as ecological valuation and damage measurement - apply to varying degrees to
indirect environment-related taxes.
Many environmental concerns have a special or temporal dimension, and this
can make it difficult to structure a tax related to the damage or emission. For example,
the cost of air pollution from automobiles is highest in urban areas and often at
particular times of day. Taxes on gasoline, for example, are blunt instruments to deal
with these aspects of environmental damage. A combination of taxes and regulatory
devices represents the best way to tackle this difficulty.
Other aspects of environmental damage may be exacerbated by the imposition
of an environmental tax, even if a link between the tax and a source of environmental
damage is established. Environmental taxes are likely to be ineffective if there is
macroeconomic instability. Setting a specific environmental tax is a wasted effort when
inflation rates are high. Thus, the fine tuning of environmental taxes, as discussed in
industrial countries, may not be appropriate in all countries.
Environmental taxes may not have the desired incentive effects of modifying
production methods that reduce environmental damage. Rather, companies such as state
enterprises, that are not profit maximizing, pass on environmental taxes without seeking
to reduce the tax burden by modifying their production methods. This is an important

concern in the case of economies in transition but also in many developing countries,
where public utilities and enterprises may play an important role in the economy.
There are also political economy concerns. There is a danger that the use of
environment taxes, by intentionally using the tax system to modify incentives, will
encourage numerous other demands to use the tax system for the special treatment of
specific activities. The experience with special tax provisions is not encouraging. A
political impediment to the introduction of environment taxes is the argument that they
harm international competitiveness. The conflict between revenue objectives and
environmental targeting, or that between equity with raising environmental taxes are
also factors that need to be carefully considered when formulating and adopting
environment-related taxes.
New tax measures may end up becoming a significant drag on economic
development. However, Japanese development during the Oil Shock represents a good
example of economic regulation established to boost competitive power in the industrial
sector.
5.

International Discussion on Environment Taxes

5.1. Environment-Related Taxes in Developed Countries-EU cases
In several EU countries, a tax-related environment tax is introduced. Table 4-1 is
a very brief comparison for environment-related taxes. These packages contain fuel tax,
carbon tax, and electronic tax, and several special taxation measures to improve the
environment.


Chapter VI.

Environment-Related Taxes in Vietnam 189


5.2. Environment-Related Taxes in Developing Countries-Chinese Case
Wang, Yang, Liu etc (1998) makes an excellent summary of taxation and the
environment in China: Practice and Perspectives.
“China has largely established a tax system appropriate to a market economy. In
general, the new tax system reflects comprehensive tax law, a fair tax burden, simplified
rules and a rational division of responsibilities. It creates a favorable tax climate to
enhance fair competition among enterprises and the further establishment of a market
economy. It also plays an important role in defining the relationships between the state
and enterprises and between central and local government. In addition, it ensures a
steady growth in national tax revenue.”
This observation could be applied to the current situation concerning
environment taxes. Environment-related tax items in China include natural resource
taxes, urban maintenance and construction taxes, vehicle use tax and others. These
“green” taxes account for about 8% of overall tax revenue. The authors appreciate the
existing framework provides a foundation for this “greening tax system”.
However, they also state that “the present tax system is not very environmentally
friendly”. The scope of the reform should be to include as many environmental costs as
possible within the relevant taxable categories and rates.
Considering the situation in Vietnam, oil related taxes make up a high
proportion of total tax revenue. Now, we would like to introduce the current oil-related
tax system in China in order to make comparison with that in Vietnam. In China,
consumption tax was introduced as part of 1994 tax reform to influence consumption
patterns, and restrain luxury goods consumption. With petrol and diesel oil in mind, the
scheme is very similar to SCT in Vietnam, and the tax is levied on per liter basis.
However, there is only one significant difference. In China, due to the close relationship
between air pollution and energy consumption as well as vehicle usage, imposing taxes
on these items may, in theory, restrain the rise of energy related consumption or
decrease the energy consumption on vehicles, since the Chinese consumption tax rate is
from 3% to 8%. From an environmental perspective, limiting vehicle use can directly
alleviate the problem of air pollution. In summary, two tax items could be seen as

designed within the context of an environment-related tax, even if the tax level was not
theoretically designed as such.
5.3. Objective of Imposing Environment Taxes-Stage for Environment Taxes
Existing environment-related tax rate, in general, is high in developed countries.
The economic model says that a policy mix approach can accomplish target emission
standards, even if introducing a lower tax rate, with a combination of subsidies.
Emission amounts for carbon dioxide and consumption amounts for fuels are typically
discussed as a tax base in the story of environment-related taxes. Among this scheme for
environment-related taxes, the final tax bearer should be the final user of that energy.
However, the tax system of environment-related tax could be designed in various ways.
The stage of imposing taxes and tax debtors in the system may be discussed in relation
to various forms of distribution. Of course, the hybrid of both stages will be the issue.
Table 4-2-1 will show a breakdown for each stage of imposing tax. The table
includes categorization and existing Japanese tax items relating to environment issues.


190

Table 4-2-2 summarizes the merits and demerits for imposing taxes at each stage.
The “uppermost stream imposition” and “upstream imposition” makes it difficult to
shift the tax burden in the tax system design, while the tax administration will be easier
to take compared to “upstream imposition”. “Upstream imposition” will be very
attractive to facilitate designing the refund, reduction and exemption of taxes, in
addition to avoiding the problem of shifting tax burdens while administration will be
difficult due to the lack of links with the current tax system.
When considering environmental taxes, it will be helpful to consider which
sector will be targeted for each of the environment related items. For example, a
warming-prevention tax should be considered associated with household, transportation,
and industrial matters. Other public administrative costs and the impact on existing
regulatory measure must be known to analyze at the stage of imposing taxes.

5.4. Relief Measures of Environment-Related Taxes
In designing environment-related taxes, relief measures should be discussed
based on several policy objectives. Firstly, industrial policy will be considered as a
means of preventing competitive power in the industrial sector or any rapid change in
the industrial structure. The measure is sometimes designed horizontally on a national
basis, for example, coal is a tax exempt item in Germany. Another measure is to pick up
specific industrial sectors. For example, electric consumption tax in Finland is subject to
tax reductions for the mining, manufacturing, and industrial sectors. The agricultural
sector and transportation are also often targets for tax relief. For example, the liquid
petroleum tax is reduced in Germany for the agricultural sector.
Secondly, social policy issues will be considered to determine the household tax
relief. For example, natural gas and electricity consumption are tax-exempt items in
Holland under the national energy regulation tax. In addition, consideration on Small
and Medium Enterprises will be an issue in this context. For example, private power
generation under 2MW is tax exempt in Germany under tax on electrical items.
Third, environment-friendly activities are the objectives for tax exemption or
reduction. For example, wind electricity is eligible for refund under Finland’s CO2 tax.
The use of public transportation would be a good target within this context, another
example being the railway exemption under Norway’s CO2 tax.
Such consideration should be kept in mind when designing environment-related
taxes. These EU environment-related taxes take into account the greenhouse effect on a
global scale. Consideration for policy objectives could be used to design
environment-related taxes on water resources or soil pollution. However, due to
uncertainty on the environment, taxes on water resource or soil pollution may be more
inefficient than regulatory measures. This point should be thoroughly discussed as part
of a future policy mix approach.
5.5. Applications for Revenues on Environment-Related Taxes in EU Countries
Three patterns of tax revenue application could be considered;
- All revenues are used to meet environmental objectives;
- All revenues are used to pump the general-account budget; and



Chapter VI.

Environment-Related Taxes in Vietnam 191

- Hybrid measures are made to combine a purpose account and a general-account
budget.
Of course, the neutrality of tax should also take into account the fact that
revenues are used as the source of tax cuts or to fund social security systems. The
experience of EU countries concerning environment tax could be summarized as the
following Table 4-4.
The table of international comparison suggests that a policy mix approach is
already implemented in several EU countries, also in a theoretical context. Subsidies
and budgetary measures should be reexamined before introducing environment-related
taxes. In general, allocation for general cost-budget is a preferable measure to consider
effective resource allocation in the usage of environment-related taxes. Of course, these
new environment-related taxes should be considered to coordinate, not only with
existing regulatory and economic measures but also existing tax measures - especially
those energy-related in the case of anti-greenhouse taxes.
5.6. Current Situation on Environment-Related Taxes in Japan
5.6.1. Brief Summary of Environmental Issues and Existing Japanese Taxes
There are three categories of environment taxes based on their nature and
function in Japan. Firstly, taxes which require those who cause pollution to fairly and
equally bear their economic costs do not exist in Japan (e.g. carbon tax). Taxes in this
category are now discussed by government officials, scholars, and citizens. Secondly,
the Japanese system includes several taxes with different purposes, but results in
decreasing pollution. Energy related taxes and the Motor Vehicle Tonnage Tax are good
examples. We could discuss this good example in the context of combined discussion
concerning the objective of thwarting global warming with the first categorization tax.

The third possible answer will be tax reduction for a specific policy goal. For example,
accelerated depreciation for environment, gentle capitalization expenditures in CIT or
tax reduction for environmentally friendly cars in Motor-related taxes are already
introduced in the Japanese system.
5.6.2. Why Are Only Energy Related Taxes Discussed in Japan?
Environment-related taxes have also become a hot topic in Japan. As noted, to
date, discussion of environment-related taxes has been related to an anti-warming tax,
linked to the Kyoto Protocol on climate change. The next question is why other
environmental targets need not be discussed within the tax language.
Firstly, such tax will be difficult to introduce, because the scheme requires the
wide consensus of civil society, whereas for the anti-warming tax, historical discussion
and the current scheme facilitate constructive discussion. Moreover, the Kyoto Protocol
will be a reasonable driver for enhancing the positive position from the taxpayer
perspective. Anti-warming moves do not represent closed business on the domestic
scene. In order to make effective regulations, discussion should be internationalized.
Secondly, regulatory measures are more effective in the world of water and soil
pollution. The conflict between regulatory and economic measures will result in a more
complicated discussion compared to other environment policy targets.