By integrating environmental concerns into the tax system, a green fiscal regime for the mining sector uses the tax system to influence environmental outcomes from mining activities. Such a regime would tax pollutants, water and energy used in the mining project, while reducing taxes on non-polluting inputs such as labour. Such an approach can be an alternative or a compliment to traditional regulatory approaches to protecting the environment.
[box type=”bio”] Steve Macey is an economist specializing in tax and extractive industries. After starting his career at the UK tax authority, he has worked as an advisor in a diverse range of countries, including Sierra Leone, Nigeria, Saudi Arabia, Lao PDR, Albania and Ethiopia. Currently, he is a consultant for UN Environment on green fiscal policy.[/box]
The annual general meeting of the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development took place in Geneva last week. Amongst the discussion topics was the fiscal regime for mining, including the launch of a new UN Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries. Entirely separate on the agenda were the substantial environmental challenges from mining. This separation is typical and conceals the underexplored potential for the fiscal regime to be used as a tool for environmental protection in the mining sector.
The impact of mining on the environment
Mining activity can lead to significant environmental and social impacts ranging from landscape degradation, to air and water pollution, leading to long-lasting consequences for the local environment and health of the population. The mining sector is also water and energy intensive, with the use of fuel oil and diesel making mining a major emitter of greenhouse gas emissions (GHG). Indirectly, the importation of machinery and products has significant environmental impacts due to the requirement for fossil-fuel dependent international transport.
… and how the fiscal regime can help
Environmental challenges arising from mining are primarily approached through legislation and regulation (including liability provisions). However, there is an underexplored synergy between the fiscal regime applied in the mining sector and environmental protection. The fiscal regime has genuine potential to influence the environmental outcomes of mining activities through several channels.
Firstly, the fiscal regime influences the incentives for mining companies to set aside funds for post-project decommissioning and rehabilitation, costs which can run into the hundreds of millions of dollars. Effectively designing the tax treatment of such provisions can avoid situations where mining sites are abandoned without mitigation of potentially substantial environmental damages.
The tax regime can also influence environmental outcomes by the tax treatment of mining project expenditure, which often amount to hundreds of millions of dollars. Given the environmental impact of many mining project inputs i.e. pollutants and energy-intensive machines, the tax system can be used to influence behavior and thus alter environmental outcomes.
The most effective use of the fiscal regime to achieve environmental outcomes is to implement ‘green taxes’ on environmentally-damaging inputs. Given the environmental impacts arising from the use of chemical pollutants, fossil fuels and excessive water usage, governments could tax inputs such as chemical pollutants, water and fuels.
Fuel taxes are already administered and applying taxes on the use of water and chemical pollutants by one large taxpayer is administratively achievable. Carbon taxes could be integrated into existing royalty regimes for coal production with rebates for exported coal. Such taxes would encourage companies to minimize the use of such inputs and to investigate and invest in environmentally safer alternatives.
Ensuring such fiscal measures do not reduce mine profitability and cause investors to delay or cancel planned investments could be avoided if such ‘green taxes’ were balanced with reduced taxes on other inputs, such as payroll taxes. Alternatively, royalties could be reduced as part of a broader fiscal reform, which considers environmental impacts alongside revenue generation and investor returns. Of course, it can be argued that reduced mining activity could be an intended outcome and not one that needs to be avoided through compensatory measures.
The corporate income tax system could also be used to encourage investments in technologies which reduce or minimize environmental impacts, by offering accelerated depreciation for assets meeting specific environmental criteria. For example in the UK, ‘enhanced capital allowances’ are available for the purchase of specified energy-saving technologies. Whilst a UK company can normally offset 20% of the remaining asset value per year, the cost of designated technologies can be fully offset against tax in the year of purchase.
It would be possible for mining or environmental ministries or agencies to develop such lists for mining-related products. Such a scheme would incentivize mining companies to purchase equipment with lower environmental impacts. A disadvantage of such an approach would be the complexity of devising such lists of products and applying such a scheme, especially for developing countries in low capacity environments.
Integrating environmental concerns in the design of the fiscal regime
Placing environmental protection alongside revenue generation and investor returns as an objective in the design of fiscal regimes in the mining sector marks a major change to current practice and advice from international organizations. Mineral dependent economies currently design fiscal regimes based on maximizing revenue generation subject to the need to attract and maintain investment, whilst environmental concerns are considered separately as a regulatory issue. In the future, there is a need for best practice to integrate environmental concerns over resource use and the impact of pollutants on the environment into the design of fiscal regimes.
This poses challenges for the design of the fiscal regime, as well as how it is administered by government. Outside actors can help overcome these obstacles by technical assistance to review and reform fiscal regimes to reflect environmental concerns as well as by providing resources to support the administration of such regimes.
References and further reading
United Nations (2017), United Nations Handbook on Selected Issues for Taxation of the Extractive Industries by Developing Countries, United Nations Economic and Social Affairs, New York, 2017
United Nations Environment (2016) Policy Brief – Fiscal reforms in the extractives sector for green finance, United Nations Environment Programme Green Economy, Geneva, 2016