Macroeconomics - IG Protecting the Environment

 Macroeconomics - Protecting the Environment

Case study (hypothetical) - Level - IGCSE

How does taxation help a country to protect the environment, which has been experiencing a massive increase in pollution due to use huge number of vehicles and trucks consuming a large quantity of fossil fuels?

Possible answer -

Though tax is a tool that Government around the world use it to collect taxable revenues but the application of taxation is much wider than only helping a Government to collect the tax revenue. Tax could also be used to protect the environment as it creates incentive for various economic agents to correct their actions. By that I mean, taxes can be used to stop those activities that damage the environment. 

Taxes create accountability among the economic agents and make them consider the social costs of their actions such as users of cars and trucks do consider driving cars or trucks for their private benefits without considering the costs to the society of their use cars and trucks, can now be brought under the realization, when they pay more for their purchases of fossil fuels while preparing for using the cars and trucks.

Tax will cause increase in the price of fossil fuels such as petrol or diesel leading to forcing the vehicle users to decrease their number of journeys. As a result, less pollution leading to have quality air into the atmosphere. 

Besides, higher tax would cause higher revenue for government that they can use to fund various projects or activities that helps to bring down the CO2 emission or can encourage producers to bring the alternative options to fossil fuels, cars or introduce environment friendly vehicles.

Meantime, higher tax will also encourage users of vehicles to opt for alternative options that could be cheaper and better to avoid paying higher taxes. Thus, there can have a match between demand and supply of alternative to fossil fuels like petrol and diesel, creating a new market for environment friendly energy or transportation.

This is how taxation can help to protect the environment.