By Barrister Aemen Zulfikar Maluka
The Author is the Executive Director and Founder of Josh and Mak LLP (UK), which is primarily a Mining and Energy law firm.
The author can be contacted at firstname.lastname@example.org
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It appears that not even the noise of the most powerful Chinese imported private electric generators, which have become extremely popular in the rich residential areas of our country, can drown the noise generated by Pakistan’s energy crisis. As we all know, in the case of Pakistan, the overall plan for energy independence has followed a disheveled path and this has severely affected our energy policy. Also, in the case of Pakistan, changing political regimes and competing, rather conflicting and contradicting political agendas have counteracted the intended effectiveness of tax credit and incentive programs for energy efficiency.
This paper will hence, without an ad-nauseam, descriptive repetition of Pakistani law and policy, seek to comment upon the rather faulty and misinterpreted public sector’s priorities in addressing the energy shortage. The author hopes to conclude at the end of this paper, based on these observations that Pakistan’s energy conservation policy-makers and legislators, particularly those who are reviewing and constructing the regime for environmental taxation based on the very much-overrated Pigouvian taxation theory, need to take another look at the current legal framework that aims at promoting energy conservation. Also, it needs to be seen that Pigouvian taxes may not be the best solution for Pakistan’s political and legal environment even though they may have, in the past, produced the desired results in many Western jurisdictions.
Till date, many tax credits and incentives as well as fines and taxes continue to be ineffective due to policy disruptions via political and executive inaction, nominal action, and competing policies. To elaborate upon this further it is important to discuss the general principles behind Pakistani environmental policy and the regulatory principles it rests upon, as a whole, especially with reference to the tax policy within Pakistan and its potential impact on social, economic, and consumer demand. There is also a need to discuss hybrid vehicles, alternative fuel vehicles, fuel cell vehicles, and fuel economy within the Pakistani tax and environmental agendas. Also, it appears and it may actually be the case, that current and proposed energy programs and energy conservation legal policies of Pakistan are in blatant disregard of fundamental environmental and tax policy norms, which make them anything but effective. Truly, even though energy efficiency has risen to the top of the law and policy agenda in Pakistan, it has largely been a comedy of errors. The supporters of the Pigouvian tax measures, which would potentially ‘stop’ pollution and energy wastage, fail to understand the position in third world countries. Which, plagued by rampant corruption in the energy sector, including the problem of electricity theft and abuse.
The ‘not-so’ Enercon
Regarding Pakistan’s current legal environment, in principle it can be agreed that conservation is more efficient than generation. The Pakistani regulatory response to the need to conserve energy was the establishment of an ENERCON, which was established in 1980s under US technical and financial assistance. Practically the organisation cannot be said to have done the needful despite its well meaning efforts in the face of political pressure for balancing the financial and economic as and pressure has emerged over the last decade, and hence the private and public lack of interest even if not apathy towards the subject.
The Enercon Bill 2013 has some interesting upcoming provisions. Under the proposed bill a “Council” is to be established. The Bill states that the Council, or Provincial Government with the concurrence of the Council, may establish any suitable structure or mechanism for enforcement of this Act including energy efficiency standards, labeling, incentives, fines and other related requirements under this Act with effect from the date to be determined by the Council. What is the purpose of the Council under the Bill, one might ask? As per the Bill, “A Council to be known as the Pakistan Energy Conservation Council (PECC)” under the Energy Conservation Bill, 2013 ‘to provide for the establishment of institutions and enunciation of mechanisms and procedures so as to provide for effective conservation and efficient use of energy’
The Bill depicts that recent legislative efforts have been aimed at reorganizing ENERCON as a more visible organisation with presence in all the provinces and major cities. However with the change of the current political regime, it is yet to be seen whether ENERCON will live up to its reputation of having at hand a much more strategic business plan with defined annual targets and achievements.
The Pigouvian tax was introduced in 1920 by A.C. Pigou was based on his treatise, namely ‘The Economics of Welfare’[i]. In theory this tax would be used to correct negative externalities like social costs like crime and pollution, which arise as a result of consumption and production of a certain product. Of late, based on the suggestions in the Mirlees Review and other economic policy makers, the argument is often used to justify environmental taxation in the UK, as being based on the double dividend proposition of the Pigouvian tax.
There is a debate however whether environmental tax aimed at encouraging energy conservation, despite its social appeal, can justify on the basis of the ‘double dividend’ hypothesis. The double dividend hypothesis states that environmental taxes (which may be aimed at energy conservation as well as pollution prevention) ‘aid’ the environment and hence the society. At the same time it is also believed that (at least in theory), they also allow other taxes on production and consumption to be reduced, hence bringing about a general relief for the public[ii].
Looking at the example of the UK the concept of environmental taxes and such has gained more popularity after suggestions from the Mirlees Review[iii] that is, that there is a strong case for using taxes, charges and emissions trading schemes (rather than regulation) in the interests of cost efficiency. However it is not just the Mirlees Review, which has supported the case for environmental taxation.
However many critics of the Pigouvian tax especially for developing countries are of the opinion that such policies may not be completely conducive to attractive foreign investment due to the rising costs of production, fuelled by extensive environmental taxes. Another view is that these measures are merely cosmetic and no solid results have been seen so far which would support the observation made by the supporters of the double dividend theory
Tax incentives and ‘ permits’, which can be bought for careless abuse of energy and/or air pollution, are widely criticized for giving a clear license to pollute to the industries as well as acting as a tool of tax arbitrage.
While it has been convenient to mimic the Pigouvian tax concept from the West by our not so aware policy makers, the upcoming governments and their policy divisions, will need be aware of the fact that the measures they take now will, in the long term affect the competitive balance of their economies as well as the future sustainable development of their local businesses.
Much Ado About Nothing: Case of the Pigouvian Tax
In spirit, at least, there is nothing more noble that robbing the rich to give to the poor. The rich are not supposed to be ‘evil tax evaders’ but also the most likely group of consumers to guzzle public services. The policy makers then decided, ‘Hey lets find a way out to punish the rich?” Lets place taxes on home electricity supply and lets give the wealthy industrialists a dose of loadshedding. The result? The wealthy industrialist sent his capital abroad, uprooted his investment from here and lay off all the ‘poor’ employees who worked for him. At his home he installed a special Chinese generator, which runs pretty much everything including air conditioners. The rich man was never punished but the poorer got poor as the country-wide employment, misery and lack of electric supply suffered due to indecisive leaders who could not decide whether the Chinese were offering them a better deal or the Iranians.
Despite the hype given to the Pigouvian tax, modern economists and politicians have failed to understand that Arthur Cecil Pigou did not trust the government to improve human well being by attempting to use good taxes, subsidies, and regulation. Pigou supported Public Choice and rejected the notion that politicians, given constitutional constraints, would be capable of implementing an efficient and effective set of taxes and subsidies. His worst nightmares seem to confirm with the fact that once politicians are given a freehand to devise ‘bonafide’ tax, they would find themselves much more busy, writing loopholes for favored interest groups and finding ways to generate evermore revenue[iv].
Coming back to the so called rich man and industrialist due to whose tax pampering, dishonest tax declarations and evasions and electricity theft, Pakistan has now been left with third-rate public services. This does not however prevent the wealthy from developing inefficient private workarounds. Everyone in Pakistan knows that a generator is a source of noise -pollution and global warming. Every wealthy house pays up to 100,000 PKR or more for a generator, when it would make sense to invest those resources in the electrical grid and the generation of better quality hydel power. However this is not the only thing we have dealt with in the most dysfunctional context, just like we have failed to address income inequality, climate change and maintain ace of national infrastructure as priorities.
In Pakistan during the last one decade, there has been a deeper decline of public services accompanied by the rise of private workarounds for the wealthy. The rich can pay for private security, gated communities and private schools, private health clubs and libraries. This mindset has not only been visible in North America but also in developing countries like Pakistan, where the feudal rich make do behind high walls topped with shards of glass preferring to throw their garbage on the gate rather than paying the council sweeper for picking the trash. Even prominent politicians have joined the ‘hall of Shame’ in the past of electricity thieves with one of our ex-Prime Ministers’ earning the nickname ‘Raja Rental’ due to his sheer dishonestly in abusing the PPIB power rental projects.
Pigou’s misinterpretation and the double dividend
At least on Paper, the Pakistani policy response has not lagged behind its other world counterparts in its initiatives to respond to these changes as evident from its current law and policy. The perceived concept of Pigouvian regulation itself has a defective basis. This is because there is a clear ‘may’ in the ability of economic instruments to achieve a given level of environmental protection at lower cost. For example the tax incentive mechanisms simply provided incentives for polluters to choose the most cost-effective abatement mechanisms. A valid argument is that driven by economic incentives, many polluters may come up with innovative ways of avoiding pollution and hence have their tax liability reduced[v]. A counter argument is that tax evaders are more creative than inventors. Adopting the EU ETS (Emissions Trading Scheme) by allowing the polluters to ‘buy’ pollution permits, no such ultimate panacea has been created to avoid illegal waste dumping and C02 emissions. The environmental burden on the livelihoods of the poor, the health of the marine Life and the damage to natural human habitats certainly do not have monetary figure, which can be placed upon them. The lacuna in the efficacy of taxation hence becomes much more wide when we actually look at whether the perceived quantification of the costs of pollution abatement is misleading or actually present a true picture[vi].
In terms of future Pakistani Energy Conservation policy, coming to the mode and manner in which green or environmental taxation is designed, it is worth looking at whether a direct tax will address an ascertained quantification of the amount of pollution being charged for. Ideally then, the double dividend theory would demand that other types of consumption and production taxes supplement the environmental tax. The double dividend theory also envisages, arguably, that the increase in environmental taxes would be supplemented by a decrease in other taxes on food, clothing and educational services. This would be in theory, feasible at a point where distortions in the economy would be balanced as a result of the way the emphasis would shift on ‘punishing’ the polluter. In reality however, experience has dictated otherwise, as environmental taxes tend to create their own distortions, especially by raising the price of goods, which may or may not be offset by reduced distortions elsewhere in the tax system. This is where the double-dividend theory fails to recognize that if the polluter or energy ‘waster’ pays, then so do the thousands of people he employs and/or has to fire due to high production costs. Many products and services connected or not directly connected to the taxed product will suffer. It so appears that the victimized a certain sector have so called ‘polluters’ while excusing those who steal electricity households or energy-intensive industry under political pressure. Hence such taxes would as such have a limited the revenue potential, certainly not enough to offset with a possible income or capital tax decrease.
For a rational energy policy in the context of declining fossil fuels, limited electricity resources and huge external costs, Pakistan will have to acquire an implementation capability that combines policy shifts with significantly improved implementation capabilities. The Pigouvian tax potentially fails its purpose in accounting for these so called external costs, where as given the pollution numbers, the external cost in Pakistan will be far higher than the European and US estimates.
[i]Pigou, Arthur C. The Economics of Welfare , London: Macmillan and Co. 1932, Library of Economics and Liberty [Online] available from https://www.econlib.org/library/NPDBooks/Pigou/pgEW.html; accessed 5 June 2013; Internet.
[ii]Stern, Nicholas. 2006. The Economics of Climate Change. Cambridge: Cambridge University Press.
[iii] Don Fullerton Andrew Leicester Stephen Smith, ‘Paper written for the Mirrlees Review “Reforming the tax System for the 21st Century” March 2008’
[iv]Samuelson P.A. 1954. “The Pure Theory of Public Expenditure,” 36(4) Review of Economicsand Statistics 387-389.
[v]Parry, Ian W.H., Margaret Walls, and Winston Harrington. 2007. Automobile Externalities and Policies Journal of Economic Literature, 45(2): 373–399.
[vi]Nordhaus , William. 2007. Critical Assumptions in the Stern Review on Climate Change. Science 317:201–202.