Vehicle and Industrial Emission Tax: A silver bullet or a poisoned chalice?

By E. N. Kwame NKRUMAH (Dr) & David ALEMZERO (Dr)

While ostensibly rooted in environmental concerns, the recent introduction of a Vehicle and industrial Emission levy in Ghana has ignited a profound and nuanced debate within the socio-political landscape. Critics argue that the hurried implementation of the levy raises questions about the government’s commitment to transparent and accountable policy-making.

The lack of a meticulously structured plan has prompted scepticism, with some contending that this tax may be more of a political expedient to raise money to support the ruling government in the upcoming 2024 than a well-thought-out strategy for environmental conservation. The economic context, characterised by existing financial burdens on both citizens and businesses, amplifies concerns regarding the timing and necessity of such a levy.

In analysing the political decision-making behind the Emission Tax, it becomes imperative to decipher whether it aligns with a genuine commitment to environmental sustainability or if it is a calculated move to appease certain political constituencies.

Revenues from carbon taxes and Emissions Trading Systems (ETS) have reached a record high, about US$95billion, according to the World Bank’s annual report. While the uptake of ETS and carbon taxes is on the rise in emerging economies, high-income countries still dominate. New instruments were implemented in Austria, Indonesia and sub-national jurisdictions in the United States and Mexico.

Australia is scheduled to recommence carbon pricing with a rate based ETS due to start in July 2024; and countries, including Chile, Malaysia, Vietnam, Thailand and Türkiye continue to work toward implementing direct carbon pricing. Ghana just recently joined the ranks as the third African nation to implement an emission tax, following in the footsteps of South Africa and Mauritius.

The primary objective of this tax is to mitigate the negative impacts linked to emissions from vehicles in order to meet the Paris Agreement target of limiting global temperature rise to 1.5 degrees by countries worldwide, as highlighted in the 2023 Sixth Assessment Report by the Intergovernmental Panel on Climate Change (AR6 IPCC).

As a member, Ghana aims to achieve its climate objectives through the Nationally Determined Contributions (NDCs) and a commitment to reducing greenhouse gases by 30 percent by 2030. Although lacking comprehensive climate change legislation, Ghana has sector-specific laws and policies; hence, achieving the NDC goals by 2030 will necessitate investments ranging from US$9.3billion to US$15.5billion.

Undoubtedly, Ghana’s energy sector plays a significant role, accounting for about 46 percent of the country’s greenhouse gas emissions. Specifically, mobile combustion emissions also constitute 34 percent of total energy emissions and 15 percent of total national emissions as of 2019.

Notably, transportation emissions, primarily from road transport, have experienced a substantial increase of 47 percent compared to 2016, a not-so-surprising surge that can be attributed to the rise in the resulting traffic congestion in urban and peri-urban areas.

Amid this congested traffic are mostly vehicles that fail to meet international emissions standards, causing air pollution, which is also closely linked to lower respiratory infections. As the 2021 Lancet study indicates, air pollution-related deaths impose a cost equivalent to 0.95 percent of the country’s gross domestic product.

At this point, one may agree that introducing the emission levy is a step in the right direction, as we champion the course of action for climate change and control. However, the introduction faces criticism for its initiation by the GRA, instead of the Ministry of Environment and Science, Technology and Innovation.

Critics argue that the motivation behind the Act is revenue-driven, contrary to its environmental objectives. The country’s heavy reliance on thermal energy – 70 percent of total energy – raises concerns about taxing individuals for pollution. The insufficient efforts to diversify the energy mix provide little incentive for adopting clean energy.

For instance, at the macro level, the country has not done enough to promote diversification of the energy mix and therefore, there is no incentive for individuals to use clean energy. The share of emerging renewable energy in the total generation is less than 1 percent, yet the policy pushes people to reduce their emissions. The question that troubles the mind is whether we have built the necessary infrastructure to increase the adoption of electric vehicles (EVs).

Can a citizen of Ghana easily import electric cars into the country without paying higher taxes than combustion engines? Why is the government not electrifying the mass transport system, like ‘Mahama Ayalolo’ or ‘Kufuor buses’ to encourage other transport owners to invest in electric taxis and buses? Can the government provide tax incentives for electric vehicle manufacturers to set up factories in Ghana?

These are some of the questions that need answers before imposing this tax and recognising that energy and road transport are significant contributors to emissions. A holistic approach is, therefore, needed to address the challenges posed by the Emissions Act.

Ghana can draw lessons from other countries to address the lapses and curb the ongoing debate on the relevance of initiating the emission tax. Primarily, many countries introduce excise taxes on carbon emissions, with escalating rates over time.

This typically forms part of a comprehensive tax policy aiming to shift the tax burden from the workforce to capital. Countries like  Finland, France, Norway, Portugal, Switzerland as well as the provinces of British Columbia and Alberta utilise carbon tax revenue to support other tax initiatives. In 2015 and 2016, Norway signalled a shift toward green and environmentally friendly taxes.

All revenue from the carbon tax imposed on petroleum activities goes directly to the state pension fund. This is part of the Norwegian tax framework that separates the returns from petroleum revenues from the utilisation of these revenues. Similarly, a portion of the revenue from Alberta’s carbon levy is utilised to regulate electricity prices, offering a type of compensation to energy consumers.

In Colombia, the entire revenue from the carbon tax is dedicated to the Fund for Environmental Sustainability and Sustainable Rural Development in Conflict Areas, and the tax paid is deductible from income tax.

France’s carbon tax revenue was directed toward corporate tax credits until 2016. It is also worth mentioning that carbon taxes are also directed toward eco-friendly purposes. For instance, in Ireland, a percentage of revenue funds €50million annually for the National Energy Efficiency Retrofit Program. Since the 2008 financial crisis, Ireland has used carbon revenues to either maintain or reduce payroll taxes.

As of 2017, there have been changes in the allocation of carbon tax revenue. In France, a portion of this revenue, approximately €1.7billion, is allocated to a dedicated energy transition account to compensate electricity suppliers for using renewable energy to generate electricity in the country.

The CO₂ levy is not the sole means of financing CO₂ emissions. The World Bank initiated the Carbon Finance Project in some African countries, aiming to enhance livelihoods through job creation and investments in education and health using carbon revenues.

For instance, the Egyptian Vehicle Scrap and Recycling programme, funded by carbon revenues, helped replace over 40,000 old taxis in Cairo, avoiding the equivalent of 130,000 tonnes of carbon dioxide in 2013 and 2014. Ethiopia’s Humbo programme reclaimed 27,000 hectares of land in less than two years, serving as a model for other countries. Kenya’s Sustainable Land Agricultural Land Management project tripled corn farmers’ yields and trained 300,000 smallholder farmers in sustainable agricultural management practices.

To conclude, the main reason for imposing environmental taxes is to reduce emissions cost-effectively; however, it seems we see the carbon tax as the means to augment Ghana’s revenue stream. The question echoing through this discourse is whether the emission tax is a transformative solution or a problematic burden on the nation’s economic and political dynamics. As we navigate the complexities of this environmental levy, it becomes evident that the efficacy of such policies hinges on a delicate balance.

The recommendation is for the establishment of a dedicated fund in Parliament, where the collected taxes can be channelled for their intended purpose, with the Ghana Revenue Authority (GRA) responsible for collection and the Environmental Protection Agency (EPA) for management. This framework ensures transparency, acceptance and effectiveness, as the earlier examples demonstrate.

The funds collected could be directed toward initiatives such as energy efficiency measures, constructing schools in disadvantaged communities, expanding renewable energy projects, reducing national debt, and more. The introduction of the levy by the GRA appears misguided, and it should involve collaboration with key stakeholders like the National Development Planning Commission (NDPC), EPA, Department of Environment, etc., to align with the objectives of the levy.

While the tax signifies a progressive step in addressing environmental concerns associated with vehicle and industrial emissions, its success lies heavily on meticulous implementation, transparent fund utilisation and collaborative efforts with various stakeholders. The potential benefits, including the promotion of cleaner technologies and the enhancement of environmental performance, underscore the importance of prudent execution.

The primary goal is not revenue generation, but rather the utilisation of a market-based tool to mitigate pollution, with revenue being a subsequent outcome. This is not a chicken-and-egg dilemma; the sequence is clear.

As Ghana navigates this path, the coming years will unveil the true impact of this emission tax, shedding light on whether it becomes a herald of positive change or presents unforeseen challenges. In the dynamic arena of environmental policy, the ultimate assessment of its effectiveness rests on the synergy between political will, public engagement and the realisation of sustainable outcomes for the nation.

Dr. Nkrumah is a financial economist and the lead consultant and partner for Tunani Africa-Ghana, a think right tank that advocates for effective and efficient policy direction and implementation. Additionally, he holds the position of PhD Programme Director at the Nobel International Business School (NiBS), Ghana.

Reach the writer through email: [email protected] or LinkedIn E. N. Kwame Nkrumah.

Dr. David Alemzero is an energy economist, lecturer and research fellow at the Southwest University of Science and Technology, Sichuan Province, P.R. China

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