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Tax Tools for Climate Protection: The US Ozone-Depleting Chemicals Tax

The Policy in Brief

Economic Instrument: Production tax on use or sale.

Problem: The production of ozone-depleting chemicals (ODCs) - primarily chlorofluorocarbons (CFCs) - poses a threat to the stratospheric ozone layer, which protects life on Earth from harmful ultraviolet radiation.

Goal: Significant reductions in the production of ODCs.

Description: A tax on environmentally hazardous ODCs, intended to directly discourage production by increasing their prices. It is the most significant instance of a classic environmental tax in the US and a key component of the US ozone protection policy. It has played a central role in stimulating reductions in the production of ODCs well beyond those required by the Montreal Protocol and the subsequent London Revisions. Its innovative features make it a useful model for others attempting to design major environmental taxes, while it has also been a significant source of revenue for the federal government.

Administering Institution: US Federal government.

Key Stakeholders: Federal government, US Environmental Protection Agency (EPA), ODC producers.

An Overview

The ODC tax is a tax on listed chemicals applied at a rate proportional to their potential for depleting the ozone layer. The tax is imposed on the sale or use of the chemicals by manufacturers or importers. For each chemical covered, the tax is calculated by multiplying three numbers - the number of pounds produced or imported, the base tax amount per pound, and an ozone-depleting factor which estimates the potential for depleting the ozone relative to CFC-11. The ozone-depleting factor is an estimate of both the magnitude of the ozone-depleting effect while the chemical is present in the stratosphere and the persistence of that effect over time.

As passed in 1989, the tax applied to eight chemicals. An additional twelve chemicals were added by the Omnibus Reconciliation Act of 1990. The tax rate, originally $1.37 per pound, was increased by the National Energy Policy Act of 1992 and was set at $5.35 per pound for 1995. After that, the tax rate is set to increase by an additional $0.45 per year. So, for instance, the tax rate in 1996 will be $5.35 plus $0.45, or $5.80, the tax rate in 1997 will be $6.25, and so forth. In keeping with the environmental purpose of the tax, ODC production is excluded from the tax if it is used as a feed stock and consumed in manufacture or if it is recaptured and recycled at the end of the manufacturing process. Other exceptions and exemptions to the basic tax include a reduced burden on CFCs used in the manufacture of foam insulation or medical sterilants and a phase-in for halons. There was a floor stock tax imposed on existing stocks of ODCs held when the tax came into force in 1990.

When the ODC tax was first considered there was concern about the impact of the tax on the competitiveness of US industries that manufactured ODCs or used them to manufacture other goods. In response, Congress included a border adjustments tax to offset any competitive impacts. Imports and exports of ODCs themselves were taxed in accordance with the destination principle, that is, imports were subject to the tax on import and any tax paid on exports was rebated. This provision protected the domestic market from predation by foreign producers without a comparable tax provision, and allowed exports to compete on a level playing field with other nations that had not adopted a tax. Products containing ODCs or manufactured with but not physically incorporating ODCs are subject to a tax on import equal to the tax that would have been paid had the product been manufactured in the US. The tax is based on the manufacturer's actual use of ODCs or, where actual use is unreported, on an imputed use.

Some Further Reading

Barthold, Thomas A. (Winter 1994). Issues in the Design of Environmental Excise Taxes, in Journal of Economic Perspectives.

Miller, Alan S. (1990). Cleaning the Air While Filling Corporate Coffers: Technology Forcing and Economic Growth, in Annual Survey of American Law, No.1, pp. 69-82.

Westin, Richard (1993). Chapter Nine, Environmental Law Practice Guide, Matthew Bender & Co.

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