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Sri Lanka’s new ‘green tax’ not a hit with drivers or environmentalists

  • Sri Lanka has introduced a revised carbon tax through the government’s 2019 budget to generate about $14 million a year in revenue for its debt-strapped economy.
  • Older and hybrid vehicles are to be heavily taxed, while electric cars are exempted.
  • Critics say the way the tax is levied — not on a car’s emission levels, but rather on its model year — means it won’t be effective in sparking a change in consumer preference for fully electric vehicles.
  • They also say the tax unfairly targets consumers, when it should instead target industry.

M.K. Vijitha Perera had been looking forward to buying her first car. But now the 26-year-old says she’s had to shelve the idea, following the Sri Lankan government’s introduction of a new carbon tax that would slap a hefty premium of at least 20 percent on the Japanese hybrid model she hoped to get.

“The government is incentivizing electric cars which are responsible for higher levels of emissions during the manufacturing process,” Perera says, adding the country doesn’t even have the infrastructure in place to make the switch.

These are just some of the criticisms aimed at the new carbon tax that’s meant to raise revenue for Sri Lanka’s cash-strapped economy, with owners of old vehicles questioning the “inequitable” basis of taxation while others question its merit as a “green tax.”

The government, keen to phase out fossil fuel-powered vehicles and incentivize the use of electric vehicles as part of a wider policy, slapped the new tax on a range of motor vehicles with effect from March 6, just a day after introducing the country’s budget for the 2019 fiscal year. The move is part of its new proposals to generate revenue; electric vehicles are completely exempted from the new tax, while gasoline-electric hybrids from Japan, a category of vehicles extremely popular in Sri Lanka, will be hit with a 20 percent tax.

In Sri Lanka, even small cars are significantly expensive due to heavy taxation aimed at keeping a high trade deficit under control. The new tax has already triggered a sharp increase in vehicle prices, which importers say is likely to dampen sales and hurt the motor vehicle industry.

The government plans to generate 2.5 billion rupees (about $14 million) annually through the new tax.

The new tax is levied based on the car’s year of manufacture and engine capacity — not on its emissions levels, for which an existing mandatory emissions tax already serves as a significant source of revenue for the government.

Sri Lanka’s commissioner general of motor traffic, Jagath Chandrasiri, told Mongabay the new tax took a long-term view of large-scale transition from fossil fuel-based to electric vehicle ownership. “It’s already a part of Sri Lanka’s economic policy,” he said.

In the past two years, the Department of Motor Traffic, through its Vehicular Emission Test Trust Fund, together with the Central Environmental Authority (CEA), have set up centers islandwide to assess vehicular air pollution in Sri Lanka.

Chandrasiri said Sri Lanka’s emission testing process was designed to demand better maintenance even from old cars. However, owners of older vehicles say they will now have to pay steep taxes even though their vehicles may not necessarily be responsible for higher levels of emissions. They say the government should not slap a tax that assumes older models have higher levels of emissions, and have called for a revision that’s more equitable.

Among the critics is Bandula Gunawardane, an opposition politician and former minister of trade and commerce and deputy minister of finance, who said the new tax was designed to generate revenue “under the guise of a green tax,” further burdening people already reeling under severe economic pressure.

“Most countries have a single tax for motor vehicles but Sri Lanka currently has about six,” Gunawardane said. “This is an unfair burden on vehicle importers and buyers both and will dry up the vehicle market.”

He said the revenue generated should ideally be used for environmental protection, including to mitigate the impacts of climate change and reduce air pollution. “The new tax is not founded on such a principle,” he said, calling for a single tax on motor vehicles.

Incentives for electric vehicles 

Responding to the criticism, Finance Minister Mangala Samaraweera spoke to Colombo-based media on March 7, where he agreed to review the tax concession on electric vehicles and also how the carbon tax is to be levied.

Samarweera, however, denied that all vehicles would be priced completely out of the reach of the middle class as claimed, saying certain vehicles would experience a price dip, such as small trucks and single cabs, by as much as 500,000 rupees ($2,800).

On the other hand, import taxes on gasoline vehicles will spike by up to 500,000 rupees ($ 2,800).

Another key point that’s been strongly opposed is the import tax on hybrid gasoline-electric vehicles, which has gone up as high as 500,000 rupees ($2,800).

In stark contrast, the import tax on fully electric motor vehicles of 70 kilowatts has been slashed by 175,000 rupees ($980), reflecting a continuing government policy of promoting electric vehicles over internal combustion ones.

According to the government, a revision of the excise duty and the implementation of a new luxury tax on motor vehicles will still have a minimal impact on smaller personal vehicles, with the thrust being the promotion of energy efficiency.

The government also intends to support the transition from gasoline to electric for three-wheelers, a popular mode of transport in Sri Lanka, under the “Enterprise Sri Lanka” concessionary loan scheme.

Under the new scheme, higher car taxes will apply to letters of credit opened after March 5, Finance Minister Mangala Samaraweera told the Sri Lankan Parliament on March 12, saying that vehicles imported on letters of credit opened before the budget, will be allowed to be brought at the old rate.

Not a green tax

The new tax will contribute toward the reduction of carbon dioxide emissions, said motor traffic commissioner Chandrasiri, who called for further incentives for those willing to make the switch from gasoline to electricity. “There is a long-term benefit in making this switch and as a country, we should respond to it,” he said.

But a key criticism is that the state revenue it will generate won’t go toward funding environmental protection mechanisms in the country — the ultimate purpose of any “green tax.”

“There is nothing to indicate that the proceeds of the new tax will be utilized for environmental protection mechanisms. It is best to identify the new tax as a revenue generator for a cash-strapped economy,” said Hemantha Withanage, an environmental scientist and head of the Centre for Environmental Justice (CEJ).

Environmentalists also argue that in most countries, the imposition of a tax on fossil fuel, or carbon tax, doesn’t necessarily target consumers as much as it does industry.

“The purpose of carbon taxation is to change behavior and effectively reduce the demand for fossil fuels. If producers absorb the cost of the tax, their profits go down and they will look for alternative sources for energy production and for improved technology to reduce carbon in fossil fuels. If the cost is passed on to the customer, the price of fuel will go up. This will increase the marginal or additional cost of each [kilometer] of travel,” said CEJ’s Withanage.

He added that the new carbon taxation system was based on the car’s age and engine capacity, and for a motorist, this meant a fixed cost, with no implication on the extent of travel. “If the objective is to reduce carbon emissions, then there should be a mechanism to assess the variable cost of travel as well,” he said.

“We have repeatedly lobbied for levying a carbon tax on highly polluting industries, on airlines and shipping companies that increase air pollution levels. These are huge businesses that can absorb the emission costs and are responsible for leaving extensive carbon footprints. Now that a tax is imposed, without any consultative process, the least the government can do is to show what plans they have for investing in carbon sinks or other environment friendly measures,” he added.

Echoing this argument, motor vehicle importers say the new tax isn’t likely to change consumer behavior, which is key in pursuing the goal of carbon emissions reduction.

“Once the tax is paid, it becomes a sunk cost, and more travel would mean less in terms of taxation,” Withanage said. “ This also does not  mean that those who pay higher registration fees for a more expensive car will travel less because of that initial absorbed cost.”

The policy appears to assume that older cars emit more carbon compared to newer cars. But while this may be true per kilometer of travel, they may also be driven less, unlike new cars.

The real problem, according to Withanage lies in flawed policy conceptualization, including a failure to offer incentives for the actual reduction of emissions.

“There will not be a huge shift towards people ditching older cars for newer models or electric cars,” Withanage said. “For owners of older cars, this is simply not an option, as the cost of the change far exceeds current and future taxes. Even for those able and willing, the difference in taxes is not significant enough to make that switch.”

“The new tax unjustifiably singles out motorists,” he said. “Other fossil fuel users such electricity producers and industries have been excluded. It will be incorrect to frame this tax as a ‘carbon tax’ when it is not founded on the universally accepted norms of an environmental tax which will ensure proceeds contribute to conservation initiatives.”

Chaturangi Wickramartne, head of science and an environmental scientist with the not-for profit, Environmental Foundation Ltd (EFL) said, while the new tax is a positive development, there would be implementation problems due to the lack of infrastructure. “To make this practical, there needs to be a massive upgrading of the country’s transport system.”


Banner image is of a main road in Sri Lanka via Pixabay

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