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Environmental Economics Research Paper No.5
Consultancy report prepared by: Dr David James, Ecoservices Pty Ltd
Commissioned by Environment Australia
© Commonwealth of Australia, 1997
ISBN 0 642 26850 9
Environment taxes consist of a special levy to finance environmental improvement programs and projects. A potentially efficient instance of such a tax, unrelated to incentive effects, is a levy designed as a front-end capital financing measure. An example of such a levy is the Special Environmental Levy introduced by the then Sydney Water Board. One of the main conclusions that may be drawn from this case study is that, to gain public acceptance of the scheme, the funds must be spent and be seen to be spent on environmental improvement programs.
The Hunter Water Corporation uses an environmental levy. Improving efficiencies within the corporation in recent years have enabled it to pass on the benefits to its customers, and reduce the levy significantly.
A number of local councils now impose environmental levies to raise funds specifically for environmental improvement programs under their jurisdiction (see Chapter 15 of this report). Generally, local citizens seem to support these levies.
This case study is included as a matter of historical interest, since the Sydney Water Board has been replaced by the Sydney Water Corporation and the environmental levy is no longer applied. The cost of environmental protection programs and projects by the corporation is now absorbed within the general rating structure.
The Sydney Water Board was responsible for the treatment and disposal of wastewater for the Sydney, Illawarra and Blue Mountains area. In the late 1980s, serious water pollution problems resulted from inadequate methods of sewage disposal. The problems included algal blooms and eutrophication of the Hawkesbury-Nepean River, pollution of other waterways and faecal contamination of Sydney beaches. There was strong public pressure to improve the environmental quality of the beaches and waterways in the region, including mass public meetings and representations from community groups.
In 1989, the New South Wales Government committed itself to clean up, and keep clean, the oceans, beaches, harbours, estuaries, rivers and waterways. This decision resulted in the Clean Waterways Programme (CWP). The vision of the CWP was clean and healthy waterways in the Sydney, Illawarra and the Blue Mountains achieved in partnership with the community. The mission of the Sydney Water Board in realising this vision was to develop and implement technical and social solutions to current and evolving water pollution problems in conjunction with the community (Water Board 1992a).
The CWP involved a planned expenditure of approximately $7 billion over 20 years, the largest environmental improvement program ever proposed in Australia.
The Special Environmental Levy (SEL) was introduced as a financing mechanism to support the CWP. Funds raised under the levy were expended under the Special Environmental Programme, implemented as part of the CWP.
An environmental levy was selected for several reasons. Extensive consultation with the community revealed strong public support for a special fund that would be allocated, and seen to be allocated, specifically to environmental improvement of the region's beaches, rivers and waterways.
Revenue from water and sewerage charges was considered inadequate as a source of funds to support the entire CWP. There were urgent needs for front-end financing in the initial phases of the program. The SEL was an appropriate mechanism to meet this need, as prospects for increasing ordinary water and sewerage rates were subject to various limitations.
Description of Instrument
The SEL was designed to be applied for five years, raising $485 million over that period to facilitate implementation of the CWP. The levy was $80 per household, with pensioners being granted an exemption.
The Sydney Water Board introduced the levy in 1989 in conjunction with its general rate collection functions. The first public report on the SEL appeared in the Report on the Special Environmental Programme, released by the board in September 1990.
In The Special Environmental Levy: Update Report (Water Board 1992a), the aims of the levy were to:
Revenue raised from the SEL amounted to $176.57 million by 30 June 1991, and a further $95.7 million was collected in 1991-92. By 30 June 1992, cumulative revenue from the fund totalled $289.56 million, including interest.
Expenditure on the various programs was $140.94 million in 1990-91 and $97.69 million in 1991-92, resulting in a cumulative expenditure of $238.63 million by 30 June 1992.
At the end of 1990-91, unexpended funds from the levy amounted to $48.48 million, due to time lags involved in planning and implementing projects. In 1991-92, unexpended funds were $2.44 million. The unexpended cumulative balance at the end of 1991-92 was $50.93 million.
Assessment Against Criteria for Evaluation
The SEL supported a wide range of projects designed to improve water quality in the Sydney/Illawarra/Blue Mountains area. Improvements were achieved in environmental monitoring, community participation, effluent quality, sludge management, odours and emissions, sewage overflows, additional sewerage services, urban run-off, bushland and wetland management and source control.
A major problem with the SEL was to allocate the funds effectively within a short time frame to achieve environmental improvement. More than 460 projects were undertaken, creating many administrative problems. Schemes should have had more realistic time frames for the expenditure of funds, including longer lead times for planning and appraisal. Economic analysis of proposed projects would have helped to allocate funds to the areas with greatest benefits to the community.
Most of the programs funded under the CWP occurred in areas where it was difficult to demonstrate the benefits to the community. For example, fine screens and sludge recycling significantly improve the quality of sewage treatment, but this was not readily understood by the public.
It is possible that the benefits of the CWP accrued mainly to residents and visitors in coastal areas of Sydney, as compared with communities further west. There may have been a perception that the distribution of benefits was inequitable.
Community participation was an important feature of the SEL. In the initial stages of the levy, the public contributed to the formulation of priorities for the program of works through seven public forums.
Adverse publicity for the SEL was created early in 1993 when the media reported that a dividend of approximately $100 million had been paid by the Sydney Water Board to State Treasury, the equivalent of the annual revenue raised under the levy. The public interpreted the SEL to be a general tax designed to contribute to consolidated revenue. The scheme received so much criticism that it was abandoned in favour of a user pays system of pricing.
The SEL was a successful way of raising revenue for environmental projects. The most important aspect of the levy, at least initially, was community acceptance. Consultation with the community ensured that the levy would be an acceptable instrument. However, the acceptability of the levy came under question when it was suggested that levy funds had been paid into consolidated revenue. Although this suggestion was incorrect, the experience underlines the importance of proving to the community that funds raised for environmental improvement projects are expended for those purposes.