Real life Pigouvian Tax: the case of the plastic tax in Italy

During the discussion of next year’s budget plan, a “plastic tax” was rumored to be included as part of the Italian political “Green New Deal” agenda. It is designed to be a consumption tax of 1 euro (recently downgraded to 60 cents) on every ton of disposable packaging and non-reusable plastic containers.

The fiscal reform was introduced, along with other “green taxes”, as an attempt to tackle the global problem of waste, spurring more sustainable consumption habits. In this sense, the tax was meant to repay the society for the negative externality produced by the plastic industry and was therefore labelled as “Pigouvian”.

It should raise around 1 billion euro in 2020, according to the Italian Treasury.

The problem is - a Pigouvian tax is not supposed to raise any additional fiscal revenue, rather it offsets the social cost of the negative activity or discourages the “bad” activity completely. Generally, the real world simply cannot thrive without plastics so easily, which means the tax isn’t really a disincentive, rather, it is a means to raise funds to be used by the government for more positive initiatives.

Indeed, the Italian ex Minister of Economic Development, Labor and Social Policies, Luigi di Maio, quickly “justified” this additional fiscal burden by hinting on incentives/mini bonuses for companies which will follow a more sustainable production cycle.

In the scenarios depicted by the Treasury revenues flowing from the tax are supposed to increase up to 2.2 millions in the following years. However, these real-life expectations do not seem compatible with the underlying reason to levy such tax: reduce production or shift towards “greener” alternatives.

Such taxes provide to the public a so called “double divided”: firstly, they reduce the amount of negative externality and secondly, provide additional funds to improve public services and bring deadweight loss to 0.

From the pool of alternative applications of Pigouvian taxes, Fullerton and Metcalf suggested the government regulates the production of negative externalities instead of taxing the producer itself.

Would the affected producer be unable to internalize such costs? They may not because the “tax” is already high. Producers of plastics are already subject to a “preliminary” tax on the type of material they are producing and one on the disposal of the waste produced which was even recently increased. By adding another disproportionately high tax on the direct production, a very viable sector of the Italian manufacturing will suffer. In general, however, in Italy the level of recycling/recovery is elevated and the country is second only to Germany in the Eurozone thanks to increasing sensitivity on the issue and investments.

Therefore, many exponents of the Italian plastic sector complained of such strong measure and claimed that the by introducing such tax “you do not save the planet but you destroy an economy”. The question is: can Italy allow itself to do so?

Considering the already heavy fiscal pressure experienced by Italian enterprises and the regular household, another main issue that has been raised is where the burden of such tax will fall. In theory, it is known that when the main activity of a business gets heavily taxed, if it is unable to internalize the costs without squeezing the margins too much, the burden of the tax will be imposed on those who are in the middle of the supply chain or the great distribution.

On paper, Pigouvian taxes increase social surplus, but it makes some market participants worse off, starting from the producers. In addition, if negative externalities are priced into the market, then all those responsible for them pay, including final consumers as well. Fiderconsumo indeed estimated that the plastic tax could cost circa 138 euro per family each year, which highlights another critique moved towards Pigouvian taxes: their regressiveness. In fact, the burden will be heavier for low-income households. The question that reveals itself from this fiasco, is sustainability the low-income households’ responsibility to account for? Or will it actually be a united effort towards a greener Italy?