Tax elasticity of demand for plastic: the cause of plastic pollution in Ghana

Abstract

ABSTRACT Seemingly overlooked causes of inefficiencies in environmental fiscal reforms (EFRs) on plastic waste management are biased tax policies, which include indirect subsidization of plastic waste. With most developing countries grappling with plastic waste, it is paradoxical that they allow considerable tax exemptions on plastics, thereby ignoring the potential environmental damage caused by plastic pollution. This study investigates whether tax elasticity of plastic demand incentivizes unnecessary plastic consumption and subsequently plastic pollution, while accounting for the effect of tax exemptions. First, a simple theoretical model is developed to characterize the tax elasticity of plastic demand. Next, by isolating the attenuating effect of import tax exemptions, both the partial adjustment model and unrestricted error correction model, yield tax-inelastic demand for plastic in the long – and short-run, and speed of adjustments to the long-run equilibrium are estimated at 78% and 88%, respectively. Higher economic activities elicit higher long-run importation of plastic materials, with the effect of environmental tax and exemption being inconsequential. These results emphasize the need for government to embark on extensive restructuring of EFRs to ensure that optimal tax rates are applied on imports and efficient structures of tax exemptions are considered, while tightening possible channels of tax rebating by importers.