An AA Tax on Batteries: "Insurance for the Nation"
Image copyright: Christopher Rayan, from stock.xchng.
Laptops, walkmans, toys, mobile phones, calculators - these are just some of the items that need batteries to function in our daily lives. The average household uses 21 batteries a year and the UK generates 20,000-30,000 tonnes of wasted general purpose batteries annually (around 600,000,000 single batteries). Less than 1,000 tonnes are recycled. That is an astonishing figure!
The most common types of batteries are:
- Nickel-Cadmium (Ni-Cd) batteries: rechargeable batteries commonly used in mobile and cordless phones, video cameras, hand held vacuums, and cordless power tools.
- Alkaline batteries: dry cell batteries commonly used in domestic items such as flashlights, CD players, tape recorders, and clocks.
- Sealed lead-acid batteries: rechargeable, and used in camcorders, cordless phones, and power tools.
- Lithium batteries: most often used in cameras.
- Zinc-air batteries: button cells used primarily for hearing aids. They contain 1% mercury by weight.
What is our tax about?
We are proposing to place a tax on alkaline batteries, hoping to reduce consumption (and therefore waste) in the process. Initially, this tax will be imposed solely on alkaline batteries; however, there is scope for government expansion if the policy is successful.
Hopefully this tax will have two positive results:
- Firstly, it would increase awareness of the environmental problems caused by the batteries.
- Secondly, it could persuade more people to start using rechargeable batteries; a much 'greener' alternative.
How will this tax be calculated?
Recent studies have shown that over 680 million batteries in the UK were bought in the last few years; most of these (89%) were general-purpose batteries. Less than 2% were recycled, producing around 20,000-30,000 tonnes of waste. We intend to tax non-rechargeable batteries. Our initial idea was to take into account the Price Elasticity of Demand (PED) of batteries. This will allow us to find out how consumers will respond to a change in price. The tax imposed will be an 'ad valorem' tax so the amount of tax placed on the goods has to be representative of the size (therefore potential waste) of the battery.
However, placing a tax on batteries in this way will be far too complicated and would be difficult to implement. Instead a flat rate tax will be used and this will also be a percentage; however, this will remain constant no matter the size of the battery. Initially the tax will be set at 18%.
The table below shows the average cost for a pack of four batteries of different sizes. The last column shows the cost of these batteries after the tax is imposed.
| Type of alkaline battery | Price of battery (Pack of 4) | Price after Tax |
|---|
| AA | £1.99 | £2.35 |
| AAA | £1.99 | £2.35 |
| AAAA | £4.29 | £5.06 |
| C | £3.99 | £4.70 |
| N | £1.29 | £1.52 |
| D | £3.99 | £4.70 |
Who will pay the tax?
As the good is inelastic, the tax will mainly be aimed at consumers. This relates to the incidence of tax. As there are few substitutes around the majority of the cost will be paid by consumers via higher prices over the counter. Nevertheless it will also be implemented onto producers whereby a tax will be applied through lower producer profits. Tax revenue can then put forward recycling batteries, helping to improve the environment.
What benefits should the tax bring about?
The tax we are proposing has several beneficial implications:
- Firstly, the environmental benefits: the tax will increase the price of disposable batteries, which will encourage households to use rechargeable batteries. With a much cheaper alternative readily available, it is hoped more parents will choose to use the rechargeable batteries, therefore reducing the amount of disposable batteries in landfills.
- Councils will also benefit if the number of disposable batteries is reduced. This money saved, if council disposal is reduced, can be invested into research and development of more environmentally friendly batteries, as well as into incentives for people to use rechargeable batteries.
- Additional tax revenue can also be used to promote environmentally-friendly initiatives such as subsidies to councils to provide cheaper alternatives.
Why is this a good way for the government to collect tax revenue?
The price elasticity of demand for batteries is relatively inelastic because they are a necessity for most households. The objective and effect of any tax is to collect revenues and to raise the price of the good respectively, and so there will be smaller changes in the quantity demanded of the item, therefore the less elastic its demand curve.
The small increase in price as a result of the tax will not cause a major change in demand for batteries in the market, leading to additional revenue.
Consumers will have to pay the tax, as they cannot change the prices put forward by shops.
Most importantly, this tax is easy to calculate.
This graph shows the imposition of a tax when there is an inelastic demand curve and an elastic supply curve.
The tax causes the market price to increase from P1 to P2 and the quantity demanded falls from Q1 to Q2. The producer is able to pass almost the entire value of the tax onto the consumer, therefore the incidence of tax is falling on the consumer.
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