A radical green approach to taxation could both reduce bureaucracy
and help save the environment. James Robertson explains.
One of the central goals of a green economy would be to make prices reflect true costs. At present, prices place an artificially low value on non-renewable natural resources and completely ignore external costs – to the air, the water, the soil, to future generations, to workers’ health. The whole economic system is geared to keeping these costs ‘externalized’. A green economy would adjust prices to include real costs and would institute a system of ‘green taxes’ to drive this forward.
Green taxes began with the simple aim of discouraging people from damaging the environment by making them pay for using natural resources. For example, burning fossil fuels in power stations causes acid rain; it damages the environment and should be taxed. Raising the tax on motor fuel would encourage people to use more energy-efficient cars or to use them less, or both. Taxing the dumping of waste in landfill sites would encourage recycling and alternative ways of dealing with waste and might help to reduce the total amount of waste we create. And so on.
That original aim still applies. But it is no longer the only one. Green taxes are now seen as part of a wider restructuring of taxation – eco-tax reform – which will encourage not just environmentally sustainable development but also better economic performance, more jobs and greater economic justice within and between nations. One reason green taxes make sense from an economic, social and environmental point of view is because they tax ‘bads’ instead of ‘goods’.
Recent studies in Britain, the US and by the European Commission have found that replacing existing taxes on employment, incomes and profits (‘goods’) with taxes on energy use (‘bad’) can yield a threefold dividend: better overall national economic performance; higher levels of employment; and a cleaner environment. Their goal should be to shift the balance between the use of human resources (now under-employed) and natural resources (now over-employed).
However, critics charge that green taxes are regressive because they hit poorer people relatively harder than richer. For example, if a tax on household energy raised the cost of heating, cooking and lighting, poor people would find it harder to pay and harder to invest in energy efficiency to reduce the higher rates. The regressive effect would be all the greater if green taxes replaced taxes on incomes and profits – which many poorer people never had to pay in the first place.
THOMAS RAUPACH / STILL PICTURES
This objection can be met in three ways: first, studies in Germany and Switzerland have found that if the revenue from energy taxes were distributed equally as an ‘eco-bonus’ to all households, low-income families would benefit most. This ‘citizen’s income’ would have a progressive effect since the same amount of money is worth relatively more to poor people than rich.
Secondly, while it’s true that a tax which falls on consumers ‘downstream’ at the end of the economic pipe will hit poor people harder than rich (on household energy for example), a tax ‘upstream’ at the beginning of the economic pipe will not be so regressive. Why? Because it will affect, not just people’s spending on energy as consumers, but also all incomes (including salaries, dividends, rents and capital appreciation) derived from energy-using production. This means it will fall more heavily on rich earners than poor ones. This is the kind of green tax we need.
And thirdly, green taxes must be part of a larger package of taxes which will make people pay for using common resources. The most obvious of these taxes will be a tax (or a ‘rent’) on the value of land – proposed by the American economist Henry George a century ago and opposed by wealthy interests ever since. Among others could be taxes on the use of radio frequencies, space or the oceans. Because these taxes will hit rich people’s incomes harder than poor people’s (like an energy tax at source) they will not be regressive.
Opponents also suggest that hundreds of different green taxes would be burdensome and confusing, creating a wave of political problems as each new tax appeared to target a particular section of society. And that is true as far as it goes. However, the right approach will be to use a comparatively small number of taxes which impact the economy ‘upstream’. These would then cascade down through the whole economy, creating a systemic disincentive to environmentally-damaging activities of all kinds, affecting all sections of society without discrimination. A tax on fossil fuel and nuclear energy at source is a good example. Energy-intensive activities like agribusiness and road transport almost always involve high levels of pollution and intensive use of resources. So taxing energy at source will help to reduce resource use and pollution at every level and in every sector of the economy.
If green taxes are successful they will reduce the wholesale destruction of natural resources. And eventually this will mean less revenue from the tax. If government finances depend on green taxes this could be a serious problem. But it is a problem that must and can be avoided. Green taxes will need to be phased in at steadily rising rates over a period of 10 to 15 years, so the total revenue from them should rise for at least that long. Afterwards, human activities will still depend on using energy and other natural resources: even when their use has fallen to sustainable levels, people will continue to use them. Widening the principle of green taxes to include taxes on the use of all common resources like land, radio frequencies, the oceans and so on would result in a new tax base adequate for future needs, though very different from the present one.
For economists, the function of green taxes is to ‘internalize’ costs now ‘externalized’. People and companies should be made to pay all the costs of their activities, instead of being allowed to impose them on other people, including other parts of the world and future generations. Ideally, green taxes should be set at rates that reflect these ‘true’ costs.
THOMAS RAUPACH / STILL PICTURES
For example, the price of food produced by modern agriculture ignores the environmental costs of energy-intensive farms using large quantities of fertilizers, pesticides and soil-destroying machinery. Other costs are hidden when the food is then processed in energy-intensive factories, packaged and transported hundreds of miles to consumers. Ideally, green taxes would include all the ‘true’ present and future costs of the resources used – as well as the damage caused to the environment and human health at every stage of production, processing, distribution, consumption and disposal.
As an abstract idea this is insightful. But the reality is that hidden costs of production are so complex that it is impossible to come up with the ‘true’ price tag. As public and political pressure grows for eco-tax reform, the rates for green taxes will continue to be decided in a rougher and readier way – and that will do no great harm.
Coal-fired power stations, oil refineries and other energy-intensive and polluting industries naturally fear that green taxes will hit them hardest – and put them at a disadvantage in international competition. Those industries have already shown, in their opposition to proposed energy taxes in Europe and US, what a powerful lobby they can be.
On the other hand, most people will benefit as eco-tax reform helps to shift the balance from resource-intensive, environmentally-damaging production to people-centred activities. ‘Sunrise industries’ will benefit, including electronic and environmental technologies and the intellectual ‘know-how’ and ‘software’ occupations that go with them. And so will the whole range of industries and occupations – including health, education, entertainment and the arts – that rely mainly on the skills of people to deliver personal services. As it becomes more widely understood that the issue is eco-tax reform, not just a particular green tax, political support will grow.
We also can’t think about green taxes without looking at the international dimension. As the recent World Commission on Global Governance put it: ‘The time has come when we must seriously consider levying charges on the use of common global resources to finance common global purposes.’ International green taxes could be a much-needed source of revenue for the UN. They could also encourage globally-sustainable development and economic justice between nations. For example, a global tax on each nation’s chemical emissions would encourage the North to reduce the burden it now puts on the planet’s capacity to absorb atmospheric pollution. A significant part of the revenue might be distributed to all nations on a per capita basis – as an international ‘citizen’s income’ recognizing everyone’s rightful share of common global resources. In that way, financial transfers now seen as aid would be transformed into ‘rental’ payments, received as of right by the peoples of the South from the high-consuming, high-polluting peoples of the North for the higher-than-average use we make of common global resources.
Realistically, we should expect eco-tax reform to be a muddled and controversial process over many years – in one country after another and internationally. But it will gather pace, as the logic behind it becomes more widely understood and as programmes for phasing it in are drawn up.
It will contribute to national economic performance, environmental and social well-being and international economic justice – and also to political cohesion. People will no longer have cause to resent paying income taxes or giving aid to the Third World. Instead, they will pay for subtracting value – for using common resources which they have not themselves created. And all, by right, will receive their share of the value of those common resources.
James Robertson is the author of Future Wealth: A New Economics for the 21st Century. He is a trustee of the New Economics Foundation and a visiting fellow at the Green College (Oxford) Centre for Environmental Policy and Understanding.
©Copyright: New Internationalist 1996