The purpose of this tax shifting is to incorporate
the environmental costs of products and services into the market
price to help the market tell the truth. This rewards environmentally
responsible behavior such as reducing energy use.
Among the various environmentally damaging activities taxed in
Europe are coal burning, gasoline use, the generation of garbage
(so-called landfill taxes), the discharge of toxic waste, and
the excessive number of cars entering cities. Germany and Sweden
are the leaders among the countries in Western Europe that are
shifting taxes in a process known there as environmental tax
reform. A four-year plan adopted in Germany in 1999 systematically
shifted taxes from labor to energy. By 2001, this plan had lowered
fuel use by 5 percent. It had also accelerated growth in the
renewable energy sector, creating some 45,400 jobs by 2003 in
the wind industry alone, a number that is projected to rise to
103,000 by 2010.
In 2001, Sweden launched a bold 10-year environmental tax shift
designed to convert 30 billion kroner ($3.9 billion) of taxes
from income to environmentally destructive activities. Much of
this shift of $1,100 per household is levied on cars and trucks,
including substantial hikes in vehicle and fuel taxes. Electricity
is also being taxed more heavily. This tax restructuring is an
integral part of Sweden’s plan to be oil free by 2025.
Among the other European countries with strong tax reform efforts
are Spain, Italy, Norway, the United Kingdom, and France.
There are isolated cases of using taxes to discourage environmentally
destructive activities elsewhere. The United States imposed a
stiff tax on chlorofluorocarbons to phase them out in accordance
with the Montreal Protocol of 1987 and its subsequent updates.
When Victoria, the capital of British Columbia, adopted a trash
tax of $1.20 per bag of garbage, the city reduced its daily trash
flow 18 percent within one year.
Cities that are being suffocated by cars are using stiff entrance
taxes to reduce congestion. First adopted by Singapore some two
decades ago, this tax was later introduced by Oslo, Melbourne,
and, most recently, London.
The London tax of £5, or nearly $9 per visit, first enacted
in February 2002 by Mayor Ken Livingstone, was raised to £8,
in July 2005. The resulting revenue is being used to improve
the bus network, which carries 2 million passengers daily. The
goal of this congestion tax is a restructuring of the London
transport system to increase mobility and decrease congestion,
air pollution, and carbon emissions.
While some cities are taxing cars that enter the central city,
others are simply imposing a tax on automobile ownership. New
York Times reporter Howard French writes that Shanghai, which
is approaching traffic gridlock, “has raised the fees for
car registrations every year since 2000, doubling over that time
to about $4,600 per vehicle — more than twice the city’s
per capita income.” In Denmark, the steep tax on an energy-inefficient
new car doubles the price of the car.
An excellent model for calculating indirect costs is a 2001 analysis
by the U.S Centers for Disease Control and Prevention (CDC),
which calculated the social costs of smoking cigarettes at $7.18
per pack. This not only justifies raising taxes on cigarettes,
which claim 4.9 million lives per year worldwide, but it also
provides guidelines for how much to raise them. In 2002, 21 U.S.
states raised cigarette taxes. Perhaps the biggest jump came
in New York City, where smokers paid an additional 39¢ in
state tax and $1.42 in city tax — a total increase of $1.81
If the cost to society of smoking a pack of cigarettes is $7.18,
how much is the cost to society of burning a gallon of gasoline?
Fortunately, the International Center for Technology Assessment
has done a detailed analysis, entitled “The Real Price
of Gasoline.” The group calculates several indirect costs,
including oil industry tax breaks, oil supply protection costs,
oil industry subsidies, and health care costs of treating auto
exhaust-related respiratory illnesses. The total of these indirect
costs centers around $9 per gallon, somewhat higher than those
of smoking a pack of cigarettes. Add these external costs to
the average price of gasoline in the United States and gas would
cost $11 a gallon. For Americans, this is shockingly high, but
it is not that much higher than the $7 per gallon that Dutch
motorists paid briefly in late 2005 or the $6 per gallon that
British, German, French, and Italian drivers now regularly pay
Asia’s two leading economies—Japan and China—are
now considering the adoption of carbon taxes. For the last few
years, many members of the Japanese Diet have wanted to launch
an environmental tax shift, but industry has opposed it. China
is working on an environmental tax restructuring that will discourage
fossil fuel use. According to Wang Fengchun, an official with
the National People’s Congress, “Taxation is the
most powerful tool available in a market economy in directing
a consumer’s buying habits. It is superior to government
Environmental tax shifting usually brings a double dividend.
In reducing taxes on income—in effect, taxes on labor—labor
becomes less costly, creating additional jobs while protecting
the environment. This was the principal motivation in the German
four-year shift of taxes from income to energy. Reducing the
air pollution from smokestacks and tailpipes reduces the incidence
of respiratory illnesses, such as asthma and emphysema.
Some 2,500 economists, including eight Nobel Prize winners in
economics, have endorsed the concept of tax shifts. Harvard economics
Professor N.Gregory Mankiw wrote in Fortune: “Cutting income
taxes while increasing gasoline taxes would lead to more rapid
economic growth, less traffic congestion, safer roads, and reduced
risk of global warming—all without jeopardizing long-term
fiscal solvency. This may be the closest thing to a free lunch
that economics has to offer.”
Accounting systems that do not tell the truth can be costly.
Faulty corporate accounting systems that leave costs off the
books have driven some of the world’s largest corporations
into bankruptcy. The risk with our faulty global economic accounting
system is that it so distorts the economy that it could one day
lead to economic decline.
If we can get the market to tell the truth, then the world can
avoid being blindsided by faulty accounting systems that lead
to bankruptcy. As Øystein Dahle, former vice president
of Exxon for Norway and the North Sea, has pointed out: “Socialism
collapsed because it did not allow the market to tell the economic
truth. Capitalism may collapse because it does not allow the
market to tell the ecological truth.”
Adapted from Chapter 12, “Building a New Economy,” in
Lester R. Brown, Plan B 2.0: Rescuing a Planet Under Stress and
a Civilization in Trouble (New York: W.W. Norton & Company,
2006), available for free downloading at www.earthpolicy.org/Books/PB2/index.htm.