Tax bads, not goods

OUR PLANET 9.6 - Climate and Action

Tax bads, not goods


say that an ecological tax reform is the most effective way to meet the targets for reducing emissions of greenhouse gases


Ecological Tax Reform presents an opportunity to achieve the targets set out in the Kyoto Protocol. These legally binding reduction targets for all major greenhouse gases, a major step forward in international efforts to avert the threat of climate change, provide appropriate pressure on governments to act. But they must also be implemented.

Before Kyoto, the European Union (EU) devoted considerable time and energy to incorporating policies and measures into the Protocol. Its proposal contained a list that would either have to be implemented as common measures or be compulsory for all Parties. This was not acceptable to many other countries and unfortunately distracted from the substance of the issue. But the Protocol, in its final form, does enumerate a range of suitable instruments for implementing commitments that would benefit from international cooperation. And the EU was able to apply enough pressure for the Parties to agree on a process that can facilitate cooperation and coordination in years to come.

One of the instruments listed in Article 2 of the Protocol concerns reducing or phasing out market imperfections and incentives that run counter to the objective of the Convention. Parties are also requested to 'apply market instruments'. This, combined with other policies and measures in the article, recognizes the prime role played by energy and resource prices in the fight against climate change. Yet subsidy policies in almost all industrialized countries now favour precisely those fuels that have a high carbon content. Reversing this trend through Ecological Tax Reform is recognized throughout the world as one of the main pillars of climate policy. As the World Resources Institute has recently pointed out, developing countries actually seem to be ahead of developed ones in reducing these ecologically and economically perverse subsidies.

Removing subsidies, however, is only one side of the coin. It has rightly become commonplace in the climate and environment debate that 'prices should speak the ecological truth'. Many studies show a positive correlation between the rising energy prices of the 1970s (caused by the oil price crisis), the innovative forces of the market and the economic performance of countries. Rising prices for energy and resource use do not only have a direct impact on consumption, but spur technological development for the revolution in efficiency that is so badly needed.

boy with sign

Great expectations

How are we going to live in a world with as many as 10 billion people demanding a lifestyle comparable to the unsustainable one enjoyed by most inhabitants of industrialized countries today? Even if developing countries only doubled their emissions of greenhouse gases by the middle of next century, the developed ones would have to reduce theirs by a staggering 80 per cent in order to avert dangerous interference with the climate system.

If all the citizens of the Earth are to be provided with a comparable standard of living without endangering the livelihood of future generations, there has to be a switch to renewable energy sources and changes in lifestyle, and at least a fourfold increase in resource productivity. Ecological Tax Reform has been widely acclaimed as the least bureaucratic, the least intrusive and probably the most powerful instrument to achieve this.

Taxing 'bads' like energy and resource use - and not such 'goods' as human labour - has been shown to yield immense ecological and economic benefits. This is why the Scandinavian countries, the United Kingdom and The Netherlands have already successfully introduced 'green' elements into their tax systems. France will soon follow. In 1997 Slovenia was the first country from Central and Eastern Europe to introduce a carbon dioxide (CO2) tax: it tripled its rate in 1998. The EU will have to rely on pricing policies to implement its 8 per cent emissions reduction target. In fact, when the EU agreed how to share out this burden this summer, The Netherlands expressed a strong conviction that the targets demand a Europe-wide energy tax by the year 2002.

The emphasis that many countries put on emission trading concepts is further evidence of the importance of energy and resource prices in implementing the Kyoto Protocol. This, of course, is also a possible path for a pricing policy since there may be differences in the perception of particular instruments on different sides of the Atlantic. Since direct pricing through the use of ecological taxes does not seem to be an option for United States legislators, indirect pricing by tradable quotas might do the job. Many economists fear, however, that trading resource quotas could lead to rather unpredictable price developments. Progressive taxes, on the other hand, provide for stable expectations and may allow better medium and long-term planning for industry and consumers.

Politically, establishing an internal trading system in the United States and other countries should diffuse some rather unjustifiable - but nevertheless powerful - fears of comparative disadvantages by some EU member states. Introducing an EU energy and CO2 tax required unanimity: it failed in 1992 because these states insisted that it be made dependent on major industrialized countries outside the EU introducing it as well.

Of course, none of the perceived detrimental effects on competitiveness appeared in those European countries that unilaterally opted for a greening of taxation - partly due to the clever ways their ecological tax reforms were designed. But, anyway, these arguments completely lost their rationale after Kyoto. The reduction and limitation commitments by all major industrial powers have created a level playing field in this regard.

cop with gas mask

Cooperation and coordination

This diversity of instruments for implementing the Kyoto Protocol's obligations demands enhanced cooperation among the Parties. Article 2 therefore calls upon industrialized countries to cooperate, to share their experiences and exchange information. The Parties are also asked to consider ways of facilitating such cooperation at its first session, or as soon as practicable thereafter. They may, furthermore, consider how to elaborate the coordination of policies and measures. Preparations for this should start immediately within the Convention's bodies and not wait for the Protocol to come into force. Emissions trading and ecological taxes can be made mutually compatible and supportive - true not just for a global emissions trading regime that can be supported by national or regional ecological tax systems, but also for the compatibility of different pricing systems in various countries.

This concerted effort towards an Ecological Tax Reform will ultimately render the wasteful, unsustainable use of energy and resources obsolete, and thus contribute to the ultimate objective of the Convention on Climate Change: to prevent dangerous interference with the climate system. Using the forces of the market will also contribute to the sustainable development of industrialized countries, and provide a powerful and persuasive example that developing countries can follow.

Professor Ernst Ulrich von Weizsäcker is President and Hermann E. Ott is Senior Fellow at the Wuppertal Institute for Climate, Environment and Energy, Germany.

Complementary articles in other issues:
Issue on Climate Change 1997
Jurgen Trittin: Spirit of optimism (Looking forward) 1999
Ralf Corsten: Where the buck stops (Tourism) 1999
Stephen O. Andersen: Industry in the lead (Ozone) 1997
Theodore Panayotou: Win-win finance (The Way Ahead) 1997

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