THE FISCAL STEERING WHEEL
Chapter 11. Tools for Restructuring the Economy
Lester R. Brown, Eco-Economy: Building an Economy for the Earth
(W.W. Norton & Co., NY: 2001).
Fiscal policy is an ideal policy instrument
for building an eco-economy because both taxes and subsides are
widely used and work through the market. By relying primarily on
these two tools to build an eco-economy, we capitalize on the market's
strengths, including its inherent efficiency in allocating resources.
The challenge is to use taxes and subsidies to help the market reflect
not only the direct costs and benefits of economic activities but
the indirect ones as well. If we use fiscal policy to encourage
environmentally constructive activities and to discourage destructive
ones, we can steer the economy in a sustainable direction.
Some environmental goalssuch
as limiting the catch in a fishery or properly disposing of nuclear
wastecan
be achieved only by government regulation. Edwin Clark, former senior
economist with the White House Council on Environmental Quality,
observes that some of the other tools discussed here, such as tradable
permits, "require establishing complex regulatory frameworks, defining
the permits, establishing the rules for trades, and preventing people
from acting without permits." In some cases, it is simply more efficient
to ban environmentally destructive activities than to try to tax
them out of existence. While the advantage has shifted toward the
use of tax policy in achieving environmental goals, there is still
a role for regulation to play.2
A major weakness of the market is that while nature's goodslumber,
fish, or grainmove
through the market, many of nature's services do not. Since there
is no bill rendered for pollinating crops, controlling floods, or
protecting soil from erosion, these services are often thought of
as free. And because they have no apparent market value, they are
often not protected. Fiscal policy can be used to compensate for
this shortfall as well.
A market that tells the ecological truth will incorporate the value
of ecosystem services. For example, if we buy furniture from a forest
products corporation that engages in clearcutting, we pay the costs
of logging and converting the logs into furniture, but not the costs
of the flooding downstream. If we restructure the tax system and
raise taxes on clearcutting timber so that its price reflects the
cost to society of the resultant flooding, this method of harvesting
timber likely would be eliminated.
Taxes designed to incorporate in their prices the environmental
costs of producing goods or providing services enable the market
to send the right signal. They discourage such activities as coal
burning, the use of throwaway beverage containers, or cyanide gold
mining. Subsidies can be used to encourage such activities as planting
trees, using water more efficiently, and harnessing wind energy.
Environmental taxes and subsidies also can be used to represent
the interests of future generations in situations where traditional
economics simply discounts the future.
The advantage of using fiscal policy to incorporate the indirect
environmental cost is that economic decisions at all levelsfrom
those made by political leaders and corporate planners to those
made by individual consumers-are guided by the market. It has a
pervasive influence. If it tells the ecological truth, it minimizes
the information that individual decisionmakers need to make an environmentally
responsible decision.
ENDNOTES:
2.
Edwin Clark, letter to author, 25 July 2001.
Copyright
© 2001 Earth Policy Institute
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