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July 25, 2002-10
Copyright © 2002 Earth Policy Institute
Restructuring Taxes To Protect the Environment
Bernie Fischlowitz-Roberts
Many countries have implemented taxes
on environmentally destructive products and activities while simultaneously
reducing taxes on income. The scale of tax shifting has been relatively
small thus far, accounting for only 3 percent of tax revenues worldwide.
It is increasingly clear, however, that countries are recognizing
the power of tax restructuring to reach environmental goals.
The market price for a gallon of gasoline,
for example, reflects the cost of drilling, extracting, refining
and transporting the oil. The market price does not account for
the air pollution and acid rain produced by burning gasoline, nor
its contribution to climate change as evidenced by rising temperatures,
rising sea levels, and more destructive storms. Raising taxes on
environmentally destructive products and activities is designed
to more closely align the market prices with their actual costs.
Germany, a leader in tax shifting, has implemented
environmental tax reform in several stages by lowering income taxes
and raising energy taxes. In 1999, the country increased taxes on
gasoline, heating oils, and natural gas, and adopted a new tax on
electricity. This revenue was used to decrease employer and employee
contributions to the pension fund. Energy tax rises for many energy-intensive
industries were substantially lower, however, reflecting concerns
about international competitiveness.
In 2000, Germany further reduced payroll
taxes and increased those on motor fuels and electricity. As a result,
motor fuel sales were 5 percent lower in the first half of 2001
than in the same period in 1999. Meanwhile, carpool agencies reported
growth of 25 percent in the first half of 2000. Thus far, Germany
has shifted 2 percent of its tax burden from incomes to environmentally
destructive activities.
One part of the United Kingdom's environmental
tax reform involved a steadily increasing fuel tax known as a fuel
duty escalator, which was in effect from 1993 until 1999. As a result,
fuel consumption in the road transport sector dropped, and the average
fuel efficiency of trucks over 33 tons increased by 13 percent between
1993 and 1998. Ultra-low sulfur diesel had a lower tax rate than
regular diesel, which caused its share of domestic diesel sales
to jump from 5 percent in July 1998 to 43 percent in February 1999;
by the end of 1999, the nation had completely converted to ultra-low
sulfur diesel.
The Netherlands has also shifted taxes to
environmentally destructive activities. A general fuel tax, originally
implemented in 1988 and modified in 1992, is now levied on fossil
fuels; rates are based on both the carbon and the energy contents
of the fuel. Between 1996 and 1998, a Regulatory Energy Tax (RET)
was implemented, which taxed natural gas, electricity, fuel oil,
and heating oil. Unlike the fuel tax, which was designed principally
for revenue generation, the RET's goal was to change consumer behavior
by creating incentives for energy efficiency. To maintain competitiveness,
major energy users were exempted from the taxes, so this tax fell
mainly on individuals.
Since sixty percent of the revenue from
these Dutch taxes came from households, the taxes were offset by
decreasing income taxes. The 40 percent of revenue derived from
businesses was recycled through three mechanisms: a reduction in
employer contributions to social security, a reduction in corporate
income taxes, and an increased tax exemption for self-employed people.
This tax shift has caused household energy costs to increase, which
has resulted in a 15-percent reduction in consumer electricity use
and a 5- to 10-percent decrease in fuel usage.
Finland implemented a carbon dioxide (CO2)
tax in 1990. By 1998, the country's CO2 emissions
had dropped by almost 7 percent. Finland's environmental taxes,
like those in most countries, are far from uniform: the electricity
tax is greater for households and the service sector than for industry.
Sweden's experiment with tax shifting began
in 1991, when it raised taxes on carbon and sulfur emissions and
reduced income taxes. Manufacturing industries received exemptions
and rebates from many of the environmental taxes, putting their
tax rates at half of those paid by households. In 2001, the government
increased taxes on diesel fuel, heating oil, and electricity while
lowering income taxes and social security contributions. Six percent
of all government revenue in Sweden has now been shifted. This has
helped Sweden reduce greenhouse gas emissions more quickly than
anticipated. A political agreement between the government and the
opposition required a 4-percent reduction below 1990 levels by 2012.
Yet by 2000, emissions were already down 3.9 percent from 1990-in
large measure due to energy taxes.
The myriad exemptions given to energy-intensive
industries in existing tax shift programs, created out of legitimate
competitiveness concerns, slow the creation of more effective tax
systems. Using border tax adjustments-where companies have environmental
taxes rebated to them upon export and have domestic environmental
taxes added to imports-can ensure international competitiveness
without tax exemptions.
Eliminating subsidies to environmentally
destructive industries will also help the market send the right
signals. Worldwide, environmentally destructive subsidies exceed
$500 billion annually. As long as government subsidies encourage
activities that the taxes seek to discourage, the effectiveness
of tax shifting will be limited.
If properly constructed, tax shifts can
help make markets work more effectively by incorporating more of
the indirect costs of goods and services into their prices and by
changing consumer and producer behavior accordingly. The emergence
of a world-leading wind turbine industry in Denmark, for example,
is one result of Danish taxes on fossil fuels and electricity, which
are among the highest in the world. These measures have also spurred
sales of energy-efficient appliances and encouraged other energy-saving
behavior.
Expanding the tax base to encompass more
products and services with deleterious environmental impacts would
greatly enhance the effectiveness of tax shifting. Aviation fuel,
for example, is currently tax-free worldwide, despite airplane emissions
causing 3.5 percent of global warming. However, recent European
discussions of imposing taxes on jet fuel are a promising development.
Such taxes might slow the projected growth in worldwide air travel
and encourage manufacturers to make efficiency improvements that
lower jet fuel consumption.
The goal of tax restructuring is to get
the market to tell the ecological truth. Thus far, tax shifts have
been limited in scope and have produced positive, if modest, results.
Creation of an eco-economy calls for tax shifts on a broader scale,
and of much larger magnitude, in order for prices to incorporate
environmental costs and to produce the requisite changes in individual
and collective behavior.
See
Table: Selected Examples of Explicit Environmental Tax Reform Packages.
Copyright
© 2002 Earth Policy Institute
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FOR ADDITIONAL INFORMATION
From Earth Policy Institute
Lester R. Brown, Eco-Economy:
Building an Economy for the Earth (New York: W.W. Norton
& Company, 2001).
From Worldwatch Institute
David Malin Roodman, Paying the Piper: Subsidies,
Politics, and the Environment (Washington, DC: Worldwatch Institute,
1996).
David Malin Roodman, Getting the Signals Right:
Tax Reform to Protect the Environment and the Economy (Washington,
DC: Worldwatch Institute, 1997).
From Other Sources
J. Andrew Hoerner and Beno�t Bosquet, Environmental
Tax Reform: The European Experience (Washington, DC: Center
for a Sustainable Economy, February 2001).
European Environment Agency (EEA), Environmental
Taxes: Recent Developments in Tools for Integration (Copenhagen:
November 2000).
Organisation for Economic Co-operation and Development,
Environmentally Related Taxes in OECD Countries: Issues and Strategies
(Paris: 2001).
Alan Thein Durning and Yoram Bauman, Tax
Shift: How to Help the Economy, Improve the Environment, and Get
the Tax Man off Our Backs (Seattle: Northwest Environment
Watch, 1998).
LINKS
European Environment Bureau Campaign on Environmental
Fiscal Reform
http:/www.ecotax.info
European Environment Agency http:/www.eea.eu.int
Center for a Sustainable Economy http:/www.sustainable
economy.org
Redefining Progress
http:/www.rprogress.org
Friends of the Earth: Economics for the Earth Program
http:/www.foe.org/
camps/eco/
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