Ecological Tax Reform

Conventionally, governments have tended to raise many of their taxes on capital and on labour rather than on materials. Income taxes, local government taxes and national insurance or social security payments have provided the basis for state revenues in most Western nations. The difficulty with this strategy, from an economic point of view, is that it represents a significant distortion of the market. In particular, it means that labour is priced higher than the economic optimum. In the next chapter, we shall discuss in more detail how this distortion operates. We shall also see that rising unemployment is emerging as a critical structural problem within the economic system. So any strategy which reduces distortion of the labour market should be at a premium.

It seems as though this situation provides an almost perfect opportunity for change: increase the price of materials to reflect the social and environmental costs associated with them; decrease the price of labour by removing distorting taxes. Ecological tax reform—as it has come to be known4—provides one of the most promising policy options governments could hope to find, dealing simultaneously with two of the most pressing problems facing them.

Given that it seems to represent a win-win situation, it is perhaps surprising that it has not already been thought of, worked out and implemented in every democratic economy in the world. In practice, a few governments have made some preliminary attempts at it. In Sweden, for example, some taxes have been introduced on sulphur and nitrogen emissions from industry. But there are some difficulties. In the first place, governments can expect real opposition, both from materials producers and from materials consumers to rises in materials prices. Proposals to introduce an energy and carbon tax in the United States and in the EU were both effectively abandoned because of strong industrial resistance. Industrial lobbies argued that higher energy costs would seriously compromise economic growth and therefore threaten an increase in unemployment—exactly opposite to the intention of ecological tax reform!

Early economic models of the impact of carbon taxes seemed to bear this out. Taxes would have to be so high, claimed economists, that they would present industry with massive financial problems.5 But these opponents and their early economic models neglected one crucial factor: in raising materials taxes, the governments would accumulate substantial revenues. These revenues could then be recycled in the economy in a variety of different ways. Later, more sophisticated economic models showed that revenue recycling was the critical issue in determining whether or not materials taxes represent an overall economic benefit or an economic burden. If materials tax revenues are recycled as reductions in taxes on labour, it is now agreed, then they can actually stimulate economic growth and increase employment.6

This, of course, is exactly what we would expect intuitively. But even with the endorsement of national economic benefits, governments may still face difficulties in implementing ecological tax reform. Even if the nation as a whole benefits from the shift, there may be short-term losers. One of the particular problems of recycling material taxes in the form of reduced income taxes is that it can have unpleasant effects on those who do not currently pay income tax. In the UK, for example, the most vocal source of opposition to proposals for a tax on domestic fuels has come from pensioners. In fact, the UK fuel tax proposal is not part of a considered package of tax reform measures. But even if it were, the same problem would arise. You cannot compensate non-wage-earners by reducing income-tax rates. Solutions exist, of course. A rise in pension payments would help. Tariff structures could be revised to reflect distributional concerns. Economic subsidies could be used to encourage energy efficiency and combat fuel poverty. But the point of the example is that any programme of tax reform requires considered, and carefully implemented government planning. Ecological tax reform is no exception.

Equally important to the long-term success of such a policy is a careful consideration of the impacts on materials suppliers. If the strategy is to be successful in reducing materials throughputs, then the output of the materials suppliers will certainly be affected. The fuel supply industries, the chemicals industries and the mining industries would all, at the very least, expect to suffer reduced physical output. In the long run, the same might be true for suppliers of other material goods. For instance, if durable consumer goods are made to last longer, the material throughput of suppliers of durable goods can only rise at the expense of reductions somewhere else in the market. The competitive producer of longer-lasting durables may be able to corner an increasing share of a limited market. But the material throughput of the sector as a whole must diminish—otherwise there will be no dematerialisation.

Pricing policies are clearly critical to the shift in profitability from materials supply to service provision. If materials are cheap and labour is expensive, then a producer will tend to be profligate with materials and thrifty with labour. Conversely, if the cost of materials increases and the cost of labour is reduced, there will be an economic incentive to increase employment and reduce material throughput. But ecological tax reform will not, on its own, achieve the desired transition. In fact, the likelihood is that it will not be politically possible to implement this kind of policy without other measures to encourage the shift from materials supply to the provision of services. There would simply be too much opposition from the many industrial lobbies whose profitability now rests on materials supply.

These considerations serve to illustrate the complex challenges which lie ahead if significant dematerialisation is to be achieved. On the other hand, the range of policy options from which governments can choose to influence commercial behaviour is broad, and the measures themselves are flexible. So our conclusion here must be that effective and comprehensive pricing of raw material inputs and environmental outputs is not beyond the wit of society or the policy of governments.

At the same time, if these strategies are to be successful in reducing overall environmental burdens we must still address the following critical question:

Can improvements in material efficiency outpace (and continue to outpace) the increase in material throughput associated with economic growth?

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