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Eco-Economy Update 2002-10
For Immediate Release
Copyright Earth Policy Institute 2002
July 25, 2002


http://www.earth-policy.org/Updates/Update14.htm

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. (See
http://www.earth-policy.org/Updates/Update14.htm )

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.


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