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Chapter 13. The Great Mobilization: Shifting Taxes and Subsidies
The need for tax shifting—lowering income taxes while raising levies on environmentally destructive activities—has been widely endorsed by economists. For example, a tax on coal that incorporated the increased health care costs associated with mining it and breathing polluted air, the costs of damage from acid rain, and the costs of climate disruption would encourage investment in clean renewable sources of energy such as wind or solar. 4
A market that is permitted to ignore the indirect costs in pricing goods and services is irrational, wasteful, and, in the end, self-destructive. It is precisely what Nicholas Stern was referring to when he described the failure to incorporate the costs of climate change in the prices of fossil fuels as “a market failure on the greatest scale the world has ever seen.” 5
The first step in creating an honest market is to calculate indirect costs. Perhaps the best model for this is a U.S. government study on the costs to society of smoking cigarettes that was undertaken by the Centers for Disease Control and Prevention (CDC). In 2006 the CDC calculated the cost to society of smoking cigarettes, including both the cost of treating smoking-related illnesses and the lost worker productivity from these illnesses, at $10.47 per pack. 6
This calculation provides a framework for raising taxes on cigarettes. In Chicago, smokers now pay $3.66 per pack in state and local cigarette taxes. New York City is not far behind at $3 per pack. At the state level, New Jersey—which has boosted the tax in four of the last five years to a total of $2.58—has the highest tax. Since a 10-percent price rise typically reduces smoking by 4 percent, the health benefits of tax increases are substantial. 7
Tax restructuring can also be used to create an honest pricing system for ecological services. For example, forest ecologists can estimate the values of services that trees provide, such as flood control and carbon sequestration. Once these are determined, they can be incorporated into the price of trees as a stumpage tax. Anyone wishing to cut a tree would have to pay a tax equal to the value of the services provided by that tree. The market for lumber would then be based on ecologically honest prices, prices that would reduce tree cutting and encourage wood reuse and paper recycling.
The most efficient means of restructuring the energy economy to stabilize atmospheric CO2 levels is a carbon tax. Paid by the primary producers—the oil or coal companies—it would permeate the entire fossil fuel energy economy. The tax on coal would be almost double that on natural gas simply because coal has a much higher carbon content. As noted in Chapter 11, we propose a worldwide carbon tax of $240 per ton to be phased in at the rate of $20 per year between 2008 and 2020. Once a schedule for phasing in the carbon tax and reducing the tax on income is in place, the new prices can be used by all economic decisionmakers to make more intelligent decisions. 8
For a gasoline tax, the most detailed analysis available of indirect costs is found in The Real Price of Gasoline by the International Center for Technology Assessment. The many indirect costs to society—including climate change, oil industry tax breaks, oil supply protection, oil industry subsidies, and treatment of auto exhaust-related respiratory illnesses—total around $12 per gallon ($3.17 per liter), slightly more than the cost to society of smoking a pack of cigarettes. If this external or social cost is added to the roughly $3 per gallon average price of gas in the United States in early 2007, gas would cost $15 a gallon. These are real costs. Someone bears them. If not us, our children. Now that these costs have been calculated, they can be used to set tax rates on gasoline, just as the CDC analysis is being used to raise taxes on cigarettes. 9
Gasoline’s indirect costs of $12 per gallon provide a reference point for raising taxes to where the price reflects the environmental truth. Gasoline taxes in Italy, France, Germany, and the United Kingdom averaging $4.40 per gallon are almost halfway there. The average U.S. gas tax of 47¢ per gallon, scarcely one tenth that in Europe, helps explain why more gasoline is used in the United States than in the next 20 countries combined. 10
Phasing in a gasoline tax of 40¢ per gallon per year for the next 12 years, for a total rise of $4.80 a gallon, and offsetting it with a reduction in income taxes would raise the U.S. gas tax to the $4–5 per gallon prevailing today in Europe and Japan. This will still fall short of the $12 of indirect costs currently associated with burning a gallon of gasoline, but combined with the rising price of gasoline itself it should be enough to encourage people to use improved public transport and motorists to buy the plug-in hybrid cars scheduled to enter the market in 2010.
These carbon and gasoline taxes may seem high, but there is at least one dramatic precedent. In November 1998 the U.S. tobacco industry agreed to reimburse state governments $251 billion for the Medicare costs of treating smoking-related illnesses—nearly $1,000 for every person in the United States. This landmark agreement was, in effect, a retroactive tax on cigarettes smoked in the past, one designed to cover indirect costs. To pay this enormous bill, companies raised cigarette prices, bringing them closer to their true costs and further discouraging smoking. 11
A carbon tax of $240 per ton of carbon by 2020 may seem steep, but it is not. If gasoline taxes in Europe, which were designed to generate revenue and to discourage excessive dependence on imported oil, were thought of as a carbon tax, the $4.40 per gallon would translate into a carbon tax of $1,815 per ton. This is a staggering number, one that goes far beyond any carbon emission tax or cap-and-trade carbon-price proposals to date. It suggests that the official discussions of carbon prices in the range of $15 to $50 a ton are clearly on the modest end of the possible range of prices. The high gasoline taxes in Europe have contributed to an oil-efficient economy and to far greater investment in high-quality public transportation over the decades, making it less vulnerable to supply disruptions. 12
Tax shifting is not new in Europe. A four-year plan adopted in Germany in 1999 systematically shifted taxes from labor to energy. By 2003, this plan had reduced annual CO2 emissions by 20 million tons and helped to create approximately 250,000 additional jobs. It had also accelerated growth in the renewable energy sector, creating some 64,000 jobs by 2006 in the wind industry alone, a number that is projected to rise to 103,000 by 2010. 13
Between 2001 and 2006, Sweden shifted an estimated $2 billion of taxes from income to environmentally destructive activities. Much of this shift of $500 or so per household was levied on road transport, including hikes in vehicle and fuel taxes. Electricity is also picking up part of the shift. Environmental tax shifting is becoming commonplace in Europe, where France, Italy, Norway, Spain, and the United Kingdom are also using this policy instrument. In Europe and the United States, polls indicate that at least 70 percent of voters support environmental tax reform once it is explained to them. 14
Environmental taxes are now being used for several purposes. As noted earlier, landfill taxes adopted by either national or local governments are becoming more common. A number of cities are now taxing cars that enter the city. Others are simply imposing a tax on automobile ownership. In Denmark, the tax on the purchase of a new car exceeds the price of the car itself. A new car that sells for $25,000 costs the buyer more than $50,000. Other governments are moving in this direction. New York Times reporter Howard French writes that Shanghai, which is being suffocated by automobiles, “has raised the fees for car registrations every year since 2000, doubling over that time to about $4,600 per vehicle—more than twice the city’s per capita income.” 15
Some 2,500 economists, including eight Nobel Prize winners in economics, have endorsed the concept of tax shifts. Harvard economics professor N. Gregory Mankiw wrote in Fortune magazine: “Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming—all without jeopardizing long-term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer.” 16
Cap-and-trade systems using tradable permits are sometimes an alternative to environmental tax restructuring. The principal difference between them is that with permits, governments set the amount of a given activity that is allowed, such as the harvest from a fishery, and let the market set the price of the permits as they are auctioned off. With environmental taxes, in contrast, the price of the environmentally destructive activity is incorporated in the tax rate, and the market determines the amount of the activity that will occur at that price. Both economic instruments can be used to discourage environmentally irresponsible behavior.
The use of cap-and-trade systems with marketable permits has been effective at the national level, ranging from restricting the catch in an Australian fishery to reducing sulfur emissions in the United States. For example, the government of Australia, concerned about lobster overharvesting, estimated the sustainable yield of lobsters and then issued catch permits totaling that amount. Fishers could then bid for these permits. In effect, the government decided how many lobsters could be taken each year and let the market decide what the permits were worth. Since the permit trading system was adopted in 1986, the fishery has stabilized and appears to be operating on a sustainable basis. 17
Although tradable permits are popular in the business community, permits are administratively more complicated and not as well understood as taxes. Edwin Clark, former senior economist with the White House Council on Environmental Quality, observes that tradable permits “require establishing complex regulatory frameworks, defining the permits, establishing the rules for trades, and preventing people from acting without permits.” In contrast to restructuring taxes, something with which there is wide familiarity, tradable permits are a concept not widely understood by the public, making it more difficult to generate broad public support. 18
Each year the world’s taxpayers provide an estimated $700 billion of subsidies for environmentally destructive activities, such as fossil fuel burning, overpumping aquifers, clearcutting forests, and overfishing. An Earth Council study, Subsidizing Unsustainable Development, observes that “there is something unbelievable about the world spending hundreds of billions of dollars annually to subsidize its own destruction.” 19
Iran provides a classic example of extreme subsidies when it prices oil for internal use at one tenth the world price, strongly encouraging car ownership and gas consumption. If its $37-billion annual subsidy were phased out, the World Bank reports that Iran’s carbon emissions would drop by a staggering 49 percent. This move would also strengthen the economy by freeing up public revenues for investment in the country’s economic development. Iran is not alone. The Bank reports that removing energy subsidies would reduce carbon emissions in India by 14 percent, in Indonesia by 11 percent, in Russia by 17 percent, and in Venezuela by 26 percent. Carbon emissions could be cut in scores of countries by simply eliminating fossil fuel subsidies. 20
Some countries are already doing this. Belgium, France, and Japan have phased out all subsidies for coal. Germany reduced its coal subsidy from $2.8 billion in 1989 to $1.4 billion in 2002, meanwhile lowering its coal use by 38 percent. It plans to phase out this support entirely by 2018. As oil prices have climbed, a number of countries have greatly reduced or eliminated subsidies that held fuel prices well below world market prices because of the heavy fiscal cost. Among these are China, Indonesia, and Nigeria. 21
A study by the U.K. Green Party, Aviation’s Economic Downside, describes the extent of subsidies to the U.K. airline industry. The giveaway begins with $18 billion in tax breaks, including a total exemption from the federal tax. External or indirect costs that are not paid, such as treating illness from breathing the air polluted by planes, the costs of climate change, and so forth, add nearly $7.5 billion to the tab. The subsidy in the United Kingdom totals $426 per resident. This is also an inherently regressive tax policy simply because a part of the U.K. population cannot afford to fly, yet they help subsidize this high-cost travel for their more affluent compatriots. 22
While some leading industrial countries have been reducing subsidies to fossil fuels—notably coal, the most climate-disrupting of all fuels—the United States has increased its support for the fossil fuel and nuclear industries. Douglas Koplow, founder of Earth Track, calculated in a 2006 study that annual U.S. federal energy subsidies have a total value to the industry of $74 billion. Of this, the oil and gas industry gets $39 billion, coal $8 billion, and nuclear $9 billion. At a time when there is a need to conserve oil resources, U.S. taxpayers are subsidizing their depletion. 23
Just as there is a need for tax shifting, there is also a need for subsidy shifting. A world facing the prospect of economically disruptive climate change, for example, can no longer justify subsidies to expand the burning of coal and oil. Shifting these subsidies to the development of climate-benign energy sources such as wind, solar, biomass, and geothermal power will help stabilize the earth’s climate. Shifting subsidies from road construction to rail construction could increase mobility in many situations while reducing carbon emissions. And shifting the $22 billion in annual fishing industry subsidies, which encourage destructive overfishing, to the creation of marine parks to regenerate fisheries would be a giant step in restoring oceanic fisheries. 24
In a troubled world economy, where many governments are facing fiscal deficits, these proposed tax and subsidy shifts can help balance the books, create additional jobs, and save the economy’s eco-supports. Tax and subsidy shifting promise energy efficiency, cuts in carbon emissions, and reductions in environmental destruction—a win-win-win situation.
4. Redefining Progress, The Economists’ Statement on Climate Change (Oakland, CA: 1997).
5. Nicholas Stern, The Stern Review on the Economics of Climate Change (London: HM Treasury, 2006), p. 27.
6. Centers for Disease Control and Prevention, Sustaining State Programs for Tobacco Control: Data Highlights 2006 (Atlanta, GA: 2006).
7. Cigarette death toll from World Health Organization, “Chronic Obstructive Pulmonary Disease (COPD),” fact sheet (Geneva: November 2006); Campaign for Tobacco Free Kids, “Top Combined State-Local Cigarette Tax Rates,” fact sheet (Washington, DC: Campaign for Tobacco Free Kids, 1 July 2007); Campaign for Tobacco-Free Kids, “Raising Cigarette Taxes Reduces Smoking, Especially Among Kids (And the Cigarette Companies Know It),” fact sheet (Washington, DC: Campaign for Tobacco Free Kids, 11 June 2007).
8. Carbon content of fuels from Oak Ridge National Laboratory (ORNL), Bioenergy Conversion Factors, at bioenergy.ornl.gov/papers/ misc/energy_conv.html, viewed 15 October 2007.
9. Gasoline indirect cost calculated based on International Center for Technology Assessment (ICTA), The Real Price of Gasoline, Report No. 3 (Washington, DC: 1998), p. 34, and updated using ICTA, Gasoline Cost Externalities Associated with Global Climate Change: An Update to CTA’s Real Price of Gasoline Report (Washington, DC: September 2004), ICTA, Gasoline Cost Externalities: Security and Protection Services: An Update to CTA’s Real Price of Gasoline Report (Washington, DC: January 2005), Terry Tamminen, Lives Per Gallon: The True Cost of Our Oil Addiction (Washington, DC: Island Press, 2006), p. 60, and Bureau for Economic Analysis, “Table 3—Price Indices for Gross Domestic Product and Gross Domestic Purchases,” GDP and Other Major Series, 1929–2007 (Washington, DC: August 2007); U.S. Department of Energy (DOE), Energy Information Administration (EIA), This Week in Petroleum (Washington, DC: various issues).
10. American Petroleum Institute, State Gasoline Tax Report (Washington DC: August 2007); DOE, EIA, “Weekly (Monday) Retail Premium Gasoline Prices, Selected Countries,” at www.eia.doe.gov/emeu, updated 9 July 2007; Gerhard Metschies, “Pain at the Pump,” Foreign Policy, July/August 2007.
11. U.S. Department of Agriculture, Economic Research Service, “Cigarette Price Increase Follows Tobacco Pact,” Agricultural Outlook, January–February 1999.
12. DOE, op. cit. note 10; carbon tax equivalent calculated using DOE, EIA, Emissions of Greenhouse Gasses in the United States 2001 (Washington, DC: 2002), p. B–1; DOE EIA, Annual Energy Review 2006 (Washington, DC: 2007), p. 359.
13. Markus Knigge and Benjamin Gorlach, Effects of Germany’s Ecological Tax Reforms on the Environment, Employment and Technological Innovation: Summary of the Final Report of the Project (Berlin: Ecologic Institute for International and European Environmental Policy, August 2005); German Wind Energy Association, A Clean Issue—Wind Energy in Germany (Berlin: May 2006), p. 4; Donald W. Aitken, “Germany Launches its Transition: How One of the Most Advanced Industrial Nations is Moving to 100 Percent Energy from Renewable Sources,” Solar Today, March/April 1005, pp. 26–29.
14. Estimate of Swedish tax shifting based on Paul Ekins and Stefan Speck, “Environmental Tax Reform in Europe: Energy Tax Rates and Competitiveness,” in press, 2007; Ministry of Finance, Sweden, “Taxation and the Environment,” press release (Stockholm: 25 May 2005); household size from Target Group Index, “Household Size,” Global TGI Barometer (Miami: 2005); population from U.N. Population Division, World Population Prospects: The 2006 Revision Population Database, at http://esa.un.org/unpp/; Andrew Hoerner and Benoît Bosquet, Environmental Tax Reform: The European Experience (Washington, DC: Center for a Sustainable Economy, 2001); European Environment Agency, Environmental Taxes: Recent Developments in Tools for Integration, Environmental Issues Series No. 18 (Copenhagen: 2000); environmental tax support from David Malin Roodman, The Natural Wealth of Nations (New York: W. W. Norton & Company, 1998), p. 243.
15. “New Hampshire Town Boosts Recycling with Pay-As-You-Throw,” Environment News Service, 21 March 2007; Tom Miles, “London Drivers to Pay UK’s First Congestion Tax,” Reuters, 28 February 2002; Energy Council, Energy Efficiency Policies and Indicators (London: 2001), Annex 1; Howard W. French, “A City’s Traffic Plans Are Snarled by China’s Car Culture,” New York Times, 12 July 2005.
16. N. Gregory Mankiw, “Gas Tax Now!” Fortune, 24 May 1999, pp. 60–64.
17. Australia in John Tierney, “A Tale of Two Fisheries,” New York Times Magazine, 27 August 2000; South Australian Southern Zone Rock Lobster Fishery Management Committee, Southern Zone Rock Lobster Annual Report 2005–2006 (Adelaide, South Australia: October 2006), p. 2.
18. Edwin Clark, letter to author, 25 July 2001.
19. André de Moor and Peter Calamai, Subsidizing Unsustainable Development (San José, Costa Rica: Earth Council, 1997); Barbara Crossette, “Subsidies Hurt Environment, Critics Say Before Talks,” New York Time, 23 June 1997.
20. World Bank, World Development Report 2003 (New York: Oxford University Press, 2003), pp. 30, 142; International Energy Agency (IEA), World Energy Outlook 2006 (Paris: 2006), p. 279.
21. Belgium, France, and Japan from Seth Dunn, “King Coal’s Weakening Grip on Power,” World Watch, September/October 1999, pp. 10–19; coal subsidy reduction in Germany from Robin Pomeroy, “EU Ministers Clear German Coal Subsidies,” Reuters, 10 June 2002; DOE, EIA, International Energy Annual 2005 (Washington, DC: June–October 2007), Table E.4; Craig Whitlock, “German Hard-Coal Production to Cease by 2018,” Washington Post, 30 July 2007; China, Indonesia, and Nigeria subsidy cuts from GTZ Transport Policy Advisory Service, International Fuel Prices 2007 (Eschborn, Germany: April 2007), p. 3.
22. John Whitelegg and Spencer Fitz-Gibbon, Aviation’s Economic Downside, 3rd ed. (London: Green Party of England & Wales, 2003); dollar conversion based on August 2007 exchange rate in International Monetary Fund, “Representative Exchange Rates for Selected Currencies in August 2007,” Exchange Rate Archives by Month, at www.imf.org/external, viewed 16 August 2007; U.N. Population Division, op. cit. note 14.
23. Doug Koplow, Subsidies in the U.S. Energy Sector: Magnitude, Causes, and Options for Reform (Cambridge, MA: Earth Track, November 2006).
24. Fishery subsidy value includes “bad” subsidies and fuel subsidies as estimated in Fisheries Center, University of British Columbia, Catching More Bait: A Bottom-Up Re-Estimation of Global Fisheries Subsidies (2nd Version) (Vancouver, BC: The Fisheries Center, 2006), p. 21.
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