EPIBuilding a Sustainable Future
Lester R. Brown

Chapter 10. Can We Mobilize Fast Enough?: Shifting Taxes and Subsidies

The need for tax shifting—lowering taxes on income while raising those on environmentally destructive activities—has been widely endorsed by economists. For example, a tax on coal that incorporates the increased health care costs associated with mining it and breathing the air it pollutes, 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 and solar. 7

A market that is allowed to ignore the indirect costs in pricing goods and services is irrational, wasteful, and self-destructive. 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 smoking from 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. 8

This calculation provides a framework for raising taxes on cigarettes. In New York City, smokers now pay $4.25 per pack in state and local cigarette taxes. Chicago is not far behind at $3.66 per pack. Among states, Rhode Island has the highest tax at $3.46 per pack. Since a 10-percent price rise typically reduces smoking by 4 percent, the health benefits of tax increases are substantial. 9

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), marginally 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 gasoline in the United States, a gallon would cost $15. These are real costs. Someone bears them. If not us, our children. 10

Gasoline’s indirect cost of $12 a gallon provides 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 per gallon—are a good start. The average U.S. gas tax of 46¢ per gallon, scarcely one tenth that in Europe, helps explain why the United States uses more gasoline than the next 20 countries combined. 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 oil supply disruptions. 11

Phasing in an incremental gasoline tax rising by 40¢ per gallon per year for the next 10 years and offsetting it with a reduction in income taxes would raise the U.S. gas tax to the $4 per gallon tax prevailing today in Europe. 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 producing gasoline and the far smaller carbon tax discussed earlier, it should be enough to encourage motorists to use improved public transport and to buy the plug-in hybrid and all-electric cars as they come to market, starting in 2010.

These carbon and gasoline taxes may seem high, but again we look to smoking for at least one dramatic precedent. A series of lawsuits led the U.S. tobacco industry in November of 1998 to agree to reimburse state governments with a cumulative sum of $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. 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 carbon dioxide (CO2) emissions by 20 million tons and helped to create approximately 250,000 additional jobs. It also accelerated growth in the renewable energy sector; by 2006 there were 82,100 jobs in the wind industry alone, a number that is projected to rise by another 60,000 jobs 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. France, Italy, Norway, Spain, and the United Kingdom are among the countries also using this policy instrument. In Europe and the United States, polls indicate that at least 70 percent of voters support environmental tax shifting once it is explained to them. 14

Some 2,500 economists, including nine Nobel Prize winners in economics, have endorsed the concept of tax shifts. Harvard economics professor and former chairman of George W. Bush’s Council of Economic Advisors 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.” 15

Environmental taxes are now being used for several purposes. Landfill taxes that discourage waste and encourage recycling 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 registration tax on the purchase of a new car exceeds the price of the car by 180 percent. A new car that sells for $20,000 costs the buyer $56,000. In Singapore, the tax on a $14,200 Ford Focus, for example, more than triples the price, pushing it to $45,500. Other governments are moving in this direction. In Shanghai, the registration fee in 2009 averaged $4,500 per car. 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 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 1992, 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 paying 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

The other side of the tax shifting coin is subsidy shifting. 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

Carbon emissions could be cut in scores of countries by simply eliminating fossil fuel subsidies. 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, 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. 20

Some countries are already doing this. Belgium, France, and Japan have phased out all subsidies for coal. Germany reduced its coal subsidy from a high of 6.7 billion euros in 1996 to 2.5 billion euros in 2007. Coal use dropped by 34 percent between 1991 and 2006. Germany 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 subsidies to the U.K. airline industry. The giveaway begins with $18 billion in tax breaks, including a total exemption from the national 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. Doug 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. He notes that since 2006 these numbers “would likely be a good deal higher.” At a time when there is a need to conserve oil resources, U.S. taxpayers are subsidizing their depletion. 23

A world facing economically disruptive climate change 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 promises greater energy efficiency, cuts in carbon emissions, and reductions in environmental destruction—a win-win-win situation. A carbon tax on coal, for example, that fully incorporated the climate and health costs of burning it would lead to a quick phaseout.

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7. Redefining Progress, “The Economists’ Statement on Climate Change,” at www.rprogress.org/publications/1997/econstatement.htm, viewed 26 June 2008.

8. Centers for Disease Control and Prevention, Sustaining State Programs for Tobacco Control: Data Highlights 2006 (Atlanta, GA: 2006).

9. Campaign for Tobacco-Free Kids, “State Cigarette Excise Tax Rank and Ratings,” fact sheet (Washington, DC: 28 May 2009); Campaign for Tobacco-Free Kids, “Raising Cigarette Taxes Reduces Smoking, Especially Among Kids (And the Cigarette Companies Know It),” fact sheet (Washington, DC: 9 January 2009); Campaign for Tobacco-Free Kids, “Cigarette Tax Increases by State per Year 2000–2009,” fact sheet (Washington, DC: 28 May 2009).

10. 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, updated using the following: 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); EIA, “US Weekly Retail,” Retail Gasoline Historical Prices (Washington, DC: 15 June 2009).

11. American Petroleum Institute, State Gasoline Tax Report (Washington DC: 1 April 2009); DOE, EIA, “Weekly (Monday) Retail Premium Gasoline Prices, Selected Countries,” at www.eia.doe.gov/emeu, updated 16 June 2009; gasoline consumption from International Energy Agency (IEA), in World Resources Institute, “Energy and Resources: Energy Consumption by Source: Oil and Petroleum Products (2005),” EarthTrends electronic database, at www.earthtrends.wri.org, updated 2007.

12. U.S. Department of Agriculture, Economic Research Service, “Cigarette Price Increase Follows Tobacco Pact,” Agricultural Outlook, January–February 1999.

13. Markus Knigge and Benjamin Görlach, 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); Michael Renner, Sean Sweeney, and Jill Kubit, Green Jobs: Towards Decent Work in a Sustainable, Low Carbon World (Nairobi: UNEP, 2008), p. 97.

14. Estimate of Swedish tax shifting based on Paul Ekins and Stefan Speck, “Environmental Tax Reform in Europe: Energy Tax Rates and Competitiveness,” in Nathalie J. Chalifour et al., Critical Issues in Environmental Taxation (Oxford: Oxford University Press, 2008), pp. 77–105; 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) and from U.N. Population Division, World Population Prospects: The 2008 Revision Population Database, at esa.un.org/unpp, updated 11 March 2009; 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); polls from David Malin Roodman, The Natural Wealth of Nations (New York: W. W. Norton & Company, 1998), p. 243.

15. Redefining Progress, op. cit. note 7; N. Gregory Mankiw, “Gas Tax Now!” Fortune, 24 May 1999, pp. 60–64.

16. Confederation of European Waste-to-Energy Plants, Landfill Taxes and Bans (Brussels: April 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; “DONG Satisfied with Electric Car Tax Relief,” Copenhagen Post, 22 May 2009; Nick Kurczewski, “Scariest Place in the World to Buy a Car,” New York Times Wheels Blog, 7 May 2008; Office of the Mayor, “Car Plate Prices Climb” (Shanghai: 21 June 2009).

17. South Australian Fisheries Management Series, Management Plan for the South Australian Southern Zone Rock Lobster Fishery (Adelaide, South Australia: 2007); South Australian Research and Development Institute, Southern Zone Rock Lobster (Jasus edwardsii) Fishery, assessment report to PIRSA (Adelaide, South Australia: 2008).

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).

20. World Bank, World Development Report 2003 (New York: Oxford University Press, 2003), pp. 30, 142; 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; Germany from UNEP, Reforming Energy Subsides: Opportunities to Contribute to the Climate Change Agenda (Nairobi: 2008), and from DOE, EIA, International Energy Annual 2006 (Washington, DC: October 2008), Table 1.4; 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); Doug Koplow, Earth Track, e-mail to Jessie Robbins, Earth Policy Institute, 2 July 2009.

24. Fishery subsidy value includes “bad” subsidies and fuel subsidies as estimated in Fisheries Center, Catching More Bait: A Bottom-Up Re-Estimation of Global Fisheries Subsidies (2nd Version) (Vancouver, BC: University of British Columbia, 2006), p. 21. 

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