Analysis: Restructuring Taxes to Shelter the Earth

By Bernie Fischlowitz-Roberts

WASHINGTON, DC, July 30, 2002 (ENS) - 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 so far, accounting for only three percent of tax revenues worldwide. It is increasingly clear, however, that countries are recognizing the power of tax restructuring to reach environmental goals.

The Alyeska Pipeline carries oil from Alaska to markets in the south. (Photo courtesy Arctic Power)

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 German 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 five 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. To date, Germany has shifted two percent of its tax burden from incomes to environmentally destructive activities.

London traffic (Photo by Ian Britton courtesy Freefoto.com)

Ultra-low sulfur diesel had a lower tax rate than regular diesel, which caused its share of domestic diesel sales to jump from five percent in July 1998 to 43 percent in February 1999; by the end of 1999, the United Kingdom 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 in The Netherlands, 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 60 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.

One of the world's largest residential solar photovoltaic projects on 64 homes in Amersfoort, Netherlands. (Photo courtesy BP Solarex)

Finland implemented a carbon dioxide (CO2) tax in 1990. By 1998, the country's CO2 emissions had dropped by almost seven 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 Swedish 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 four percent reduction below 1990 levels by 2012. 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.

Wind turbines in Denmark (Photo courtesy Vestas)

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. 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. To date, 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.

{Published in cooperation with the Earth Policy Institute.}