Green Capitalism - Waves of the Future
Climate Change, Non-Renewable Resources, Energy, Contaminants, Carbon Pricing...The 21st Century Environmental Revolution
8. Structural Change
9. Implementation Issues and Scenarios
Environmental / Eco-Taxation and Carbon Taxes. The Benefits of Cap-and-Trade Alternatives.
Revenue-neutral taxation would be free, less costly, and more market-friendly and effective. More details at:
Revenue-Neutral Taxation: A Free Tool for Global Warming and Other Environmental Problems
Overview Reviews
See also Book II of the Waves of the Future Series
CHAPTER 8-9
8. Structural Change
The Current Incentive Structure
Under normal circumstances, you would expect governments, and certainly more so an economic system, to reward good behaviors and deter bad ones. Not doing so would lead to a very dysfunctional society and have harmful consequences. This is exactly what is happening with the environment.The way the current economic system is set up makes it more profitable to consume carbon-intensive fossil fuels than renewable energy, to use cheaper toxic compounds in manufacturing processes, and to mine greater quantities of metals as it creates jobs and increases profits. In other words, current economics actually rewards the production of greenhouse gases and the wanton destruction of resources and the environment. Why is it so surprising that the planet is in a total mess? It is just the direct result of the current incentive structure of the economy.
The market system on which the entire world economy currently depends is configured into a destructive mode. It is setup to do exactly what it is doing now!
The Green Economic Environment (GEE)
The only approach capable of bringing change on the scale that is needed to turn things around for the environment would have to involve the economic system. One way to do this is to change the incentive structure that drives it, and the easiest and most obvious means to make that happen is to modify taxation to create a green economic environment in which non-polluting and conservational behaviors would be rewarded and their opposites, deterred.This could easily be achieved by shifting the income and retail taxes that governments collect to environmental levies on non-renewable resources, pollutants, and fossil fuels. The changes would be done in such a way as to not increase overall taxation, hence, be revenue neutral. This strategy will be referred to as the Green Economic Environment (GEE). For the sake of clarity, the acronym “GEE” will apply specifically to the approach as opposed to a or any green economic environment.
A Brief Overview of the GEE
Our current taxation system can be characterized as a politically-driven shotgun approach to filling the tax coffers. It is dysfunctional economically and disastrous for the environment. At this point, not much thought is being given to the fact that taxation is the very incentive structure that shapes our lives and the economy of our countries.The lack of emphasis on the environmental component of taxation leads to behaviors that make us pollute the planet and deplete and waste non-renewable resources as if there were no tomorrow. Current environmental problems are in large part caused by the improper structuring of the economic system in which we live.
That can be changed by altering the tax incentive structure of economies to reward environmental and conservational behaviors and punish their opposites. Under such a system, a significant part of government revenues would come from taxes on non-renewable resources, contaminants, and fossil fuels.
The GEE strategy proposed in this book would be revenue neutral. As such, a government would collect the same total amount of taxes after its implementation, but it would come from different sources. For example, if 60% of taxes came from income, 38% from retail sales, and 2% from environmental levies, the implementation of the GEE could result in a new distribution looking like this: 40% coming from income, 10% from sales (a total of 48% reduction for the two), and 50% from the environment (a 48% increase).
The new incentive structure would create a green economic environment and a new consumer landscape in which the price of non-renewable resources, pollutants, and all the products made with them would increase. The goods made with renewable and non-toxic materials would become cheaper and gain a competitive advantage.
As a result, consumption would naturally and effortlessly shift to greener products and sectors of the economy. Good citizenship would be rewarded rather than punished as it is now, and the destruction of the planet would be deterred rather than encouraged as is currently the case. The GEE would create a greening effect that would conserve resources, reduce contaminants, and decrease greenhouse gas emissions.
As a general rule, the GEE would involve taxing non-renewable resources—such as metals—at the source to promote conservation and create natural markets for recyclables. These would replace or make profitable the municipal recycling programs that are currently funded by taxpayers. Simple higher input costs would be more easily understood and managed by businesses compared to a haphazard collection of regulations.
Substances that are damaging to the environment (toxic compounds, carcinogens, etc.) would be taxed, whether they are inputs in manufacturing processes or consumer goods.
Oil and other fossil fuels would have levies assessed not only to decrease usage and greenhouse gases but also to create a stable and profitable renewable energy sector. This would be the simple mechanism by which countries would reduce their carbon emissions and reach their Kyoto targets. It could entirely replace the more complex and costly cap-and-trade system although both strategies could work side-by-side.
Regulations would be used in the packaging industry. In conjunction with GEE taxes, they would create natural markets for container reuse. This would serve to replace most of the existing refundable-deposit systems and result in efficiencies and a drop in costs for the consumer.
Of course, all of these new taxes would be compensated for by a drop in existing ones on income and retail sales since the system is revenue neutral.
The shift to a green economic environment would be fully scalable. That is, the GEE could be implemented as fast or as slowly as people desire. This would enable countries to make the transition to the new system as quickly as possible without creating economic havoc or unnecessary human suffering. Scalability would allow governments to start with lower taxation levels—giving consumers and the industry time to adjust—and progressively increase them over time. It would also make it possible for countries to give different weights to each of the components of the GEE according to their own goals and political imperatives.
For companies, the GEE environment would make it more profitable to preserve resources than waste them. The opposite would be true for the use of toxic materials and contaminants in the production process and the emission of greenhouse gases.
High-Efficiency Systems
Many environmental policies are inefficient and expensive to administer. They are cumbersome to the business sector as they require that staff keep up to date on compliance and regulations. It is usually much easier for companies to make decisions based on the price of the resources needed to manufacture a product (the cost of inputs) than have to deal with a maze of government rules. It is a language readily understood and simpler for planning and decision-making. It is already part of normal business practices and expertise. This is the language that the GEE also speaks.Environmental taxation would raise the cost of an input in a predictable way. Businesses would make decisions on that simple parameter. Current environmental policy is cumbersome to governments because regulations need to be monitored and enforced, often necessitating additional costs and bureaucracy.
A second aspect of efficiency has to do with the total number of tax collection points. That is, all of the individuals and businesses that governments collect from. Removing part of the taxes people pay on income would eliminate the need for many individuals to submit tax returns or, at least, would make those much simpler. That could mean thousands fewer or easier filings to be processed.
However, much more interesting is the effect on retail levies. Many governments currently collect retail taxes from just about every single business selling goods or providing services to consumers. This represents thousands of corporate taxpayers and means a lot of unnecessary bureaucracy.
As you go up the production chain—from primary resource extractors, to input producers, to manufacturers, to retailers—the number of individuals from whom governments have to collect taxes grows. For example, a copper mining company might sell its products to 10 part makers. Each of these in turn might sell parts to 10 manufacturers. At this level, 100 businesses would have to be collected from. Each of them might sell to 10 retailers. Collecting taxes at that level would then involve 1000 companies. In other words, the higher up you collect, the more costly it is not only for governments but also for businesses and the economy as a whole.
The GEE would collect taxes mostly at primary levels, therefore minimizing the number of players involved. Furthermore, it would do so only on target items: non-renewable resources, contaminants, fossil fuels, etc. Green sectors would generally see taxes disappear from their products.
Dual-Level Planning
There are two main types of planning in the environmental arena, the general (or macro) and intricate (or micro). Governments are responsible for planning at the general level. This is where they state what they want and establish plans of action to achieve certain goals. The difficulty with many environmental issues is that they are very complex to manage at the micro level. Problems are often just too intricate in the day-to-day reality of markets and business operations even for the best specialists in governments.It is not really a matter of failure. For example, even with today's technology, we still cannot predict the weather with any degree of accuracy for more than a few days ahead of time. Currently, government regulations and programs are the main planning mechanisms used to address environmental issues. They fail to do the job. Furthermore, when they do not work, the taxpayer ends up footing the bill. A successful green strategy would need to have appropriate expertise at the micro level while retaining the ability to operate within general government guidelines.
The market has a multitude of agents—business people—each an expert in a given field. Nobody else can better estimate the effect of higher input costs on the final price of a product or the bottom line. All planning on their part is based on familiar market decisions and comes free of charge to the taxpayer. The private sector represents a massive wealth of expertise at the micro level. If unqualified for planning at the general level, the business community possesses the detailed knowledge necessary to make the best economic decisions in regard to their own markets. Governments cannot hope to emulate or even approach that kind of expertise.
The GEE would rely on governments for general directions and on the market for decisions at the micro level. Setting tax levels would enable countries to guide the economy where they want it to go and allow market expertise to make things happen in the most cost-effective way possible. This would provide perhaps the best combination of planning and a much more powerful and effective strategy for the environment.
Business-Friendly Green Policy
The GEE would reduce the regulation and tax collection burden on industry. It would also provide for much simpler decision-making for businesses. The fact that the system would be highly flexible, fully scalable, and comprised of several components that could be implemented independently would allow for a smoother implementation for everybody.New Approaches to World Development
A worldwide implementation of the GEE would give rise to several new mechanisms for world development. Since the 1970s, the developing world has been hit by several oil crises, preventing many countries from gaining significant ground on poverty. As renewable energies are diversified and can be produced nationally, developing countries would benefit from the GEE in terms of balance sheet and job creation.Global resource conservation would increase the international price of most metals. Developing countries would get better prices for their commodities and could be allowed to have lower GEE tax levels to increase their international competitiveness and gain market shares, boosting their own economy and promoting their industrial development.
Environmental regulations have always been an issue of contention in international markets. The developing world has historically been perceived as having an unfair competitive advantage over developed countries because of lower environmental standards. The world cannot afford a race to the bottom.
Comprehensive GEE-based international agreements could raise standards across the board to benefit the entire world community while not affecting competitiveness. Conversely, a unilateral increase of environmental standards in the developed world could be used as a means to increase the competitive advantage of developing countries. The former would benefit from a cleaner environment while the latter would get an economic boost from a greater share of markets.
In more ways than one, the GEE would provide a simple and effective framework for international development.
Tax Fraud
To some extent, most social and economic systems are prone to fraud. The fact that the GEE would be levied at the manufacturer level would significantly decrease the number of collection points. As such, the system would be not only more efficient but also less prone to fraud than current widespread retail taxes.Black market or undeclared work is a problem around the world. The bill for the underground economy can add up to hundreds of millions of dollars every year in a medium-size country. In Canada, for example, people do not pay income tax on their first $10,000 of income (the basic deduction). As such, black-market fraud up to that amount is mostly meaningless; no one pays income tax on it anyway. The GEE could shift up to the first tier of income tax ($30,000 in Canada) over to the environment. This would mean that $40,000 dollars of a person's income would no longer be taxable and subject to fraud. This could have a significant impact on government revenue and result in lower overall taxes.
A New Future
The GEE is a strategy that could bring about the large-scale change that is needed for the environment. The new incentive structure would create an economic environment that would turn a highly destructive market system into a powerful force for positive change.The strategy would take advantage of the dual effect of levies—one that is wasted by income and indiscriminate retail sales taxes. With no overall increase in taxation, it would transform the economic system in which we live into a mean green machine and make environmental change possible to occur at a speed so far unanticipated and not even dreamed of.
The implementation of the GEE would change the incentive structure of capitalism from a system that essentially destroys the planet and punishes people for working (income tax) and consuming (sales taxes) to one that rewards them for doing the right thing and promotes resource conservation and environmental responsibility. The new incentive structure would foster this in both the industry and consumers.
The GEE would also be highly efficient. Its administration would be much less costly than our current patchwork of regulations as it would make use of simple and well-understood systems. It would speak a universal language, one understood by workers, business people, consumers, and voters: money. Once the new rules are set, societies would progressively refashion themselves around green economics and environmental lifestyles.
The scalability of the GEE would allow for choice in speed of implementation and help soften its impact on specific economic sectors. Its various components could be implemented together or independently as desired.
This structural approach to environmental issues would not be anti-business or anti-economic. It would work in concert with the main components of the current market system. Overall, companies would not be stuck with the costs of this green transformation anymore than taxpayers. On the contrary, the GEE would make it profitable for companies to invest in green practices and environmental research and development (ER&D).
Many business opportunities would arise following the implementation of this new tax structure. The current catering to green market niches would become a stampede for opportunities in an exploding new economic frontier. Countries and corporations at the forefront of ER&D would find themselves in a race to capture the new 21st century world markets. Wasters, polluters, and those who do not care for the environment or are unable to adapt would only fall behind and see the fate of the dinosaurs.
The GEE would give rise to a new overall mechanism for world development.
General Issues Relating to the GEE
Governments collect taxes from a number of sources, for example, income, retail sales, the environment (levies), and profits. In addition, specific products such as cigarettes and alcohol are often taxed for deterrence purposes.For the sake of simplicity, the following discussion will concern mainly the first three types. Of those, income is probably the main source of revenue for most governments, with sales coming in second and environmental taxation being minimal. The GEE would progressively shift the tax burden from income and sales to the environment.
Keeping Taxation Progressive
Most Western countries have a progressive taxation system. That is, people contribute according to their ability to pay. For example, in Canada the tax rate on the first $30,000 of net income is about 30%. It is the first bracket. If that were the only one, we would have a flat tax system. That is, everybody would pay the same rate, no matter the income level. This first bracket is actually a flat component in a progressive tax system.As one's net income rises above that, a higher rate is paid. For example, Canadians are taxed at 45% in the second $30,000 bracket. For the next two tiers above that, they pay respectively 55% and 60%. In order to keep taxation progressive under a GEE system, only the flat portion of income tax would be suitable for a shift to the environment. In Canada, that would be the first bracket, or the tax on the first $30,000 of net income after the basic deduction.
In addition, we also have to be careful with respect to how we go about eliminating that bracket. Simply increasing the basic deduction (about $10,000 in Canada at the moment) to reduce the total taxable income would be regressive because it would lower taxable incomes at the top where people pay the highest tax rate. That would be regressively cutting back taxes.
If a government chose to increase the basic personal deduction as a means of implementing a GEE system, the tax bracket thresholds would need to be adjusted lower by the same amount to avoid changing the existing distribution of incomes. Alternatively, a government may simply set the tax rate in the first bracket to 0%.
The GEE would imply a large reduction in income tax for everybody. Authorities have to make sure that it is done in a way that maintains the status quo with respect to progressiveness.
Most countries have retail sales taxes. This is what people pay on top of the purchase price of items bought in stores. This type of sales levy is not progressive as the same rate is charged equally to everybody. As it is a flat tax, it would fully qualify for a shift to environmental taxation. Any state or provincial sales taxes of the kind would be equally suitable for the shift.
Compensation for Lower Income Earners
The increase in environmental levies would have to be compensated for in social support programs as their recipients generally do not pay tax on the financial assistance they receive and would otherwise see their real taxation increase. Lower income earners may face a similar problem because their basic deductions are large compared to their taxable income. Governments may have to look into making appropriate adjustments to the system so that their total taxation remains the same and the shift to the GEE is fair to all.In the late 1980s, Canada went through a tax shift. The manufacturers' sales tax—a levy collected at the manufacturing level—was replaced by the GST, a retail tax. The federal government then opted to compensate lower income Canadians by issuing checks on a quarterly basis to millions of people in the country. It is still writing these to this day, some 20 years later. This is not exactly the most efficient way to do things. Adjustments need to be made directly to social support programs and the taxation system so that the benefits received and take-home pay compensate directly for the GEE.
Revenue Neutrality and Transparency
The transition to a green economic environment needs to be as voter friendly as possible. To that purpose, the cornerstone of the GEE is its revenue neutrality. For every green dollar collected, taxpayers would see their income or sales taxes reduced by one dollar. On average, the same total amount of taxes (income, sales, and environmental) would be paid by taxpayers before and after the implementation of a GEE system.Revenue neutrality is a fundamental aspect of the GEE and is key to its political viability and implementability. Although voters may be willing to pay taxes differently, they would not be so easily convinced to give more. To ensure proper and continued political support, governments would have to be highly transparent with respect to revenue neutrality and report on it regularly.
9. Implementation Issues and Scenarios
The next few chapters will take the GEE from general principles to specifics of implementation. Concrete examples will be looked at in order to demonstrate its feasibility and dispel misconceptions. The new system will be explored from various angles and in real situations in order to get people used to the idea of being taxed differently (but not more) and show that a transition to the GEE would be much easier than it appears.The Silent Scenario
This scenario will serve as a benchmark to assess to what extent the GEE would help achieve our goals for the environment. First, let us silence or remove the financial aspect from the green debate and see what needs to happen for the environment. Then, let us assume that we are in a perfectly planned world and that we have to draw a comprehensive plan to address environmental issues.To conserve non-renewable resources for future generations, mineral extraction would have to be reduced. This would mean that the mining industry would decrease in size. Unfortunately, this is a necessary evil; resources cannot be conserved if we keep digging them out of the ground as fast as we currently do.
It would also mean that we would need to consume less of them. Aluminum soft drink containers would likely be phased out and replaced by glass. In many cases, tin cans for food storage would disappear from store shelves and be substituted for by more environment-friendly alternatives. Metal components in various products would be more strategically used and replaced whenever possible.
Metal-heavy sectors would see many transformations. The automobile industry would start building vehicles that are conservational, i.e. that use non-renewable resources much more sparingly. That would likely be achieved by replacing metals with substitutes wherever possible and decreasing car sizes.
Automobiles would have much longer lifespans. The used car industry would thrive as resale values would be higher and people would buy fewer new automobiles and get them fixed more extensively as a means to conserve metals. The production of new vehicles would decrease slowly in the short term as new generations of conservational, fuel-efficient, and alternative-energy cars and trucks would be needed. In the medium and long term, it would progressively grow smaller in size.
Automobiles and other vehicles would need to become more fuel efficient as well as switch to alternative energies. That has already started to happen. As time goes on, we will consume less gasoline. We will pump less oil from wells and rely more and more on biofuels and electricity.
New jobs would be created in green sectors of the economy, including renewable energy, as the demand for their products would increase. The wood and renewable resource industries would thrive and need to be properly managed to prevent their collapse as has already happened in some cases.
Feasibility
One of the main concerns with respect to economic changes is the uncertainty they can create. Scholars are still looking for the perfect theoretical solution to environmental problems, but there can be a huge gap between theory and practice, especially if the changes involved are of significant magnitude.Brand new, maverick solutions usually face a lot of resistance. Many are never implemented simply because of the large amount of uncertainty they involve. This is a significant concern when searching for answers to environmental problems: the old ways have not worked; the new ones often present too many unanswered questions.
Although the GEE is new and sweeping in magnitude—as it needs to be, given the size of the problems at hand—it relies on an age old system. The strategy would only involve a shift between different components of government taxation. Environmental and deterrence levies are already in place in many countries. Along with income and retail sales taxes, they are all components of total taxation.
As expressed earlier, in the late 1980s, Canada had a major shift in taxation. It eliminated the manufacturers' sales tax and replaced it with one collected at the retail level. The new levy was about 7% and applied to most goods and services sold in the country. It was the first time that the latter were taxed in Canada. The transition went relatively smoothly despite being met by initial distrust and opposition. As such, we know that a taxation shift can be done.
A GEE strategy would be revenue neutral and should not change the overall amount of taxation collected in a country. For this reason, the shift would not put recessionary pressures on the economy. Consumer spending on goods and services would remain essentially the same.
For example, people in a typical country might pay $1 billion more in environmental taxes under a GEE system, but their income and retail taxes would be reduced by the same amount. As a result, their purchasing power would remain the same. In other words, things would generally be more expensive, but consumers would have more money to spend and come out even in the end. As long as the consumption level remains the same—which would be the case under the GEE—the shift should not result in a net loss of jobs.
Many environmentalists see consumption itself as the problem. They are correct to some extent, but there is more than one way to reduce our environmental impact: we can reduce consumption or make it greener. Opting for the former would mean a slowdown in economic growth, and few are ready to support that at the moment. Ideally, both should be done, but in the short term a greater impact can be achieved by focusing on the latter as it is much more politically viable than a reduction in consumption and the unemployment that it would imply.
The GEE would progressively make existing levels of consumption greener and greener without threatening to send economies into recession. For that reason, it is currently the best viable option we have. Under the system, growth would shift to green products. Polluting industries and the consumption of their goods would progressively change or have to shrink.
The green sector is an emerging market in which there is not a huge amount of competition at the moment. Implementing the GEE in a country would give it a significant competitive advantage in what will be a strong growth sector of the future. Export markets are likely to grow and result in a lot of job creation.
The GEE is essentially based on established and well-understood economic practices. All countries around the world have lived with the ins and outs of taxation for a long time. The strategy is readily implementable and has a relatively low level of uncertainty, given the magnitude of the changes that would result from its implementation.
Geopolitical Concerns
The ups and downs in the price of oil over the last few decades have given us some insights on the geopolitical implications the depletion of resources can have for modern economies. The conditions created by shrinking supplies increase poverty and the cost of living and can trigger recessions as well as deadly conflicts.A global move to resource conservation could significantly extend reserves and slow down the depletion process, easing up the pressure for potentially chaotic events in the future. Mineral resources other than oil have been less a concern to most countries because their supply has remained largely uncartelized and unpoliticized. They are also less massively used compared to energy.
However, metals are much less replaceable than oil. Alternatives to petroleum do exist and are actually plentiful. They are just more expensive. That is not the case for other mineral resources. What will happen when their supplies begin shrinking like petroleum? They are a major component of the infrastructure of most countries, and our lifestyle depends on them.
At the current rate of depletion, shortages will soon begin to occur, and the economics of metals could resemble those of oil. Power could shift to mineral-rich countries just as it did for the Middle East with respect to energy. Countries that import much of their mineral resources will see power shift away from them, their wealth quickly following suit.
That would likely be the case for the U.S. The question is, do we want to accelerate this process with high rates of depletion and precipitate economic decline and more global crises, or do we want to conserve resources worldwide and decrease the potential for problems developing as a result of scarcity?
There are only two choices available to us. We can do nothing and let the process occur haphazardly and end up with a repeat of the Middle East power shift and related human suffering, or we can make it happen within a global framework that would provide for sanity, prevent cartelization, and ensure continued supply to all countries.
The long-term self-interest of all countries lies in starting the conservation of resources immediately and in supporting international efforts in the same direction. Europe and the U.S. will be especially vulnerable to future crises because their economies and predominant lifestyles result in the use and waste of a lot of resources and they have already exhausted much of their own local supplies.
Countries will want to cut back production and use of metals by a fair amount in the medium term. Significant changes are needed. The reality of non-renewable resources is one of impending crises that can be softened and delayed, perhaps avoided, with the proper global framework.
Rate of Implementation
Two of the issues regarding the conservation of non-renewable resources are how far and at what rate we should cut back their extraction. No single person can determine that. In the long term, we would have to be looking at extended sustainability levels. In the immediate future, the answer will likely come as a result of a political and social process. A couple of considerations will be useful in helping with the decision process.The potential job losses resulting from the implementation of a new tax structure is a legitimate social issue. Large-scale unemployment is not expected to result from this as the total level of taxation would not increase and countries' money supply would not change. Overall, the same amount of consumption and investment would be around, but it would shift from one sector to another, for example, from oil to renewable energy.
Total employment should therefore remain relatively stable, but work would not transfer directly from one sector to another. If you lose your job as an oil worker, you may not get one in the new wind turbine industry or get in at the same pay rate as you had before. So, just how fast should we go?
Attrition has been used in the past as a worker-friendly approach to change and is usually one of the better alternatives whenever possible. The way it works is that rather than laying off people, companies do not hire new employees as older ones retire or quit for one reason or another. Alternatively, they offer bonuses to workers willing to take early retirement. These are undeniably the best possible options when companies can afford them.
However, neither system is perfect. When a business closes down, there is no money for early retirement and everybody gets laid off, old and young. Even when planned, a closure by attrition or early retirement leaves casualties.
How long would it take to fully implement the GEE if we did it by attrition? New entrants into the workforce may average about 20 years of age. Let's assume that most will retire at age 60. That leaves an average career span of about 40 years. Add another 10 years as a measure of security. As such, someone starting work today would technically retire in 50 years.
Consequently, at the best possible speed, we would need about 50 years to bring down production amounts of non-renewable resources from 100% (current levels) to 0% if we were to totally stop the extraction of minerals. Obviously, that is not what we are trying to do. If we were to bring them down to 50% of current levels in the medium term, it would take us about 25 years through attrition.
The above is not to suggest that we should reach that specific target in that span of time, but it is a benchmark that can help us see more clearly into the future and minimize potential socio-economic disruptions from a GEE implementation. We may choose to go faster for environmental expediency and especially at the beginning, or more slowly. Ultimately, the socio-political process will determine the exact speed of implementation of the GEE.
If half of one attrition span (25 years) is deemed both a reasonable and responsible time line to reach medium-term resource conservation targets, by 2035 we will have cut by 50% our consumption of non-renewable resources. Another half-span would take us to 25% of current consumption levels by 2060.
What targets countries will chose for the very long term is uncertain at this point. What we know for sure is that we should start early. Our current rate of use is highly harmful to the environment and severely depletes resources for future generations. The sooner we start, the better.
Taxation Management Concerns and Solutions
Environmental initiatives can pose a number of problems if not designed appropriately. Alain Verbeke (Solvay Business School, Free University Brussels, Belgium) and Chris Coeck (Faculty of Applied Economics, University Centre of Antwerp, Belgium) expressed concerns that poorly managed environmental levies may result in a backlash in the business community, a decrease of their support for environmental taxation and the general impression that environmental taxes have become “arbitrary measures to stabilize government income” (Verbeke and Coeck, 1997, p. 510). In other words, politicians could abuse the system to raise total taxation.The GEE is specifically designed to be revenue neutral. The proposed system is a shift and not additional taxation. As such, it is meant to not be used to arbitrarily increase government income. Revenue neutrality is a large part of its political viability. Open disclosure and a high level of transparency would be part and parcel of the new system and would easily prevent abuse.
Concerns have also been raised that green taxation is often used to fund environmental programs (for example, taxing contaminants and using the proceeds to fund water improvement programs) and that the environment would get disproportionate amounts of funding while other programs would come up short.
This is not the case with the Green Economic Environment. All new levies would be directed to general revenue as is the case with current income and retail taxes. This would prevent the arbitrary financing of certain programs over others and ensure that government spending on social programs and services remains the same. The GEE is not about increasing funding for the environment at the expense of other programs. It is about creating a green incentive structure for economies.
Another concern raised in literature with respect to taxation is its dynamism. Verbeke and Coeck (1997) warn that using taxation as a source of income for governments or as funding for environmental programs may not yield the intended benefits for a number of reasons. Green taxation revenues tend to be dynamic and may not provide as stable a source of government income as desired. Let us look at an example of this.
Suppose that a government implements a carbon tax that is expected to generate a billion dollars in revenue annually. The resulting increase in gasoline prices would generate positive environmental behaviors as expected—the purchase of more energy-efficient cars, increased use of public transportation, a switch to alternative energies, etc.
Because this would result in a decrease in oil consumption, over time the tax would bring in less than the expected revenue target. Governments would then have to increase it further to generate the originally desired one billion dollars. This action would presumably lead to lower consumption yet. The environmental tax would have to be raised again. Dynamism could result in a kind of treadmill effect which would eventually create a number of problems. Let's address these issues.
The problem that Verbeke and Coeck describe is a very legitimate concern. Continuously increasing levels of environmental taxation could seriously undermine the strategy as well as a country's international competitiveness. However, the dynamism of environmental levies is a very good thing in itself. It would spur us on to continue year after year to improve on resource conservation and environmental protection. We want the economy to become more and more environmental over time. Dynamism is actually the chisel which would make society and the planet greener and greener year after year. But it needs to be controlled.
The implementation of the GEE would be progressive. This implies that initial taxation levels would be lower and need to increase in order to reach long-term target levels. As such, there would be room for raising tax rates without creating problems, and dynamism would therefore be an integral part of the implementation process.
Once desirable levels of conservation and protection are achieved, or international competitiveness ceilings have been reached, we can reverse the process and raise income tax if the government take from environmental levies falls. Of course, that would have to be done without increasing total taxation. As such, the dynamic effect of the GEE is perfectly and easily controllable. We just have to remain aware that the issue will need to be managed.
Note that under the current system, government revenue varies from year to year depending on economic cycles, profits, personal earnings, unemployment rates, national retail sales, etc. It decreases in times of recession and increases in periods of growth.
Varying revenue is not a new issue for governments; gaps in income have historically been made up by temporarily borrowing money or through budget cuts. The GEE would only continue that, not change it.
National and International Issues
International competitiveness is probably the most difficult issue concerning the implementation of a green economic environment. Although most countries could readily initiate and gradually put in place such a system, few would be able to quickly proceed with a full-scale implementation because of the effect on their ability to compete internationally.The GEE is not unique in this respect. Minimum wage levels, interest rates, productivity, social programs, greenhouse gas reduction targets, and a number of other factors also affect international competitiveness. The GEE would be just one of a range of variables in that respect.
Any resource tax would by necessity be collected prior to export and make a country's goods more expensive and less competitive in foreign markets. Although exceptions could be made, a rebate on exports would not be a realistic solution as a resource tax would become diffused in finished products.
For example, while a bar of steel may see a full increase in price from a given levy, a product with a 30% content of the metal would see only a partial rise in price. For that reason, it would be far too complex to try to estimate the percentage of non-renewable resources in every item to be exported and compensate for the levy with a rebate.
Individual countries would therefore be limited in their ability to tax resources past a certain level as it would overly decrease their international competitiveness. As such, most should be able to carry out the initial phase of the GEE as it involves lower tax rates, but trade-bloc or international accords would likely be needed to support a high level of implementation of the system.
That being said, even a milder variant of the Green Economic Environment would sill yield substantial benefits. There are obviously the positive effects with respect to carbon emissions, contaminants, non-renewable resources, the green energy sector, etc. However, there are other advantages to the system as well.
For example, it would mean that fewer non-renewable resources would be exported to be wasted overseas, therefore preserved for future generations. Countries would not want to conserve and tax resources in home markets but export them cheaply to places where there are no conservation efforts being made.
As well, the GEE would affect primary resources more strongly than final goods, as seen in the bar of steel example above. This would prompt countries to transform them more extensively into finished products and develop their local manufacturing industry—which would create jobs—rather than export them as raw materials.
Keep in mind that countries could choose to not fully tax the export of raw materials in order to lower the impact of the GEE on their international market shares. To soften the effect of resource levies on certain industries, governments would also have the option of initially imposing import taxes on big ticket items so as to maintain local manufacturers' competitive advantage within a country. As more and more countries get involved in conservation programs, import taxes could be progressively phased out.
Note that international competitiveness is an issue with greenhouse gases as well. The establishment of common carbon emission targets (within groups of countries) in the Kyoto Accord addresses the problem. The same solution could simply be applied to the GEE.
The Green Economic Environment strategy could work with already established emission targets and, as stated earlier, alongside cap-and-trade. It would simply act as a mechanism (which neither the latter nor Kyoto provides) to reduce greenhouse gases and enable countries to meet their carbon reduction commitments.
An emission trading system is only a flexibility component which allows companies that exceed the caps agreed under Kyoto to buy credits from businesses that have done better than their reduction limits. You do the math! Plus one thousand units minus one thousand units equals zero. As a whole, no net carbon reduction is achieved by the system. Incentives and decreases in emissions are the result of the Kyoto Accord's caps.
When you look at it closely, most countries do not have a mechanism that would foster or help the industry and consumers to reduce carbon emissions. The GEE does provide one. As discussed later on, the Green Economic Environment could replace both the Kyoto Accord and cap-and-trade and deliver a simpler, less costly but much more powerful market-based approach for carbon emission reduction whether at the local or the international level in the form of a new global environmental accord.
The long-term and most efficient solution to the problem of competitiveness differentials is the negotiation of international accords. Under such agreements, countries would see their taxation levels increase at the same agreed upon rate just as they do with carbon emission levels under the Kyoto Accord.
Because of its scalability, the GEE would be readily implementable on a national basis in most countries around the world. The first ones to implement the system would also be the first to shift their economies towards cutting-edge sectors of the future (metal substitutes, conservational techniques and designs, alternative energies, electric and fuel-cell vehicles, etc.) and would therefore gain a huge competitive advantage in wide-open emerging markets.
International agreements would remedy to competitiveness problems between countries and make it possible to shift into high gear the fight against global warming and the worldwide conservation of resources and preservation of the environment.
Burden of Change
Throughout history, all too often the cost of social advancement, the burden of change, has been borne by those who lose their means of living as a result of economic events or industrial and social shifts. To a large extent, this is a choice. If society as a whole benefits from certain changes, why should a few be responsible for the costs associated with them? Why should we not compensate them for these?Clearly, some of the costs of change cannot be avoided, but we, at least, can mitigate them. It is not only an issue of social justice; the absence of compensation is often counter-productive. The higher the unmitigated costs, the more reluctance to change is created in a society.
In a constant race for economic positioning, a nation which resists change loses its edge and quickly falls behind. Tomorrow's innovative societies are those which will be best able to quickly adapt to new and changing environments. Removing blocks to change is becoming an increasingly important factor in this rapidly evolving world.
Unemployment in particular sectors or for specific people is often a direct cost of change. Improving the way we deal with this problem would ensure that certain individuals do not unduly bear the burden for changes that benefit an entire country. In fact, it is the responsibility of a fair society to make certain that they do not. It would also help remove resistance to change, making a country much more innovative and successful in a competitive world environment.
Most countries already have unemployment insurance programs or other types of support systems along that line. If we are serious about environmental change—we know that the needs are massive—these social safety nets have to be given a second look so that they act more in concert with the changes that need to happen in society and target more closely the sectors that may be affected by new policies.
Better support would make the implementation of a green economic environment easier and benefit countries in the long run.