Green taxes

Many serious threats to humanity's future (from climate change and ozone depletion to air pollution and toxic contamination) arise largely from the economy's failure to value and account for environmental damage. Because those causing the harm do not pay the full costs, unsuspecting portions of society end up bearing them (often in unanticipated ways). People in the United States, for example, annually incur tens of billions of dollars in damages from unhealthy levels of air pollution, but car drivers pay nothing at the gas pump for their part in this assault. Similarly, if farmers pay nothing for using nearby waterways to carry off pesticide residues, they will use more of these chemicals than society would want, and rural people will pay the price in contaminated drinking water.

Taxation is an efficient way to correct this shortcoming, and a powerful instrument for steering economies toward better environmental health. By taxing products and activities that pollute, deplete, or otherwise degrade natural systems, governments can ensure that environmental costs are taken into account in private decisions (whether to commute by car or bicycle, for example, or to generate electricity from coal or sunlight). If income or other taxes are reduced to compensate, leaving the total tax burden the same, both the economy and the environment can benefit.

Opinion polls show that a good share of the public thinks more should be spent on protecting the environment, but most people abhor the idea of higher taxes. By shifting the tax base away from income and toward environmentally damaging activities, governments can reflect new priorities without increasing taxes overall.

So far, most governments trying to correct the market's failures have turned to regulations, dictating specifically what measures must be taken to meet environmental goals. This approach has improved the environment in many cases, and is especially important where there is little room for error, such as in disposing of high-level radioactive waste or safeguarding an endangered species. Taxes would be a complement to regulations, not a substitute.

Environmental taxes are appealing because they can help meet many goals efficiently. Each individual producer or consumer decides how to adjust to the higher costs. A tax on air emissions, for instance, would lead some factories to add pollution controls, others to change their production processes, and still others to redesign products so as to generate less waste. In contrast to regulations, environmental taxes preserve the strengths of the market. Indeed, they are what economists call corrective taxes: they actually improve the functioning of the market by adjusting prices to better reflect an activity's true cost.

In a minor form, environmental or so-called green taxes already exist in many countries. A survey by the Organization for Economic Co-operation and Development turned up more than 50 environmental charges among 14 of its members, including levies on air and water pollution, waste, and noise, as well as various product charges, such as fees on fertilizers and batteries. In most cases, however, these tariffs have been set too low to motivate major changes in behavior, and have been used instead to raise a modest amount of revenue for an environmental program or other specific purpose. Norway's charge on fertilizers and pesticides, for instance, raises funds for programs in sustainable agriculture (certainly a worthy cause) but is too low to reduce greatly the amount of chemicals farmers use in the short term.

There are, however, some notable exceptions. In the United Kingdom, a higher tax on leaded gasoline increased the market share of unleaded petrol from 4 percent in April 1989 to 30 percent in March 1990. And in late 1989, the U.S. Congress passed a tax on the sale of ozone-depleting chlorofluorocarbons (CFCs) in order, to hasten their phaseout, which the nation has agreed to do by the end of the decade, and to capture the expected windfall profits as the chemicals' prices rise. The most widely used CFCs are initially being taxed at $3.02 per kilogram ($ 1.37 per pound), roughly twice the current price; the tax will rise to $6.83 per kilogram by 1995 and to $10.80 per kilogram by 1999. During the first five years, this is expected to generate $4.3 billion, which multiple effects (a carbon tax for example, would lower both carbon and sulfur dioxide emissions by discouraging fossil fuel consumption) and because the taxed activities will decline even before taxes are fully in place, revenues shown in the table cannot be neatly totaled. But it seems likely that the eight levies listed here could raise on the order of $ I30 billion per year, allowing personal income taxes to be reduced about 30 percent.

A team of researchers at the Umwelt und Prognose Institut (Environmental Assessment Institute) in Heidelberg proposed a varied set of taxes for the former West Germany that would have collectively raised more than 210 billion deutsche marks ($ 136 billion). The researchers analyzed more than 30 possible "eco taxes," and determined tax levels that would markedly shift consumption patterns for each item. In some cases, a doubling or tripling of prices was needed to cut consumption substantially. Halving pesticide use, for example, would require a tax on the order of 200 percent of current pesticide prices