An Appraisal of Ecological Tax Reform

Critical Response No. 2

By Alison Smith

The second proposal for a transition towards a Steady-State Economy, declared by Herman Daly, is ‘Ecological Tax Reform.’ Daly defines this type of reforms as “shift(ing the) tax base from value added (labour and capital) on to ‘that to which value is added’, namely the entropic throughput of resources extracted from nature (depletion), and returned to nature (pollution). (Daly)” My goal in this response is to explore, more deeply, the implications of Daly’s account for ecological tax reform. And do so, by assessing these implications within a current time frame and in correlation with additional ecological economists viewpoints.

The purpose of this tax shift is to incorporate the environmental costs of products and services into the market price to assist the market in telling the environmental truth. Effectively rewarding environmentally responsible actions, such as reducing energy requirements. As Daly states, these taxes will “internalize external costs” (Daly) and encourage or induce more stringent allocation of natural resources. Daly also notes in his first proposal that pollution is much harder to monitor for taxation than extraction and therefore the onus would be largely placed on extraction industries. Although the industries affected by the tax could simply include the new expenses in their final price, effectively projecting the cost upstream, limits are established and pollution emissions are reduced.

The pressures of increased prices on primary resources tend to encourage investment in sustainable development of infrastructure and or an alteration in consumer habits. Lester Brown, an environmentalist author, writes extensively on global environmental issues and provides relevant examples of Daly’s ecological tax reform in practice. However a clear distinction is apparent between Brown and Daly’s classification of the tax. Daly preaches taxation on “that to which value is added” (Daly) where as Brown, expands this classification to include all “those who contribute to the throughput” (Brown). Browns definition still directs taxation onto reckless primary industries, but also taxes individuals for reckless behaviors. An example of ecological tax reform contributing to sustainable innovation, assessed by Brown, is the London congestion tax. In 2005 an equivalent to $14 was imposed on car entrance into the city centre. The revenue was used to enhance public transport energy consumption and geographic reach. The mission of this congestion tax was to increase public mobility, decrease congestion, air pollution and carbon emissions. Another example is the unprecedented steep tax on newly produced energy-inefficient cars in Denmark. This specific tax “doubles the price of the car” (Brown) and has lead to a virtual extinction of energy-inefficient cars in the region.  Brown does examine cases when taxation is systematically shifted from labor to energy production instead of focusing on individual consumerists. He sites in 1999 Germany adopted a four-year plan to simultaneously reduce individual income tax while implementing a new tax on energy producers. This resulted in a decrease of fuel use by five percent, a commendable reduction, but more impressively the plan “accelerated growth in the renewable energy sector, creating some 45,400 jobs in the wind industry alone” (Brown). Taxation shifts towards resource extraction and deposition, along side taxation towards individuals who contribute to the overall throughput undoubtedly strains the validity of economic reason. In other words, it bluntly asks, does the current process still make economic sense with this ilk of the unfamiliar taxes?

Tim Jackson explores the notion of absolute decoupling, which is the base of “breaking the link between ‘environmental bads’ and ‘economic goods’” (OECD). Jackson states that absolute decoupling “is essential if economic activity is to remain (logical) within ecological limits” (Jackson). The parameters of absolute decoupling relate more to Daly’s industry based taxation. But before I investigate further it is important to clearly define this notion. The Organization for Economic Co-operation and Development identifies absolute decoupling when “the environmentally relevant variable is stable or decreasing while the economic driving force is growing” (OECD). The motivation of a corporation to continually profit, for example in oil extraction, regardless of these taxes will force greater investment in energy efficient technology and pollution reduction methods, which increase absolute decoupling. Iron ore extraction is an industry where absolute decoupling is not only non-existent but is in a negative value. That is to say, the environmental throughput is greater than the economic driving force. An ecological tax of this particular industry might be the driving momentum for innovation in extraction that could significantly contribute to better resource allocation.

Ecological taxes generate a number of environmentally beneficial results. This brand of taxation exposes the costs of throughput and concentrates these costs to both primary industries and individual contributors. The short-term effect is investment in sustainable development and the long-term effect is the growth of absolute decoupling.