Many economists endorse the policy of establishing taxes to reflect the cost to society of an economic activity. For example, a tax on coal would incorporate the increased health care costs from breathing polluted air and the cost of global warming. These economists believe such taxes are necessary to reflect the “truth” of market activities and endorse reducing taxes on income while raising taxes on environmentally destructive activities.
New York Times columnist Tom Friedman recently wrote a column entitled (No) Drill, Baby, Drill. He describes Costa Rican policy that economic growth and environmentalism work together. Costa Rica utilizes a holistic strategy to think about growth – one that demands that everything gets counted. Its citizens pay for using natural resources, polluting the air, or engaging in other activities that produce social cost. They call it “payment for environmental services” and the water, fish, forests, and climate are not treated as free anymore. It has been able to accomplish this by putting energy, environment, mines and one all under one government agency. By putting energy and the environment under one minister, the environmental sector was able to influence energy choices by pointing out the need to think 25 years ahead rather than six months and pointing out that, in the long run, renewable energy is the cheapest energy. Today, Costa Rica gets more than 95% of its energy from hydro-electric power, and wind and geo-thermal. In 1985, they got 50% from hydro, 50% oil.
Costa Rica decided that landowners who keep their forests intact or rivers clean should be paid, because this benefits everyone downstream and the forests absorb carbon To pay for environmental services, Costa Rica imposes a tax of 3.5% on the cost of fossil fuels. The tax goes into a fund to pay indigenous communities to protect their forests. Users of water pay villagers upstream to keep their rivers pristine. As a result of these taxes and payments, Costa Rica has reversed deforestation and has twice the amount of forest it had 20 years ago.
Costa Rica is not the only country enacting taxes that reflect the indirect costs to society of an economic activity. Nine countries in Western Europe have enacted environmental tax reform. Activities taxed in these countries include carbon emissions, emissions of heavy metals, and garbage generation. The Nordic countries, led by Sweden, Germany, Italy, France and the UK have all implemented tax reform without increasing the level of overall taxes but by shifting the burden of taxes. In 1999, Germany implemented a program to shift taxes from workers to energy users and, by 2001, this had lowered fuel use by 5%. A tax on carbon emissions adopted in Finland in 1990 lowered emissions there by 7% by 1998. The city of Victoria, British Columbia, adopted a trash tax of $1.20 per bag of garbage and reduced its daily trash flow by 18% in one year.
Several cities have imposed congestion taxes. London adopted a congestion tax in 2003 when the average speed of an automobile was 9 miles per hour. A tax of $8 was imposed on motorists driving into the center of the city during working hours. The tax immediately reduced the number of cars by 24%.
The economists believe that environmental tax shifting brings a double dividend: by reducing taxes on workers, labor becomes less costly and more jobs are created while the environment is protected. Economist supporters of environmental tax shifting include eight Nobel Prize winners. Former Harvard Economist Professor N. Gregory Mankiw, wrote in Fortune that “Cutting income taxes while increasing gasoline taxes would lead to a 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.” Read more here
The US government has yet to broadly embrace environmental tax shifting that takes into account the long-term costs of environmentally destructive activities, in large part due to the anti-tax movement and its unrelenting mantra that such taxes not only would not be a free lunch but would ruin western civilization as we know it. While Congress refuses to take strong action, they may be missing an extraordinary opportunity to restore their credibility and popularity. According to World Watch Institute, a recent poll indicates that 70% of US and European voters support environmental tax reform once it is explained to them.
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