Economics for a Sustainable Planet

From the Foundation's 1997 Annual Report

At the heart of the environmental dilemma is the failure of economies to incorporate environmental costs into private decisions, leaving society at large to bear them. Automobile drivers do not pay the full costs of local air pollution or long-term climate change when they fill their gas tanks, nor do farmers pick up the entire tab for the health and ecological risks of using pesticides. This blinkered view of societal expenses has burdened many nations with huge environmental cleanup bills and given political and economic inertia to many unsustainable activities.

Of the many tools governments can use to reorient economic behavior, environmental taxes are among the most promising. Taxing products and activities that pollute, deplete, or otherwise degrade natural systems is a way of ensuring 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. Each individual producer or consumer decides how to adjust to the higher costs: a tax on air emissions would lead some factories to add pollution controls, some to change their production processes, and others to redesign products to generate less waste. By raising a large proportion of revenue from such "green taxes" and reducing payroll taxes to compensate, governments can reward work and penalize pollution and help move economies toward a sustainable path.

Taxes offer an efficient way of correcting for the market's failure to value environmental services. Most governments raise the bulk of their revenues by taxing income, profits, and the value added to goods and services. This has the perverse effect of discouraging work, savings and investment—things that are generally good for an economy. If governments stopped taxing work and wealth creation and instead taxed pollution, waste and resource depletion, both the environment and the economy would benefit. A comprehensive set of environmental taxes, designed as part of a broader restructuring of fiscal policy, could do much to steer the economy toward sustainability.

The most promising activity around this issue is occurring at the state level. Minnesota, Vermont, Maryland, and Ohio have all begun policy debates about using fees collected from pollution or energy consumption to offset state or local taxes. It is likely that the first "green taxes" will be adopted in one of these states. Opportunities at the national level may arise as proponents of discarding the current income tax system jockey over alternatives such as a sales tax or flat tax. This discussion will give critics of the payroll tax (which impacts disproportionately on the poor) the chance to point out that most Americans pay more in payroll taxes than income taxes. Meanwhile, the expected shortfall in the Social Security Trust Fund early in the next century provides an additional reason to look at taxing pollution rather than labor.

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