Green Taxes Make Bad Goods Better

Taxes on products like gasoline and plastic grocery bags help cover the actual and often unseen costs incurred by their use.
Prices should not be confused with costs. Green taxes exemplify this basic rule of economics well. While energy prices in the United States are lower than in the European Union -- gas costs around half as much -- Americans nonetheless spend just as much on energy as Europeans because they waste so much. The disparity in prices is so great that some -- such as the Global Governance Project in its paper "Implementing the Kyoto Protocol Without the United States: The Strategic Role of Energy Tax Adjustments at the Border" from March of 2003 -- speak of unfair competition. A quick study of the figures in the paper reveals that energy prices in Germany are lower (with one exception) than the EU average, both of which are consistently higher than the US average. Military costs were not included in the calculation.

With prices that low, who is interested in conserving? Indeed, as the Energy Park at the World Fair 2000 in Hanover, Germany stated: "If the current average gas mileage of American cars were increased to the level of German cars, the annual savings would equal the annual total consumption of petroleum in Africa, China, and India together." Note the wording: Americans do not have to drive less; they can just switch to some of the European cars that get 80 mpg.

Just raising the miles per gallon will not, however, do the trick. That would probably just make driving cheaper if gas prices did not increase, probably leading people to drive more. In contrast, higher prices would bring about efficient products without any further legislation. Trying to enforce better fuel consumption without changing the prices is doomed to fail, but raising prices will do the trick nicely.

The green tax movement in Europe is already strong, but growing even further. Green taxes in the EU range from the tax on tourism in Majorca, where a charge is levied per hotel night based on number of stars the hotel has, to the recent "ecotax" is Germany, which added a few cents to each liter of gas sold and a similar amount to other forms of energy.

The revenue generated from green taxes is not always used exclusively for environmental purposes, which has created some confusion. In Germany, for instance, the ecotax has mostly been used to offset the rising costs of labor; German employers have to pay half of their employees' health care and pension plan installments, and these non-wage costs have been rising. But what the critics often forget is that simply raising the costs of energy reduces consumption, which is in itself good for the environment.

And indeed, the German "ecotax" has led to lower consumption of gasoline since it was introduced a few years ago: 1.2 percent less in 2002 and 1.8 percent in 2001. Sales of more efficient cars and efficient technology have risen. More people are traveling by train. Prices may have risen, but costs are stable thanks to lower consumption.

I recently spoke with Anselm Görres, Chairman of Green Budget Germany, about the German experience with the 4.6 cents per liter of gas (about 18 cents per gallon) that Germans called the ecotax.

Craig Morris: Mr. Görres, the green tax is quite unpopular in Germany. Why?

Anselm Görres: It is an effective pill, but a bitter one. And of course, people do not understand that they pay the green tax to themselves. In the final analysis, it doesn't cost a cent. Whatever you pay extra for gas, you get back when health care and pension plans are lowered. And if we didn't have the green tax, we would certainly have higher sales tax.

The press does not help when they only report -- as they did before the German elections in 2002 -- how the tax platforms of the political parties would affect people's net income without ever mentioning how these taxes would be spent. A party might charge less for gas, but also cut spending on kindergartens, for example, but the spending side is often never mentioned.

Absolutely. You have to look at the overall macroeconomic picture. And I am disappointed that we do not display more intelligence in the public discussion of tax issues. In the end, the green tax not only does not cost us anything; it even saves us money because we move to more efficient technology and do not have to import as much oil.

What about the complaint from environmentalists that this green tax is not green at all because it is not used for environmental purposes?

As I always say, the capital gains tax is not for the capitalists either. Having said that, a good environmental tax prevents conduct that damages the environment, for instance by making energy so expensive that people consume less of it. But we should not forget that, though most of the revenue from the green tax is used to lower labor costs by reducing health care and pension plans, part of it does go to subsidize renewable energy.

In other words, we need a certain amount of tax money to run the public sector, and we can use design the taxes collected to control the conduct of citizens at the same time.

Exactly. You shift the burden within the overall system, without having to raise the tax rates overall. In fact, we can even try to lower the overall tax burden while we shift the taxes from good ones to bad ones.

And the bad ones are -- aside from non-wage labor costs -- the sales tax because it does not make a distinction between good and bad behavior?

The sales tax is one of the very bad taxes. In Germany, the 16 percent sales tax is one of the reasons why the black market is booming: a painter simply costs much less when a homeowner does not have to pay the 16 percent "extra".

It sounds like the green tax has always been there. Taxes on gas in Germany have been very high for decades.

That's the way it should be. In this case, people realized early on that energy consumption leads to other costs, such as road construction, etc.

Critics of the green tax in Germany claimed that diesel would become so expensive that truckers would drive from Poland to France without filling up in Germany. Is Germany trying to be different?

The only thing that is different about Germany's approach to the green tax is the tendency of political conservatives to let the German industry itself decide how much environmental protection it wants to have in so-called "voluntary agreements." You don't have anything like this in other countries. The polluter pays principle is rigorously enforced in England, with harsh penalties. German industry would like nothing better than to have the government let them decide how much they should do for the environment.

[Author's Note: Germany is the only country in the EU to have liberalized its electricity and gas markets without setting up a regulatory body. However, on March 24th a decision was reached to create such a body after 2003. Americans readers should keep in mind, though, that deregulation has run relatively well in Europe and Germany -- no blackouts or price hikes here -- and consumers are even allowed to get all of their power from green sources at little extra charge.]

Contrary to what these critics are saying, green taxes are the rule in almost all European nations. And on March 21st, a resolution was passed in Brussels to raise the minimum tax rates on energy for all EU countries, including the 10 new eastern European members. With the stroke of a pen, green taxes were adopted in ten eastern European countries. The green tax is a pan-European fact, not a German exception.

Finally, do you see a connection between the war in Iraq and green taxes?

Yes, in several respects. I am not one of those who believe that the USA only waged this war for oil. It is one important factor among many. But to the extent that it is a reason, it is not a good one. We can't be waging wars so we can waste energy endlessly. The more we industrialized nations wean ourselves from oil, the less we will be tempted to try to create order in oil-exporting nations, who should be taking care of such things themselves.

Second, environmental protection requires global instruments. The USA has clearly expressed its contempt for the global instruments we spent so much time and effort trying to create in the past few years, be it the Kyoto Protocol or the International Court of Justice or the recent disdain of the UN. We need to have respect for the UN. It's the only global instrument we have. We need to strengthen our international institutions, not only for the sake of the environment, but also for the sake of peace.

For more information about green taxes worldwide -- including in US -- visit the website of Green Budget Germany, where you can also sign up for the bimonthly newsletter. Craig Morris translates for Petite Planète, which specializes in technologies and policies to keep this small planet going.
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