Green Taxes Make Bad Goods Better

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.