Can Green Taxes Save Our Environment?

Dear EarthTalk: Near tax filing day this year I heard some economists on TV discussing “green taxes” that can benefit the environment. Can you enlighten me?

—Wendy, Providence, RI

Just like taxing cigarettes helps to discourage smoking, so-called “green taxes” can work to discourage activities that damage or pollute the environment. According to Vermont Businesses for Social Responsibility, “Very simply, green taxes use the tax code to adjust the prices of products or activities. Through taxes, we can increase the cost of activities or products that damage the environment and decrease the cost of activities or products we want to encourage for environmental reasons.”

Taxes on gasoline, for example, are “green taxes” because they encourage conservation of a limited and polluting resource. Since businesses and consumers are price-conscious, adjustments to taxes force people to think about the choices they are making. Green taxation, or “tax shifting,” as it is known in economic jargon, may also involve tax rebates, such as those given to consumers who purchase clean-fuel vehicles.

In the 1990s Great Britain instituted a fuel tax known as a “fuel duty escalator.” It resulted in a significant drop in fuel consumption and a large increase in fuel efficiency, especially for diesel trucks. Finland, The Netherlands and Sweden have all instituted similar measures, mostly trying to curb energy consumption.

In addition to trying to influence positive behavior, green taxes also seek to make the prices of goods reflect their “true costs.” We buy a lot of disposable products, for example, and quite inexpensively. But local communities then have to deal with the resultant waste, incurring costs not reflected in the retail price we pay. A tax, then, could price these items more in line with their true costs, with the revenues inuring to the municipalities that have to pay to landfill, incinerate or recycle them.

Another philosophy behind tax shifting is to move away from taxing ordinary, everyday “good” behavior (like earning an income) while taxing less desirable behavior. Germany, for example, implemented a tax reform in 1999 that lowered income taxes at the same time it raised energy taxes.

So far, the experiment has been successful, says J. Andrew Hoerner, sustainable economy program director at Redefining Progress, a non-profit organization in the U.S. that works on issues of sustainable economics. “In 44 economic studies of environmental tax reform in Europe,” he says, “we basically concluded that the impact on the Gross Domestic Product is positive, the impact on employment is positive, and the effect on emissions is to reduce them.”

While the scale of green tax shifting accounts for only three percent of tax revenues worldwide, the concept is gaining in popularity, especially in light of rising fuel costs the world over. In the U.S., according to Erich Pica, director of economic campaigns at Friends of the Earth, Vermont and California are exploring tax shifting, and many states offer a wide range of green tax rebates. A comprehensive listing of various state tax incentives rewarding those who buy renewable energy, drive hybrid cars and increase energy efficiency is available via the website of the Database of State Incentives for Renewable Energy.

CONTACTS: Redefining Progress, www.rprogress.org; Friends of the Earth, www.foe.org; Database of State Incentives for Renewable Energy, www.dsireusa.org.