Why the North Must Act First 2

But what is the truth? The truth will never be established in sound scientific terms. But there are reasonable estimates available. Lutz Wicke, then head of economics at the German Environmental Protection Agency, estimated annual economic damages resulting from environmental pollution to some 100 billion DM for West Germany in 1985, which was roughly 6% of the GNP. He restricted himself to classical factors such as air, water and soil pollution and noise. If damage from resource depletion, greenhouse effect, exported damages and long-term damages were added, an estimate of 200 billion DM or more can be easily defended. This contrasts with some 20-30 billion DM polluters were or are paying annually (see Figure 3).

The task of making prices tell the truth could then be described as putting an additional price tag of some 5 to 10% of the GNP on the use of energy and other resources. And according to theory that would make countries richer not poorer. There is, in fact, some surprising empirical indication that this may be true. Comparing the economic performance over the last 15 years of the biggest industrial powers shows a clear hierarchy; and looking at the average domestic energy prices which these countries maintained, you see a positive, not a negative correlation (see Figure 4). The worst economic performance was achieved by countries which subsidised energy and water use, namely the socialist countries.

Figure 4

Very high energy consumption is becoming a symbol of backwardness. Efficiency orientation in the use of energy and natural resources in my view will be the clue to making environmental protection a win-win game. And pricing is the market economy tool for this efficiency orientation.

Pricing can be done either directly via taxes or charges, or indirectly via regulatory constraints or tradable permits. Regulation or permits tend to involve high administrative and monitoring costs and are therefore unlikely to work effectively in less developed countries. For practicality and welfare reasons I would favour direct pricing of ecologically important input factors. Ton control and tax crude oil, crude chlorine or mercury is much easier than to monitor effluents or to control at each transaction the correctness and legitimacy of a permit.

Among the pricing instruments, environment ministers tend to favour special charges over taxes. Charges mean that the revenues are earmarked for good works to be done by the environment minister.

But quantitatively, the instrument is very limited. Earmarked charges mean additional financial burdens on the economy. The German Environment Minister Töpfer came under heavy attack from business for his proposals of additional charges on waste and CO₂. Moreover, charges require a fairly solid proof of who was the polluter and of which remedial measure is justified. This burden of proof involves substantial monitoring and control costs (no less than command and control instruments). I am not surprised that the total amount of charges collected in OECD countries remains smaller than 0.1 % of the GDP of these countries.

Taxes, by contrast, are not earmarked. Therefore the state is free to use them for no other purpose than to reduce other taxes, notably VAT, income taxes or corporate taxes. The overall fiscal burden would in this case remain constant even if fairly substantial "green taxes," e.g. of an order of magnitude of five percent of the GDP (fifty times the size of present charges), are collected.

Revenue neutral energy taxes of this size would have a steering effect far exceeding that of present charges. Assuming that chiefly fossil and nuclear energy would be taxed, the share of renewables would increase while the size of the energy pie would shrink. If the price of fossil and nuclear energy was doubled, the total pie would shrink by some 20% (allowing some fifteen years' time of adjustment). The portion of renewables could easily double. More drastic effects should be expected from a quadrupling or octupling of fossil and nuclear energy, as Figure 5 indicates. Some substitution effects from fossil and nuclear to renewables are actually just around the corner.

Figure 5

If energy taxes and other green taxes are introduced in a revenue neutral manner -- as I suggest -- one would speak of an ecological tax reform, rather than of taxes. The tax reform would substantially depenalise and hence encourage human labour, the creation of added value, and corporate activities, while wasteful technologies, wasteful consumption patterns and wasteful infrastructures would be gradually driven out of the market. Figure 6 shows this shift which would be first noticed by investment capital -- which always smells where the sunrise sectors of the economy are to be found.

Figure 6

To avoid negative distribution effects, some compensation could be offered;in the European context it might be sufficient to lower the VAT which has very similar distributive effects as green taxes. But additional compensation may have to be considered.

To avoid ruptures both on the side of producers and of consumers, the ecological tax reform should proceed rather slowly but steadily. The slowness of change is necessary to give technology development, infrastructural changes, training and cultural changes sufficient time. The time horizon of such changes is twenty to fifty years, not two to five years!

For practical politics I am suggesting a revenue neutral tax reform which could increase prices by five percent annually -- in constant dollars -- for fossil and nuclear energy, for water and for bulk minerals. In the energy field the first steps in many countries could be done by just cutting existing tax privileges and subsidies (e.g. in fossil fuels). The price increase could be steeper, with no harm to the economy; and the tax should apply only to virgin matter -- so as to encourage recycling.

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			*Table of Figures*
	Introduction		Fig.1 People Polluting the Environment
	"The North is the Polluter"		Fig.2 CO2 Emissions
	Halving CO2 emmisions		Fig.3 Pollution costs, what polluters pay

	Switching policy emphasis, pricing input		Fig.4 Economic performance v. energy prices
	Costs of pollution		Fig.5 Fossil & nuclear energy prices
	Revenue neutral energy taxes		Fig. 6 Impact of energy tax on profits
	Systemic energy productivity gains		Fig.7 Fuel consumption v. price