4. Sustainability and Employment in Reality: a Review of Empirical Analyses

In the Introduction reference was made to one evaluation of the macro economic consequences of the first 15 years of environmental policy development in the industrialised countries (OECD 1985). It turned out that these effects were negligible or very small, and that, in terms of employment they were slightly positive, though this was statistically insignificant. This is far removed from the perceptions of many who discuss environment-economy relationships and who often think that environmental policy has seriously constrained economic development. If it has posed constraints, they were buffered effectively and have given rise to mitigating activities with positive economic returns as, well as environmental quality benefits. During that period, total environmental expenditures as percentage of GDP in countries such as Germany, US, Japan, were more or less constant in the 1.2-1.7% range.

The current situation does not really suggest that drastic changes have occurred since 1985. In some countries the percentage has gone up, and generally it may be taken to be in the 1.7-2.2% range. If we look at the net environmental costs of industry, this is at the level of +7% of annual turnover on average, in a range extending from 0-2.3%, depending on the sector considered, in an environmentally progressive country such as the Netherlands. In that country environmental policy has been intensifying since 1989, and in terms of environmental expenditure there has been a doubling of effort in the period 1988-94. This tendency is likely to continue over the next decades, if present environmental policy plans prevail. However, this is - again- not expected to lead to major macro economic repercussions. The Dutch Central Planning Bureau has calculated that from 1985-2010 environmental expenditure will grow from 2-4% of National Income, with environmental investments becoming 3.5 times as large, with dramatic expected drops in the levels of emissions of e.g. Sulphur Oxides and waste (drops in the 80% range).. The macro economic impacts of 'this are: very small positive impacts (1-2% points) on GNP, consumption and employment if other European countries adopt similar . policies' and similarly small negative impacts if the Netherlands makes this move in isolation (1-3% points); the reference scenario predicts a near-doubling of GDP and a 26% rise in employment between 1980 and 2010, and these are thus hardly expected to be affected. Sectoral impacts may be substantial Den Hartog and Mans 1990): substantial expected loss of jobs in especially agriculture (the intensive horticulture and pig and poultry farming), the chemical sector and the metals industry, but increased employment in e.g., construction.

If one were to assume that industrial development is to some degree manageable through explicit policies, then the question comes up whether industrial restructuring could be a vehicle for achieving win-win situations in terms of environment and 'employment In the Netherlands this has been an area of research in the 1970s and 1980s. Several groups (e-g- James, Jansen and Opschoor 1978; WRR 1987) have used linear optimisation models to heuristically explore the scope for this, and their results were that over a 10-15 years period overall economic growth combined with changes in the sectoral composition would indeed improve the environmental situation (with some 20%) and generate. adequate job opportunities to meet policy objectives. To illustrate the likelihood of model predictions such as the latter, environmental policies up till now have generated an 'eco-industry' in the Netherlands of 525 companies employing 30,000 labourers (OECD 1995), which is about equal to the expected loss of jobs in the agricultural sector due to more stringent environmental policies.

Meanwhile, the concerns over jobless growth have become more prominent at least in Europe, as, in the wake of the recovery from the recent economic recession unemployment is not falling rapidly. and as international investment appears to favour industrial development in specific areas (South East Asia, US) at the expense of others. Nevertheless, the evidence suggests that these fears may be signs of over-anxiety and that environmental considerations do not really form a major factor. In fact, when looking at the experiences with delinking growth from environmental pressure so far, one has reasons to expect that deliberate, well-considered, intensified strategies towards sustainable development through accelerated dematerialisation might provide a technological and economic challenge that could indeed result in the realisation of win-win possibilities (see also Section 5)

5. Restructuring the Economy: Prospects for Sustainable Employment

The previous Section resulted in the insight that technically and economically there are possibilities to at least over the next decades raise both the quality of the environment and the level of employment. One may ask how these possibilities can be made to materialise. New strategies or policies may be needed to do so- From an economic perspective, such strategies could lean on two main approaches: (i) programmes to deliberately boost transductive activities, in environmental management, and (ii) redesigning the system of incentives and disincentives within the economic process. The first approach to a large degree amounts to "retrofitting" the present economic system by adding environmentally and employment friendly extra activities; the latter approach is a more integrated approach from within the economic process.

The first approach would mean the definition and implementation of a range of sectoral, collective or even micro projects that are relatively labour intensive and would either remedy or compensate environmental damage (the 'retrofitting' part) or amount to preventative activities. For these to be relevant from an employment perspective, they would have to raise a number of jobs in the range 10-20% of total employment (which is current unemployment) or a substantial part thereof Against this figure the reader should be reminded of die fact that the 'eco-industry' now provides only up to 1% of jobs in a country such as the Netherlands. Extending this idea to other branches of transductive activities would certainly boost employment, but would be environmentally neutral. Apart from the problem of designing a significant set of programmes, there is the issue of financing them. Here, Goudzwaard and De Lange's proposals are theoretically feasible, though not yet accepted by a politically relevant platform. Such programmes require political support: not only at the national level, but also internationally, if a majority of the opponents would have to be satisfied. Failing that, national economies moving towards such transductive programmes might run the risk of loosing competitive advantages or pricing themselves out of international markets due to too high levels of taxation.

Secondly, suggestions have been made to fundamentally alter the relative prices of labour versus environmental capital, so that the economic process would veer away from over exploiting the latter and expelling labour. The most radical proposals in this respect suggest that the economy should begin by ridding itself from outdated and unwarranted subsidies on environmentally relevant goods and activities (such as on energy, transport and agriculture) and subsequently or simultaneously should implement institutional reforms such as a change of the tax system. In fact, such ideas have now been put forward in documents such as the EU White Book on the European economy in the 21st century EU 1993)- We proceed in this section by looking in more derail at this second approach.

5.a Altering the Fiscal System

The basic idea behind proposals to change the tax base is that the major sources of environmental pressure are economic activities and that these activities are directed both in terms of level or volume, and in terms of innovation, by price signals emanating from the market place. Changing prices might thus lead to a change in behaviour of economic agents and a resulting change in the activities that form the economic process in such a way that it becomes less environmentally harmful, and eventually perhaps even sustainable. Prices are affected by property rights, institutional arrangements (such as social security and fiscal Systems) and government policies. Thus, environmental policies should make use of these as vehicles for achieving sustainability.

Traditionally, environmental policies have used direct government regulations (e.g. zoning, permitting, standard setting) as their main set of instruments, but increasingly use is made in environmental policy of so called financial and economic instruments (such as taxes or charges, subsidies, deposit-refund systems, tradable permits and quota, etc. - see Opschoor, Lohman and Vos 1994, and Opschoor and Turner 1994). These financial and economic instruments were introduced to either raise the funds to undertake or finance public environmental management activities (such as collective waste water treatment, or environmental research), or to induce economic agents (notably producers and consumers) to behave differently, i.e. in an environmentally friendlier way (e.g. by taxing pollution or by making private transport more expensive than public transport). In fact, looking at environmental charges in particular, one may distinguish:

1. incentive charges. intended to suppress the level of environmentally unfriendly activities;
2. [earmarked] revenue raising charges, intended to finance particular environmental programmes;
3. environmental taxes, intended to raise revenues for the treasury.

Charges of the first type can be applied when economic agents can indeed change their behaviour and when they are relatively sensitive to price signals (a situation that is referred to as one with 'high price elasticity'); the result of effective incentive charges is,' that the level of the affected environmentally unfriendly activity dwindles, which is good for the environment but does eventually lead to a charge with a zero or low revenue. The revenue raising charges and environmental taxes have funds raising as their dominant function and hence should not be applied to activities or products that are easily and quickly avoided; hence, their direct environmental impact may be much smaller.

Especially in some parts of Europe, large social security systems have been developed, including advanced schemes for compensating unemployed labourers, which had to be financed from special charges on employment and from general taxes, which partly are based on wages as well. Moreover, there is always pressure to raise wages from a redistributional point of view, which, in an employer's perspective, makes the wage rare -and labour in general- a somewhat unstable element. The upshot of this is, that labour became a relatively expensive and uncertain factor of production whereas land, energy, water and pollution/waste remained relatively cheap (sometimes even totally unpriced) and predictable. This had several consequences: to begin with, employers would be induced by these relative prices to choose techniques that would use less labour and more environmental capital in the form of materials and especially energy; moreover, it gave rise to continuous efforts in S&T to make labour more productive.

The proposals discussed in this Section entail a substantial extension of the use of environmental taxes (ecotaxes for short) the revenues of which will be used to reduce taxes and charges on labour. From a treasury perspective, this operation would be revenue neutral, but the basis of the fiscal system would be radically altered. This reform is expected to pay a 'double dividend' of enhanced environmental quality (due to the incentive impact of such charges and taxes) and increased employment (as a Consequence of reduced costs of labour). And it is theoretically obvious that a reduction of labour costs would, as a first order impact, increase the demand for labour as well as raise its supply. However, there are some difficulties in applying this idea, that make it less rewarding than has been expected.

5.b Ambiguities

A distinction must be made between the "substitution effect" of a change in the relative price of labour (which is always positive when labour costs are reduced) and its "scale effect", which is the rise in the level of activity as a consequence of the reduced avenge costs. If however the reduction in labour costs is compensated by an equivalent rise in ecotaxes, then the combined scale effects of the lower labour costs and the raised environmental costs may be negative, with an ultimately adverse effect on the demand for labour and the level of production. At the level of the economic process as a whole, a shift in tax base as analysed here may mean reduced activities in some sector and expansion in others, but the overall outcome is, at least theoretically speaking, uncertain, due to the ambiguities in the size of the scale effect and its magnitude in relation to the substitution effect.

These ambiguities become even more significant if we consider the impacts of a national fiscal system reform in an international context. If internationally the relative prices of labour and environmental goods do not change, that is, if a country embarks on this road atone, then economic agents may relocate their activities to other countries, where the environment is still cheaper. These relocation effects may amplify the overall scale effects dramatically. Examples of this is transboundary purchase of petrol (or fuels in general) from countries where prices are lower, and setting up new plants in countries where environmental capital production factors (such as energy, land, water) are cheaper. Relocation effects will reduce the domestic demand for goods and services and thus led to diminished employment opportunities. This will translate into lower wage rates, thus shifting the social costs of a cleaner environment again to the labour force (this time in the form of lower real incomes). In the very long run, and/or if the wage gap between the various countries becomes too large, labourers too may relocate, by migrating to countries with higher wages or more opportunities.

A final dynamic aspect to consider here is the impact of a reform of the tax system on innovation. As this will now be induced to embark upon a trajectory of enhancing environmental productivity, and assuming that eventually a tax system reform will spread over more countries, countries moving first towards this trajectory will find that they have technologies and products for which there is a growing international market; this is the so called "first mover advantage" that may in the long run offset some of the disadvantages of moving ahead in this area.

Turning now from the social aspects to environmental ones, there is another problem in relation to the 'double dividend': ecotaxes will typically be raised on the basis of products and activities that have a relatively low price elasticity - otherwise they run dry as a source of public revenue. But this means that the environmental impact of ecotaxes may be smaller than hoped for. And, if they do alter behaviour, they may do so in a politically unacceptable way, that is: by shifting excess costs to the polluters.

5.c Double Dividend: how much?

The above theoretical observations and analyses cast serious doubts on the magnitude of any dividends - social or environmental, double or not. In fact, they have been very powerful as having shaped the intuitions and perceptions that manifested themselves m the public debate on environmental charges and ecotaxes so far. In what follows a review will be presented of work done to explore in more quantitative terms what could be expected of ecotaxes, in a number of studies addressing the environmental and economic impacts of such ecotaxes, especially energy or carbon/energy taxes in the European context.

One set of studies investigated the impacts of alternative energy taxes on the environment and the economy of the Netherlands (Opschoor and Turner 1994). These alternatives ranged from an economywide tax raising energy prices with 100%, to one that raised prices 50%, to a variant where the larger energy consumers were exempted. The first two alternatives could be implemented at the national level, or OECD-wide. The studies used a macro model fed with exogenously introduced dislocation effects; as no mitigating policies at the borders of the Dutch economy or even the OECD were considered, these dislocation effects dominated the study. In both cases of economy-wide taxes, GDP as well as employment drop; there are substantial reductions in domestic energy consumption and' related carbon emissions (of up to 35%) but some two thirds of these are related to the relocation effect and therefore the net reductions in energy consumption and carbon emissions are only one third or less of these 35%. The alternative exempting large consumers is likely to generate some extra employment (in the order of an. additional .3-.5%) but also at the expense of a slightly reduced GDP Relocation effects are absent here, as the sectors operating on international markets have effectively been exempted. Looking at a similar tax with the aid of a so called General Equilibrium model (which generates long term economic effects of specific shocks such as a fiscal: system reform) has resulted in slightly more optimistic predictions of the employment impacts; especially if the mechanism to "recycle" the returns of such a tax back into the economy (that is:. the pattern of tax reductions elsewhere in the system) is chosen in such a way as to' maximise the employment impact ([)e Wit 1994).

Other studies have explored the impacts of a European carbon/energy .tax,. using a range of models. They generally rind that the double dividend exists indeed; but 'also' that it is not very large. Employment effects found are below 1% but positive (whereas the amount of revenue involved is about 1% of GDP). There may or may not be a positive effect on GDP (the range is from -.7%-+.5%). In other words, the substitution effects are there and the scale effect indeed may go either way. This depends on the recycling mechanism; the general finding is that recycling by reducing social security payments is best Majocchi, in prep.), and this might raise the maximum employment effect to 2%. Welsch (in prep.) finds that the wage elasticity is a key determinant of the scale effects: if that elasticity is higher, then the increase in GDP becomes smaller. The implication of this is, that the double dividend may occur more pronouncedly is the reduction in labour costs financed by an ecotax is not offset by increased wage claims (see also De Wit 1994).

Summarising the above material, one may conclude that:

• it is very likely that shifting the tax base from labour to environment will have favourable impacts on the level of employment;
• on the social side, the (employment) dividend will occur only in a situation of unemployment, but even then it will raise the supply of labour as well as the demand for it, thus leaving the unemployment ratio unchanged;
• the employment dividend will be smaller as the revenues of the ecotaxes are smaller, e.g. if they are collected from elastic activities and products; they may be bigger when these activities are continued, but then the environmental dividend is reduced or nil.

There appears to be a trade off between the employment and the environmental dividend, at any degree of shift in the tax base.

• the more countries are involved in changing fiscal regimes, the less dislocation effects will lead to net losses in economic and employment benefits;
• quantitatively. the impacts on employment should not be expected to be very large and the short term effects may be more substantial tan the long run ones, due to a generally larger flexibility on the labour market in the long run;
• possibly the impact on innovation will be such that there are additional employment gains to be expected;
• as long as there are net employment and net environmental benefits, a shift of the tax base from labour to environmental goods will raise welfare;

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