April 24, 2006	Monday	Rabi-ul-Awwal 25, 1427

As Americans are filing their income taxes, many of their counterparts in several European countries are benefiting from a steady decline in income taxes as governments lower taxes on income and raise taxes on environmentally destructive activities - like burning gasoline or coal.

The purpose of this tax shifting is to incorporate the environmental costs of products and services into the market price to help the market tell the environment truth. This rewards environmentally responsible behaviour such as reducing energy use.

Among the various environmentally damaging activities taxed in Europe are cal burning, gasoline use, the generation of garbage (so-called landfill taxes), the discharge of toxic waste, and the excessive number of cars entering cities.

Germany and Sweden are the leaders among the countries in Western Europe that are shifting taxes in a process known there as environmental tax reform.

A four-year plan adopted in Germany in 1999 systematically shifted taxes from labour to energy. By 2001, this plan had lowered full use by five per cent. It had also accelerated growth in the renewable energy sector, creating some 45,400 jobs by 2003 in the wind industry alone, a number that is projected to rise to 103, 000 by 2010.

In 2001, Sweden launched a bold 10 year environmental tax shift designed to convert 30 billion kroner ($3.9 billion) of taxes from income to environmentally destructive activities. Much of this shift of $1,100 per household is levied on cars and trucks, including substantial hikes in vehicle and fuel taxes. Electricity is also being taxed more heavily.

This tax restructuring is an integral part of Sweden’s plan to be oil free 2005. Among the other European countries with strong tax reform effects are Spain, Italy, Norway, the United Kingdom, and France.

There are isolated cases of using taxes to discourage environmentally destructive activities elsewhere. The United States imposed a stiff tax on chlorofluorocarbons to phase them out in accordance with the Montreal Protocol of 1987 and its subsequent updates. When Victoria, the capital of British Columbia, adopted a trash tax of $1.20 per bag of garbage, the city reduce its daily trash flow 18 percent within on year.

Cities that are being suffocated by cars are using stiff entrance taxes to reduce congestion. First adopted by Singapore some two decades ago, this tax was later introduced by Oslo, Melbourne, and, most recently, London. The London tax of 5 pound, or nearly $9 per visit, first enacted in February 2002 by Mayor Ken Livingston, was raised to 8 pound, more than $14, in July 2005.

The resulting revenue is being used to improve the bus network, which carries two million passengers daily. The goal of this congestion tax is a restructuring of the London transport system to increase mobility and decrease congestion, air pollution, and carbon emissions.

While some cities are taxing cars that enter the central city, others are simply imposing a tax on automobile ownership. New York Times reporter Howard French writes that Shanghai, which is approaching traffic gridlock, “has raised the fees for car registrations every year since 2000, doubling over that time to about $4,600 per vehicle - more than twice the city’s per capita income”. In Denmark, the steep tax on an energy-inefficient new car doubles the price of the car.

An excellent model for calculating indirect costs is a 2001 analysis by the US centres for Disease control and Prevention (CDC), which calculated the social costs of smoking cigarettes at $7.18 per pack. This not only justifies raising taxes on cigarettes, which claim 4.9 million lives per year worldwide (more than all other air pollutants combined), but it also provides guidelines for how much to raise them.

In 2002, 21 US states raised cigarette taxes. Perhaps the biggest jump came in New York City, where smokers paid an additional 39 in state tax and $1.42 in city tax-a total increase of $1.81 per pack.

If the cost to society of smoking a pack of cigarettes 7.18, how much is the cost to society of burning a gallon of gasoline? Fortunately, the International Centre for Technology Assessment has done a detailed analysis, entitled “The real price of gasoline”. The group calculates several indirect costs, including oil industry tax breaks, oil supply protection costs, oil industry subsidies, and health care costs of treating auto exhaust-related respiratory illnesses. The total of these indirect costs centres around $9 per gallon, some what higher than those of smoking a pack of cigarettes.

Add these external costs to the average price of gasoline in the United States - just over $2 per gallon in 2005 - and gas would cost $11 a gallon. For Americans, this is shockingly high, but it is not that much higher than the $7 per gallon that Dutch motorists paid briefly in late 2005 or the $6 per gallon that British, German, French, and Italian drivers now regularly pay for gasoline.

Asia’s two leading economies - Japan and China - are now considering the adoption of carbon taxes. For the last few years, many members of the Japanese Diet have wanted to launch an environmental tax shift, but industry has opposed it. China is working on an environmental tax restructuring that will discourage fossil fuel use.

According to Wang Fengchun, an official with the National People’s Congress, “Taxation is the most powerful too available in a market economy in directing a consumer’s buying habits. It is superior to government regulations”.

Environmental tax shifting usually brings a double dividend. In reducing taxes on income - in effect, taxes on labour - labour becomes less costly, creating additional jobs while protecting the environment. This was the principal motivation in the German four-year shift of taxes from income to energy. Reducing the air pollution from smokestacks and tailpipes reduces the incidence of respiratory illnesses, such as asthma and emphysema - and thus overall health care costs.

Some 2,500 economists, including eight Nobel Prize winners in economics, have endorsed the concept of tax shifts. Harvard economics professor N. Gregory Mankiw wrote in Fortune. “Cutting income taxes while increasing gasoline taxes would lead to more rapid economic growth, less traffic congestion, safer roads, and reduced risk of global warming - all without jeopardizing long- term fiscal solvency. This may be the closest thing to a free lunch that economics has to offer”.

Accounting systems that do not tell the truth can be costly. Faulty corporate accounting systems that leave costs off the books have driven some of the world’s largest corporations into bankruptcy. The risk with our faulty global economic accounting system is that it so distorts the economy that it could one day lead to economic decline and collapse.

If we get the market to tell the truth, then the world can avoid being blindsided by faulty accounting systems that lead to bankruptcy. As Oystein Dahle, former Vice President of Exxon for Norway and the North Sea, has pointed out: “Socialism collapsed because it did not allow the market to tell the economic truth. Capitalism may collapse because it does not allow he market to tell the ecological truth”.

(Courtesy Earth Policy Institutye, Washington)