Chapter 12: Saving the Planet

By: Chris Balkaran and Braden Hutchins

Nudge: Brief Overview Nudge: Brief Overview Traditionally, governments have sought to limit the effects of emissions through command-and-control initiatives, such as establishing thresholds that certain types of emissions cannot exceed E.g. Acid Rain Agreements, California auto regulations

The costs involved sometimes are higher than anticipated (Regulation is expensive and cumbersome)

However, because we cannot monitor and reason with every polluter (including all of us!), we must expect some form of government intervention

Traditionally, governments have sought to limit the effects of emissions through command-and-control initiatives, such as establishing thresholds that certain types of emissions cannot exceed E.g. Acid Rain Agreements, California auto regulations

The costs involved sometimes are higher than anticipated (Regulation is expensive and cumbersome)

However, because we cannot monitor and reason with every polluter (including all of us!), we must expect some form of government intervention

Nudge: Brief Overview Nudge: Brief Overview

Two main reasons for environmental degradation:Tragedy of the CommonsLittle (if any) feedback on environmentally damaging actions E.g. Thermal Inertia

Solutions:TaxationCap-And-Trade System

Two main reasons for environmental degradation:Tragedy of the CommonsLittle (if any) feedback on environmentally damaging actions E.g. Thermal Inertia

Solutions:TaxationCap-And-Trade System

Nudge: Brief Overview Nudge: Brief Overview Tax:

Places a value on natural resources to take into account negative externalityE.g. Carbon

Pros:Easy to implement - acts like any other tax Consumers must take tax into account when making purchases

Cons:Taxes are unpopularDoes not limit actually emissions

Tax:Places a value on natural resources to take into account negative externalityE.g. Carbon

Pros:Easy to implement - acts like any other tax Consumers must take tax into account when making purchases

Cons:Taxes are unpopularDoes not limit actually emissions

Nudge: Brief OverviewNudge: Brief Overview

Cap-and-TradeThe ‘rights’ to pollute within a given amount are bought/sold in a market

Pro:Actual limits to emissions setEasier for big industry to adjust to

Cons:Continual monitoring needed (more expensive)

Not feasible for individual consumersNeed a large enough market

Cap-and-TradeThe ‘rights’ to pollute within a given amount are bought/sold in a market

Pro:Actual limits to emissions setEasier for big industry to adjust to

Cons:Continual monitoring needed (more expensive)

Not feasible for individual consumersNeed a large enough market

Nudge: Brief OverviewNudge: Brief Overview

Both a tax and ‘cap-and-trade’ provide incentives and allow for choices for taking into account negative externalities

These types of incentives allow for individuals and firms to see how polluting impacts their bottom line - it provides immediate feedback.

E.g. 50 liter gas tank filled up once a week50 liters x 7.23 cent Carbon Tax Per Liter x 52 weeks in a year

$3.62 per fill up$188.24 in carbon tax paid per year

Both a tax and ‘cap-and-trade’ provide incentives and allow for choices for taking into account negative externalities

These types of incentives allow for individuals and firms to see how polluting impacts their bottom line - it provides immediate feedback.

E.g. 50 liter gas tank filled up once a week50 liters x 7.23 cent Carbon Tax Per Liter x 52 weeks in a year

$3.62 per fill up$188.24 in carbon tax paid per year

Article for AnalysisArticle for Analysis

Environmental Tax Reform: The European Experience

By J. Andrew Hoerner and Benoit Bosquet

Written For: The Center For A Sustainable Economy

February 2001

Environmental Tax Reform: The European Experience

By J. Andrew Hoerner and Benoit Bosquet

Written For: The Center For A Sustainable Economy

February 2001

Summary of ArticleSummary of Article

Looks at Environmental Tax Reform (ETR)

ETR is when revenue from taxes on pollution or resource depletion is used to lower taxes on economic activities (e.g. labour) - also called revenue neutral

Looks at Environmental Tax Reform (ETR)

ETR is when revenue from taxes on pollution or resource depletion is used to lower taxes on economic activities (e.g. labour) - also called revenue neutral

Summary of ArticleSummary of Article

In 2001, eight countries had implemented ETR

Denmark, Finland, Germany, Italy, Netherlands, Norway, Sweden, United Kingdom

Typically reduce the tax burden placed on labour by cutting income tax or social security contributions paid by employers

Most focused on greenhouse gas emissionsNot all environmental tax is revenue neutral

E.g. In the Netherlands green taxes constitute 9% of all tax revenue, only 0.5% is revenue neutral

In 2001, eight countries had implemented ETR

Denmark, Finland, Germany, Italy, Netherlands, Norway, Sweden, United Kingdom

Typically reduce the tax burden placed on labour by cutting income tax or social security contributions paid by employers

Most focused on greenhouse gas emissionsNot all environmental tax is revenue neutral

E.g. In the Netherlands green taxes constitute 9% of all tax revenue, only 0.5% is revenue neutral

Policy ImplicationsPolicy ImplicationsMarket-based approach to environmental control

Allow greater flexibility in deciding where, when, how or to what extent to cut pollution emissions, thereby reducing cost to the economy and increasing personal freedom

If designed properly, national market-based systems allow reductions of total national pollution emissions with greater flexibility and lower cost than with less flexible and comprehensive approaches

Market-based approach to environmental control

Allow greater flexibility in deciding where, when, how or to what extent to cut pollution emissions, thereby reducing cost to the economy and increasing personal freedom

If designed properly, national market-based systems allow reductions of total national pollution emissions with greater flexibility and lower cost than with less flexible and comprehensive approaches

Policy ImplicationsPolicy Implications

“When the revenues of environmental taxes are used to reduce other distorting taxes, the economic outcome is better than if those revenues are not so distributed, in terms of impacts on both employment and GDP”

E.g. 87% of 104 economic simulations predict that ETR will create employment.

“When the revenues of environmental taxes are used to reduce other distorting taxes, the economic outcome is better than if those revenues are not so distributed, in terms of impacts on both employment and GDP”

E.g. 87% of 104 economic simulations predict that ETR will create employment.

Policy ImplicationsPolicy ImplicationsOf 100 simulations, 75% predicted a negligible impact on GDP.

Of 100 simulations, 75% predicted a negligible impact on GDP.

Policy ImplicationsPolicy Implications

However, how money is redistributed makes a difference.

Social security contribution reduction:

86% chance of increased employment.65% of simulations showed GDP gains

Income tax reduction:35% chance of increased employment.25% of simulations showed GDP gains

However, how money is redistributed makes a difference.

Social security contribution reduction:

86% chance of increased employment.65% of simulations showed GDP gains

Income tax reduction:35% chance of increased employment.25% of simulations showed GDP gains

Policy ImplicationsPolicy Implications All eight nations adopted measures to promote new clean energy technology when implementing carbon tax E.g. Tax incentives for energy efficient technologies and electrical plants

In all cases, the economic net benefit of a carbon tax along side the other measures was preferable

Policy packages that use a portion of the tax to finance energy efficient or renewable energy improvements are more likely to result in positive employment and GDP impacts, as well as more emissions reductions/savings

All eight nations adopted measures to promote new clean energy technology when implementing carbon tax E.g. Tax incentives for energy efficient technologies and electrical plants

In all cases, the economic net benefit of a carbon tax along side the other measures was preferable

Policy packages that use a portion of the tax to finance energy efficient or renewable energy improvements are more likely to result in positive employment and GDP impacts, as well as more emissions reductions/savings

Case Study: DenmarkCase Study: Denmark

1992 - CO2 tax introduced: initially proposed at DKK 100/metric ton, but later reduced to DKK 50/metric ton

If companies undertook new environmentally-efficient technologies to heat office buildings for example, the Danish government would give a tax refund (an incentive)

1992 - CO2 tax introduced: initially proposed at DKK 100/metric ton, but later reduced to DKK 50/metric ton

If companies undertook new environmentally-efficient technologies to heat office buildings for example, the Danish government would give a tax refund (an incentive)

Case Study: DenmarkCase Study: Denmark

Other ways tax revenues were ‘recycled’ into the economy:A large pool of funds was set aside to assist small companies and agriculture

Reduced employers’ contributions to social security

The Danish government also reduced income taxes, particularly those in the low-income tax bracket

Other ways tax revenues were ‘recycled’ into the economy:A large pool of funds was set aside to assist small companies and agriculture

Reduced employers’ contributions to social security

The Danish government also reduced income taxes, particularly those in the low-income tax bracket

Case Study: DenmarkCase Study: Denmark

SwedenSweden

In 1991, the first major shift in the tax base from traditional factors of pollution

New tax on carbon dioxide and sulpher dioxide

Reduced energy tax on fossil fuels

Income tax scaled back

In 1991, the first major shift in the tax base from traditional factors of pollution

New tax on carbon dioxide and sulpher dioxide

Reduced energy tax on fossil fuels

Income tax scaled back

SwedenSweden In 1993, big industry complained that the tax hurt their comparative advantage in Europe

Carbon Tax reduced In 1997, political attitudes changed again - carbon tax raised

Now, the carbon tax is adjusted annually in line with inflation

In 2000, the scope of the carbon tax increased More fuels included (E.g. Diesel)

Money used to finance continuous education of the work force - goal to help shift economy from primary skills (e.g. resource extraction) to secondary or tertiary skills.

In 1993, big industry complained that the tax hurt their comparative advantage in Europe

Carbon Tax reduced In 1997, political attitudes changed again - carbon tax raised

Now, the carbon tax is adjusted annually in line with inflation

In 2000, the scope of the carbon tax increased More fuels included (E.g. Diesel)

Money used to finance continuous education of the work force - goal to help shift economy from primary skills (e.g. resource extraction) to secondary or tertiary skills.

SwedenSweden

Money returned to individuals and firms through income tax reductions and cuts to social security contributions

Key Exemptions limit effectiveness:Energy productionSome agriculture

Money returned to individuals and firms through income tax reductions and cuts to social security contributions

Key Exemptions limit effectiveness:Energy productionSome agriculture

BC Carbon TaxBC Carbon Tax

Applies to 70% of fossil fuels purchased or used.

22 types of fuel are covered.Currently 2.41 cents per liter (for gas)

Scheduled to rise annually until 2012 when the price reaches 7.24 cents per liter.

Personal and corporate income taxes scheduled to fall incrementally over the next five years.

Applies to 70% of fossil fuels purchased or used.

22 types of fuel are covered.Currently 2.41 cents per liter (for gas)

Scheduled to rise annually until 2012 when the price reaches 7.24 cents per liter.

Personal and corporate income taxes scheduled to fall incrementally over the next five years.

BC Carbon TaxBC Carbon Tax Affected by world oil prices

E.g. $140 a barrel vs. $38 a barrel Certainty of price, uncertainty of emissions

Time frame to short Total revenue neutrality limits alternatives

Regressive or progressive? Exemptions

E.g. Exporting goods, inter-jurisdictional shipping and aircraft, aboriginals, visiting military and diplomats, aluminum and cement manufacturing

Affected by world oil prices E.g. $140 a barrel vs. $38 a barrel

Certainty of price, uncertainty of emissions

Time frame to short Total revenue neutrality limits alternatives

Regressive or progressive? Exemptions

E.g. Exporting goods, inter-jurisdictional shipping and aircraft, aboriginals, visiting military and diplomats, aluminum and cement manufacturing

ConclusionsConclusions A carbon tax provides an incentive for individuals to take into account emissions when making purchases

If revenue neutral, can be used to encouraged employment

Will have negligible effect of GDP Hard for many big businesses to adapt to Does not provide actual limit on emissions But is cheaper to implement than a cap-and-trade

More importantly, it provides more freedom and flexibility that a command and control system

A carbon tax provides an incentive for individuals to take into account emissions when making purchases

If revenue neutral, can be used to encouraged employment

Will have negligible effect of GDP Hard for many big businesses to adapt to Does not provide actual limit on emissions But is cheaper to implement than a cap-and-trade

More importantly, it provides more freedom and flexibility that a command and control system