A conceptual framework for ecotaxation
The best way to think of exotaxes (and the measures to recycle their revenue) is as a method of regulation.
An ecotax / expenditure package
Links to ecotaxation resources, people and organisations
So we have two forms of taxation:
A good revenue tax is one that has a robust tax base ie. the tax does not change behaviour that much and thus people do not avoid the tax to any great extent. Also revenue taxes ought to be used to divide up personal and corporate income into a private pool (what stays with us after we've paid our revenue taxes) and a public pool (sourced from the revenue taxes) to meet social needs. In this context it makes a lot of sense to retain income tax.
- revenue-motivated taxation
- regulation-motivated taxation
A good regulatory tax on the other hand is one that triggers people to change their behaviour in a way that improves the public good. The aim of regulatory taxes is to change behaviour, not raise money. Furthermore a regulatory tax that does not change behaviour very much is a regulatory tax that is not working very well!
Regulatory taxes work best when people are highly responsive - that is, they very actively avoid the tax. These taxes work best when they have very high short-term and long-term elasticities.
One way to greatly enhance the effectiveness of a regulatory tax is to use as much of its revenue as can be spent effectively on making it easy for people to avoid the tax. If this is done, a much lower tax rate can produce the same effect - which is politically, socially and economically important.
To boost responsiveness, revenue from regulatory taxes could be used to provide:
When there are no longer any effective responsiveness-enhancing expenditures to be made then the revenue tax revenues should be rebated back to the community at large - not just to those who paid the tax.
- education programs
- new infrastructure
- targetted investment incentives in alternatives
- R&D into solutions/alternatives
- structural adjustment assistance
Regulatory taxes generally need to be increased whenever the economy grows otherwise the increased income in the community means that people can increasingly afford to ignore the tax.
If part of the regulatory tax revenue is to be recycled into the economy because there are no longer any effective expenditures that can be made to foster responsiveness, then the money should be reinjected in such a way that any inflationary effect of the tax is negated. So if an ecotax makes costs go up in one area, the rebated tax should be used to reduce costs somewhere else in the economy.
Where payroll taxes exist, costs might be reduced by lowering or, better still, eliminating them.
Once payroll taxes are eliminated it might be sensible to subsidise the cost of labour. In countries with high wages and high unemployment (eg. Western Europe) this subsidy could be used to reduce employer-paid labour costs - targetted at jobs most likely to be accessible to the unemployed. In countries with low bottom-end wages and low unemployment (eg. the US) the wage subsidy might be targetted at the working poor to increase their total take-home pay.
In this framework the very popular concept of "tax shifting" can be seen in context. It is not the whole story but merely one strategy that may be appropriate in specific circumstances. In other words ecotax revenues should not always be spent on reducing other taxes. They may be used to reduce total costs to business and the community either by directly funding cuts to other costs (eg. labour) or by providing investment funds to boost efficiency and productivity in the economy.
Furthermore, it will be quite appropriate to continue taxing some 'good' things like worker and corporate income to provide public revenue.
Rather than saying that the objective of ecotaxation is to "tax bads, not goods", the slogan should be to "tax bads ahead of goods".
An ecotax package aimed at substantially repositioning Australia as an ecologically sustainable
economy over a period many decades will need to have the elements set out below if it is to deal
effectively with the goals and objectives implicit in the commitment to
The proposed ecotaxes and channels for the recycling of the revenues are set out in Figure 1. Unless
otherwise stated the tax rate would rise steadily until its environmental objective had been achieved
100%. Until that point, the rate of each ecotax would be indexed to the growth of the economy.
Ecotaxes (or equivalent tradeable permit schemes) are very important mechanisms for signally to
business and the rest of society that economic behaviour needs to change. However the effect of a
signal depends of the responsiveness of the receiver. It is therefore of extreme importance that any
ecotax package is preceded and accompanied by a very active program to change people's
responsiveness to ecotaxes eg. through supporting education, R&D, infrastructure provision so that
alternative behaviours are possible, etc.
Ecotax and Expenditure Package for an Ecologically
Measures required to create an economically
viable and ecologically sound closed-cycle economy.
Tax on the way in:
Lost/dissipated material inputs
Tax to equalise costs on the way in:
Virgin material prices
(cf. regeneratively recycled materials)
Tax to stop side effects:
Alienation from the natural state
Degradation of nature
Tax to block escape routes from the economy: eg.
Waste to industrial or municipal tip
Waste to incinerator
Waste to sewer/sea
Waste to export (to prevent physical dumping)
Charge user fees:
Waste storage rentals
- All taxes and the waste storage rentals would be indexed to the growth of the economy (except the virgin-resource tax - see next item).
- Input virgin resource prices increased to just exceed regeneratively
- The level of all disposal charges would reflect the extent to which disposal lowers the quality and accessibility of the waste for eventual reprocessing.
- Disposal charges would be split between waste disposers and
manufacturers/importers to affect product design and disposal behaviour.
V 2.b 2/7/00
Most ecotax packages are aimed exclusively at conserving energy and minerals and cutting pollution.
This package includes three nature-related taxes. One, the degradation tax, is designed to penalise any
negative change in the condition of nature. This should curtail clearing of bush, draining of swamps
and degradation of all sorts. The second tax creates a penalty for holding land or waters in a continuingcondition
of partial or complete alienation from nature. This tax is meant to encourage the containment of human
activities and in some cases the return of land and waters to a natural or more natural condition. It will
also encourage 'treading lightly' on the environment. Because humans depend so much on the use of
land and waters this tax is likely to only have a very slow effect. The third nature-related tax is the landcare levy on income used to create revenue for restoration work.
The depletable energy tax is designed to trigger a shift from fossil fuels to renewable energy sources.
Energy needs to be taxed differently from materials. The purpose of energy taxation is to discourage
the use the use of fossil fuels. It is easy to tell when fossil fuels enter the economy (via sales of oil; gas
and coal) but not so easy to tell when energy leaves the economy (as waste heat). Also energy cannot
be perpetually recycled, unlike materials. So it is most practical to tax energy as it enters the
economy rather than as it leaves.
There are a suite of materials taxes (Note: 1) that are designed to encourage the emergence of a closed-
cycle economy and to encourage dematerialisation. The philosophy applied here is that it is the
extraction of resources from nature and their return as wastes or pollution that is the problem and not
the holding of resource stocks in the economy. So the suite of materials taxes are designed to block the
return of wastes to nature either through conscious disposal or accidental or deliberate dissipation. So if physical resources are useful in the economy and can be held effectively within it without any leakage
they would only incur a tax if nature was damaged in the process of creating the resource. These taxes
would encourage people to treat wastes as resources. Tips and dumping would virtually cease. The
rentals for waste storage would be set high enough to ensure that waste warehouses did not become
The waste disposal taxes would be split in half, with one half of the charge being fed to direct disposers
by a user-pays system and the other half being charged to product manufacturers and importers on the
basis of the estimated or actual levels of dumping of their products. This would encourage
manufacturers and importers to modify their products to favour waste elimination.
Virtually 100% material recycling is only possible if degraded and apparently useless materials are
specially reprocessed and repurified to create new high quality materials. Regenerative recycling tends
to be more expensive than cascade recycling (where resources are used at a lower quality than their
previous use) and is rarely carried out at present because high quality virgin resources can be obtained
much more cheaply. There would therefore need to be a virgin resources tax that was just high enough
to make it desirable to carry out regenerative recycling.
Sending wastes to other countries for dumping needs to be discouraged as it undermines the closed-
cycle economy in the home country. Exporting wastes for recycling needs to be handled very carefully
too as it often leads to a collapse of waste collection in the receiving country. Outright export bans may
not be compatible with World Trade Organisation rules but an export tax is probably acceptable (Note
2). The export tax needs to be complemented with some kind of offset system so there can be some
limited waste and recycled material trading to make use of different countries' specialist capabilities.
Ecotaxes are a market-based form of regulation and they are not imposed to create a revenue stream.
Indeed a measure of the success of a regulatory tax is the fall of the revenue stream. However ecotaxes
will generally produce some revenue. This money should not be used to support general public
expenditures otherwise the community can become dependent on the continuation of the revenue and
hence the continuation of the original environmental problem. The revenue should either be used to
directly to fund solutions to the problems the tax was created to deal with or it should be rebated to
To avoid ecotaxes being inflationary the revenues should be returned to the economy in such a way
that there is a compensatory reduction in other business costs and average incomes are not reduced.
The elimination of payroll tax is one good way to do this, as is the payment of wage subsidies.
In the early stages of the introduction of the ecotax package it would be advisable to rebate the
depletable-energy tax and the carbon component of the pollution taxes when energy intensive products
are exported - to allow for more gradual structural adjustment by export industries. This modification is
particularly important for Australia because energy intensive products make up such a large percentage
of its exports. It is probable that the depletable energy tax and the carbon component of the pollution
taxes would not be fully applied to energy intensive exports until an international agreement was
It is important that the ecotax revenue is not just recycled within specific industries as that will limit the
adjustment to that sector, with the result that it will not be possible for full ecological sustainability to be
achieved. For example, if a greenhouse gas tax were placed on the natural gas industry and the revenue
was only cycled back to that industry to fund emissions reductions, the gas firms would try to reduce
the use of fossil fuel energy in the extraction, processing and distribution of the natural gas. But the
industry's objective would be to sell natural gas so the member firms would work hard to reduce their
small amount of gas emissions while also working hard to get the rest of society to increase their
greenhouse gas emissions by a much larger margin. If the greenhouse tax revenues are not recycled
completely in the industry, the tax will force natural gas prices to rise and by recycling the tax revenues
across the whole economy other sectors will have an improved financial capacity to reduce their
demand for natural gas. If the greenhouse gas tax grew over time it might trigger a complete shift to
renewable energy sources and the adoption of effective measures to reduce the need for energy. This
outcome would be impossible with 100% industry specific revenue recycling.
(1) That is, the tailings, waste disposal, waste to export, pollution and the lost or dissipated materials taxes.
(2) Milton Churche (Department of Foreign Affairs and Trade, Canberra) personal communication, 1995.
Ecological Tax Reform Association (FÖS) (Language: German)
Publications and other resources:
The Wuppertal Institute (European
focus) (Language: German/English)
Redefining Progress (US focus)
Tellus Institute's ecological tax reform
page (US focus)
Ecological tax program (US focus)
Minnesotans for an Energy Efficient
Economy (Minnesota/US focus)
World Resources Institute (US focus)
Resources for the Future (US focus)
Sustainable Economy Unit, Forum
for the Future (UK focus)
New Economics Foundation
(NEF) (UK focus)
International Institute for Sustainable Development
International Society for Ecological
Banneker Center for Economic Justice (Georgist economics)
Ecotax bulletin of the
Wuppertal Institute (European focus/international scope) (Language: English)
Journal: Environmental Taxation and Accounting
Redefining Progress ecotax material
Economists' Statement on
Climate Change - Endorsed by over 2000 economists including six Nobel Laureates - includes section on tax shifting
ISEE Ecotax discussion
Communications for a Sustainable Future - on-line discussions archives and current on-line seminars
Center for a Sustainable Economy free email newsletter ("Tax News Update") on ecotaxation (US focus)
von Weizsäcker, E. & Jesinghaus, J. (1992). Ecological Tax Reform. ZED: London
David Roodman, economics researchers with the
Worldwatch Institute. - author of "Getting the signals right: Tax reform to protect the environment and the economy." Worldwatch Paper 134 (1997).
Clive Hamilton, Australia Institute. - co-author of "Ecological tax reform in Australia".
Harald Agerley Danish web site or
US web site
If you think we have missed any useful links please
let us know. Thanks.
Author: Philip Sutton
First posted: 19 September 1998
Content updated: 17 August 2000
Format updated: 6 October 1998
Feedback & Enquiries:
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