Green Tax Criteria

1. Introduction

2. Criteria

3. The Ecological Tax Reform in Germany

In spite of enormous successes in reducing environmental damage, industrial societies are still living beyond their means and, therefore, at the expense of future generations. In a world of a population seeking an ever-increasing standard of living, excessive amounts of raw materials are transformed into waste in too short a time. Today our environment is faced with this enormous burden of pollution and there is consensus about our eco-system being on the brink of breakdown. Obviously, we are carrying out a global experiment and hardly anyone seems to care about its long-term outcome.

Apart from environmental problems many industrial countries find themselves confronted with rising unemployment rates. People are bereaved of their chances to secure their social existence. The economic damage is twofold. There are mounting social expenditures such as welfare and unemployment benefit.  At the same time the national income is reduced through losses in taxes and social security contributions.

The idea of raising or implementing environmental taxes, as well as the idea of relieving the strain of employment costs, are both closely related to the idea of an ecological tax reform.
Our researchers from “Jetzt und Morgen” have been intensely involved in promoting a “green” tax reform giving special consideration to ecological effectiveness and economical efficiency. The results are summarized by 22 criteria.

1. To ensure the greatest ecological effectiveness with minimal economical expense, environmental taxes are ideally to be placed on pollutants. Placing taxes on energy results in lesser utility because
    
• not all significant pollutants can be noticeably reduced by energy taxes; 
• energy intensive processes do not necessarily result in the greatest pollution;
• there is no motivation to reduce pollution through environmentally friendlier technology;
• the various ways of producing energy (e.g. nuclear, fossil fuel, or renewable energy sources) have varying potential for danger, which are not discerned by energy taxes.
  
2. It is necessary to establish quantified and ecologically justified environmental goals and to apply these as the foundation for environmental taxation. An environmental goal must include at least the following:
    
• geographical area
• relevant pollutants
• a quantified goal of reduction, and
• a timeframe  which the goal should be attained.
   
3. An environmental tax is ideally focused on one specific pollutant. Conversely, if an environmental tax serves multiple goals, this can lead to economic and ecological inefficiency.
    
4. The height of an environmental tax, which in the form of a guidance tax is supposed to reduce the emission of a pollutant, is measured ideally on the quantity of the pollutant emitted.
    
5. The rate of an environmental tax is - at least approximately - to be set taking price elasticity into account, while benefiting the environmental goal. Price elasticity is here to be understood as the effect which (for instance) the environmental tax has on the amount of emission. If price elasticity is not given its due attention, ecological and economical inefficiency is the result. There is also the danger of the rate of the environmental tax being set arbitrarily or through lobby interests.
    
6. With the loss of economic and ecological efficiency, an environmental tax that is supposed to reduce the emission of a pollutant as a guidance tax can be set on energy (for instance, an energy tax towards the reduction of CO2 emissions). However, the following must be given:
    
• there must be a quantified and ecologically justified goal to reduce the relevant pollutant,
• the rate of taxation must be determined to the largest possible extent by price elasticity, as well as by pollution equivalence of the individual pollution carriers.
   
7. If taxes are set on energy without pursuing a quantified, pollutant-oriented emission goal, at least a quantified goal to save energy must be fixed. Additionally, the rates of taxation must be ascertained with as much consideration for price elasticity as possible. However, the economic and ecological efficiency will still be relatively low as long as the same rate of taxation applies to all types of energy independant from the potential for ecological damage.
    
8. The rates of taxation must be high enough for an ecological effect to be be expected.
    
9. The international competitivness of the affected industry must be taken  into consideration.
    
10. The rate of taxation must not result in overtaxation of the economy.
     
11. The entire volume of taxes should not be raised through environmental taxes: tax hikes and the introduction of new taxes must be balanced by the reduction of other taxes.
     
12. Citizens and businesses should not be expected to submit to a higher overall tax- and expenditure burden after the introduction of environmental taxes (principle of revenue neutrality).
     
13. The value-added tax which is raised on environmental taxes must be included in the contemplation of revenue neutrality and given back to the citizens and businesses.
     
14. The function of guidance, not the chance to produce income, must be the point of focus of an environmental tax. If the rates of taxation are determined without the benefit of quantified environmental goals, the income function will prevail.
     
15. The revenue from an environmental tax should not be used for pre-specified purposes. Instead, it should be included in the general revenue. That way, the government’s scope for bargaining and decision making will remain intact. If the revenue from environmental taxes is instead used for specific purposes, the tax income will have to remain on a high level. The resulting reduction of environmental damage would then be counter-productive concerning the national tax income.
     
16. The volume of subventions should not be increased through the return of revenue from an environmental tax. Nevertheless, the conventional model of ecological tax reform want to transfer environmental tax revenues to social security. Thus, social security would be subsidized. Even though subsidies can be useful in stimulating development, if granted for too long, they run the risk of leading to misdirected developments. Because of subventions, cost allocations accounting for the causality in social security would no longer be possible. In order to use the socially available resources efficiently (here: pension scheme resources), the demand of environmental protectors for realistic prices must prevail: For natural goods, for public benefits as well as for the social security system, genuine prices must be applied. For social security, health-, and unemployment insurance, the insured persons should pay the genuine prices. This would reveal structural problems within the social security system, encumber losses through federal misuse of resources (benefits other than social security) and gives a feel for the value of benefits. Instead of subsidizing entire systems, those who cannot manage the true expense of elementary social benefits should be supported by the state through reduced tax rates or through transfer payments.These measures correspond to the basic rule that citizens should be taxed and supported according to their competitiveness. (Read our account on Subject Relieving).
    
    The lack of cost transparency in social security does not promote unwanted developments by itself. Shortsightedness concerning the problems of high employment expenses contributes as well. Without a doubt, the acknowedgement that the efficient use of energy does not take place, because energy nowadays is too cheap, is correct. The fact that new jobs are not being created in Germany because employment is too expensive also remains undisputed. However, to conclude that social security ought to be subsidized with the revenue from ecological taxes indicates shortsightedness. In the end, the high costs of employment could be the result of various causes. To focus on merely one issue (and to do this through subvention as well) holds the risk of being counterproductive and promoting misdirected developments.
     
17. The principle of cause should not be violated by the return of revenue obtained from an environmental tax. Should social security be subsidized with tax income, the following problem will result: the workers’ and salaried employees’ social security will be financed through environmental taxes by housewives and -husbands, students, retirees, civil servants, the self-employeed, etc. These groups do not benefit in any manner from the subvention of social security and unemployment insurance. Indeed, they must finance their own old age provision themselves.
     
18. By returning the revenues of an environmental tax, the principle of equality should not be violated. Long-term tax-breaks for the industry or individual branches or businesses are an equivalent to subventions and should thus be avoided.
     
19. The state has to bear the financial risk that the revenue from an environmental tax doesn’t reach the height of financial compensation to citizens and businesses.
     
20. An ecological tax reform must be announced within an appropriate time before its introduction.
     
21. The details of an ecological tax reform, including components of the individual stages, are to be published with the announcement of the whole concept.
     
22. Broad political acceptance should ideally underlie concepts for an ecological tax refor

On the German government’s initiative, the Bundestag (the parliament) settled on a far-reaching law concerning the introduction of an ecological tax reform. It went into effect on 1 April, 1999, and lays down:

1. The increase of mineral oil tax on fuel
   (6 Pfennige/liter = roughly 0.125 $/gallon), heating oil (4 Pfennige/liter = roughly 0.084 $/gallon) and gas (0.32 Pfennige/kilowatt hour = roughly 0.178 $/kilowatt hour).
    
2. The introduction of an electricity tax of 2 Pfennige/kilowatt hour
   (roughly $0.01/kilowatt hour).
    
3. Reduced tax rates of 20% for industry; many other exceptions.
    
4. The revenue from environmental taxes will be used to subsidize the governmental social security. The contributions of employers and employees, which are measured on salary, will be reduced in this manner in order to decrease the costs of employment (employers and employees contribute 50% each to the social security of the German worker).
    
5. Businesses, for which the burden of environmental taxes is 20 % greater than their relief through lower social security contributions, will be reimbursed by the federal government.

In the meantime, four further stages of the reform have been established; they concern the years 2000 to 2003. The most important developments are:
 

1. The tax on gasolinie and diesel will be raised annually 6 Pfennige per liter.
    
2. The tax on electricity will be raised 0.5 Pfennige per kilowatt hour annually.
    
3. The current tax for heating oil and gas will remain the same.
    

The ecological tax reform in Germany appears to have only slight positive effects on the environment, while being economcial dubious. Indications for this are (refer to the 22 criteria):

1. There are no quantified and ecologically based environmental goals.
    
2. The tax rates were therefore not determined according to justifiable environmental goals.
    
3. Social security will be subsidized.
    
4. The volume of subvention is thereby increased.
    
5. The entire tax volume will be raised, because no taxes were lowered parallel to the introduction and/or increase of taxes.
    
6. The principle of cause is violated, because those not employeed must contribute to the social security of salaried employees.
    
7. The dilemma arises that high energy consumption will become the basis for assurable social security financing. The reduction of energy consumption (intention of energy taxes) will lead to financial problems in the social security system.