2011-04-20 10:41:00

Ecological tax labor reform - a mechanism to improve the quality of life


From the position of the green economy, the economic system of humanity is not seen as a «thing in itself», but as an open dependent subsystem within a larger system of the biosphere of the planet. In such an approach the cost of goods should include not only the costs directly incurred by the person during manufacturing and consumption, but also the costs of the biosphere. We should consider the costs of goods for the system as a whole, the costs of energy and material resources that have been spent on its production (including their scarcity not only for humans but also for the biosphere) and the costs of the «services» of the environment: disposal of waste from its production and consumption, and restoration of the resources used.

In environmental economics a key role is played by the concept of «natural capital." Based on the classic definition of capital as a «fund, which produces the flow of useful goods and services," natural capital is a fund that produces a stream of natural resources and services. Natural capital includes mineral deposits, natural populations of animals and plants, freshwater pools that support water, fertile soil etc. Besides useful goods and resources, natural capital provides people with a range of services, namely, the restoration of soil fertility, photosynthesis and oxygen regeneration, circulation of substances in nature, self cleaning of air and water, waste absorption, recreation services, etc.

Thus, the income from natural capital includes natural products and natural services, while man-made industrial capital can not replace the natural capital. In contrast to classical market economy which provides for the possibility of replacement of natural capital with a cost equivalent artificial capital, in natural ecological economics human capital is only partially interchangeable, and in most cases complementary and indispensable.

The goal of ecological economics is to ensure a balanced development of human society, that is, a development that meets the needs of the present generation without compromising the needs of future generations. Classical economics sought to avoid any restriction of production and achieve its unlimited growth. Ecological economics, on the contrary, considers that it is necessary to begin with a definition of the natural boundaries of growth, which are measured by the intensity of energy flow and the period of circulation of substance in the biosphere.


One of the strengths of ecological economics is the ability to implement its principles into practice using the tools of the market economy. A significant leverage that permits to direct the vector of economic development in a certain direction with no straight administrative intervention, is tax policy. Although initially taxes performed mainly fiscal function, in the modern economy they also impose regulatory and stimulating functions.

Current tax system in most countries has been formulated on the basis of outdated world view which considered natural capital «free». It is obvious that such a tax structure promotes the depletion of natural resources and environmental pollution. However, the same tax structure encourages employers to save costs on new jobs and wages and promotes reduction in the number of jobs, hence promotes unemployment.

Now there is paradoxical situation: tax policy promotes phenomena which society considers dangerous and harmful and holds back those which society considers useful. Such inconsistency of traditional tax structure led to the introduction in the EU countries the concept of «ecolabour tax reform». The main idea of this reform is simple and obvious: transfer of the tax burden from labor and capital to resource flow.

One of the strengths of the ecotax reform is to obtain double dividend. First, the taxation of natural resources is a strong incentive to reduce their consumption. Contrary to the popular view of the entrepreneurs, while implementing ecotax reform, expenses «on the environment» do not become an additional burden that is administratively «put» on the manufacturing sector, but instead create an opportunity for modernization of enterprises. Second, since the growth of the «environmental» taxes is accompanied by a parallel reduction of taxes on labor and capital, the employer generally has the same expenditures as before, but receives an incentive to open new jobs and increase wages.


Ecolabor tax reform is currently being officially implemented in nine Western European countries (Denmark, Italy, Netherlands, Norway, the UK, Switzerland, Sweden and Finland). Belgium and Austria have not officially announced the implementation of ecotax reform, but actually changed their tax systems in favor of increasing environmental taxes and reducing labor taxation.

The scale of dividends received, was quite proportional to the scale of reform, and it was very different, depending on the strength of the political resistance to reform by large energy companies and others that are not interested in reform. For example, in Italy only 0.1% of the total tax burden was redistributed on pollution and resource flow as a result of the reform, while Denmark redistributed 6% «for the ecology» of the total amount of taxes.

The most telling is the experience of Germany where ecotax reform brought more than 20 billion euros of «green taxes» to the budget. Under the principle of «fiscal neutrality» 90% of them were used to reduce taxes on labour and personal income which resulted in the creation of 250,000 new jobs.

The UK was the first to introduce a tax on disposal and storage of waste, and at the expense of funds derived from this reduced the rate of deductions to the funds of compulsory social insurance. In total, 11 countries have implemented different scale redistribution of the tax burden. Taxes on the consumption of resources, especially energy, pollution (in particular the emissions of substances that affect the climate, the disposal and storage of waste) were implemented. The funds in all countries were used to compensate the reduction of taxes on labor, particularly income taxes, and contributions to pension funds and social security funds. Some of the funds were returned to entrepreneurs in the form of targeted grants for energy and resource savings. In most cases, it was possible not only to maintain the principle of «fiscal neutrality», but even to increase overall budget revenues while reducing the tax burden on the income of citizens and stimulating the creation of new jobs.


The degree of ecologization of the economy determines the level of the quality of life in the country. In 2010 in the list of top twenty leading countries in the quality of life, states that previously made concrete steps towards greening were included: Norway, Australia, New Zealand, USA, Ireland, Liechtenstein, the Netherlands, Canada, Sweden, Germany, Japan, Republic of Korea, Switzerland, France, Israel, Finland, Iceland, Belgium, Denmark, Spain. Post-Soviet countries have such positions in the ranking: Azerbaijan (67), Armenia (76), Belarus (61), Georgia (74), Kazakhstan (66), Kyrgyzstan (109), Latvia (48) Lithuania (44), Estonia (34), Moldova (99) Russia (65), Tajikistan (112), Turkmenistan (87), Uzbekistan (102), Ukraine (69). Although by the aggregate capital Ukraine is among twenty richest countries in the world.

If CIS countries want to be on par with the European Union, they shold not try to catch it up but run ahead. Therefore, it is necessary to provide a way to such a Europe as it will be in the years 2020–2030. The transition to a green economy through ecotax labor reform will create jobs, increase incomes, duration and quality of life.

Ecological modernization of the country by the transition to the green economy through the implementation of ecotax labor reform will help to unite the nation, form patriotic spirit and responsibility of citizens for the convenience of present and future generations.

Vladimir Kosterin, Head of the Risk Reduction Foundation (Swiss)

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