2011-09-11 11:43:00

Head of "Risk Reduction Foundation" (Swiss): Ecological tax labor reform - the mechanism of green economy

Introducing the author’s article by Vladimir Kosterin, head of the Swiss «Risk Reduction Foundation», «Ecotax labor reform — the mechanism of green economy»

The idealization of the free market — the old way of economic thought

Once our ancestors believed that the Earth is flat and rests on three giant whales. Now, hardly anyone would agree that their children were taught in schools such a «geography», because humanity was not standing still, after the «era of the three whales» the Magellan took his saling and Gagarin — space flight. Meanwhile, in hundreds of institutes and universities thousands of students are studying an economy based only on the works of Adam Smith and other free-market ideologues as a «very foundation». We are taught that the free market is a universal regulator of the social and economic processes, they say, it is enough to create conditions of unrestrained market game for people and businesses, and all problems will be solved automatically.

At one time Adam Smith’s market ideas were revolutionary and progressive. Smith began working not as an economist, but as an ethical philosopher, who was interested in finding the way to the common good. The search has led the scientist to conclude that the free market is «invisible hand», which in the process of exchanging goods and services, directs the activities of all subjects to the common good, even though each of the subjects is guided only by self-interest.

Liberation of the market from strict state regulation (still mostly feudal) opened unprecedented opportunities for economic development, made the distribution of wealth dependent on the mind of the individual and on the work he has invested, and in this sense the common good was really, much better provided by a free market than in the non-market, regulated economies. Ironically, those were the works of moral philosopher Smith and his school which in the future, led to the complete separation of morality and ethics from the economy and to the modern understanding of the global market as a system of ruthless competition between selfish individuals and corporations. But at the same time, the development of the free market was the key to technological progress since the industrial revolution of the XIX century and continuing to the Atomic and Space Era and to the modern world of information technologies. Almost all the benefits of modern civilization, which we use every day, from cars and air conditioners to the Internet — are products of the free market. Not surprisingly, that after two centuries, of the market economy, only few dared to question the main tenets of the theory of Smith.

However, in parallel with the rapid evolution of technology and the formation of a global economy humanity began to deal with previously unknown problems, for the solution of which market mechanisms proved to be unsuitable. The market economy has been unable to protect natural resources from depletion, and human health from the harmful effects of pollution. By the inertia of the Adam Smith it was possible for a while just not to pay attention to these «side inconveniences» of a market civilization. However, in the mid-twentieth century «side inconveniences» have acquired the same scale as the civilization itself. Damage caused to the environment and health equaled those benefits that were provided by technology and the market, and for some regions even exceeded these benefits. It became clear that the traditional market economy is not able to find the solution of global environmental problems, and this is no accident: in its conceptual framework the main understanding of the dependence of human economy from the mechanisms of the natural ecosystems of our planet is missing. Market economy considers only superstructure, exchange of goods and services between people, in complete isolation from the basis of natural resources, providing materials and energy for process of creation of all these material goods, which are further distributed by the free market.

Why, then, the market economy worked so well for over two centuries? For the same reason for which mankind still can often use the mechanics of Isaac Newton: it is a certain approximation to the truth, which works well in certain time and space scales (if the objects do not approach to the size of the atom, and the speed is infinitely far from the speed of light). While we live in the usual scale of the world, Newtonian mechanics provides all our needs. As soon as atomic scales or space velocity are needed for our purposes, it immediately becomes outdated and is replaced by the quantum mechanics and Einstein’s theory of relativity.

In times of Adam Smith, the planet was inhabited by about eight hundred million people. Even in the time of the industrial revolution of the XIX century world population was only slightly more than a billion. Significant areas of undeveloped land remained on the planet and natural resources logically seemed to be endless. The humanity in that days physically could not exhaust them during the life of a generation or more.

At a time when humanity was taking away from the biosphere only a small percentage of material goods formed by nature (in the form of biomass of plants and animals and in the form of minerals), it was possible to ignore the complexity of ecological-economic system and to focus only on one of the elements — market mechanism of circulation of goods and services. Circulation of surplus value created by labor took place between individuals and businesses in the community, that is, within humanity «separated» by economic theory from the surrounding world. Resources were taken from the environment and wastes were returned back to it, but it was outside the market economy, because it worked as a «thing in itself», where the «input» to the system is a resource flow which is endless and is received from"nowhere», and the «output» is also seen as an endless stream of waste to «nowhere». Thus for the basic tenet the assertion was accepted that all the resources and services, created by nature are a priori «free». Even if the natural resources have monetary value, they were not considered as non-renewable and non-interchangeable.

However, in the early twentieth century, world population has grown rapidly from one to two billion, and the scale of mineral extraction made ​​Vladimir Vernadsky for the first time to estimate the activity of mankind as a geological factor. The scale of human economic activity equaled the scale of the natural processes occurring in the biosphere. Today humanity is using more than 40% of the biomass formed by land plants during photosynthesis and even considering photosynthesis of the World ocean, humanity consumes 25% of the biological production of our planet. Land degradation has touched 35% of the planet’s soil. A natural limit of efficiency of plants photosynthesis is increasingly becoming a factor which limits crop yields, and this is the limit that we are not able to move or get around of it. Human industrial activity changes the gas composition of the atmosphere within a generation, which has already affected the global climate. The ozone layer that protects all living things from the cosmic ultraviolet is now under threat. Three European countries had to revise the state borders due to rapid melting of mountain glaciers in the Alps. Domestic waste has formed «garbage swirls» in the Atlantic and the Pacific which are clearly visible from space orbit. The accident only on one oil platform actually destroyed the ecosystem in the Gulf of Mexico and caused trillions of losses. Common fresh water is in some parts of Africa a scarce resource, because of which, according to the UN, armed conflicts are taking place, similiar to old «oil wars»…

In these circumstances, it is impossible to consider the economy as a «thing in itself», bringing environmental issues «out of the brackets». The man has made the world «filled with humanity», and in this world economy stopped to be small in relation to the biosphere. So, the main principle of the classical market economy, formulated during the «underpopulated world» stopped working.

Green economy: the condition of human survival

The first steps in this direction have already been made. As in its time, the ideas of Adam Smith had a revolutionary impact, now the idea of ​​ecological economics is paving the way to universal recognition, first formulated in 1996 by Herman Daly in «Beyond growth: the economics of sustainable development."

From the position of the green economy, the economic system of humanity is seen not as a «thing in itself», but as an open-dependent subsystem within a larger system of the biosphere of the planet. The biosphere is considered as a system open to the flow of solar energy, but closed and balanced relatively to substance turnover. The economy of mankind as a subsystem of biosphere is open relatively to matter and energy. The economic activity of humanity is regarded by ecological economics as the creation and consumption of material goods in the transformation process of substance with the use of energy while the substance and energy are taken from the environment.

The cost of goods in such an approach should include not only the costs directly incurred by the person during manufacturing and consumption, but also the costs of the biosphere. We should take into account prime costs of goods for system as a whole, the cost 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 cost of the «services» of the environment: the disposal of waste from its production and consumption, and restoration of the resources used.

In ecological economics a key role is played by the concept of «natural capital." Proceeding from classical definition of capital as a «fund, which produces the flow of useful goods and services," natural capital is a fund that produces a flow of natural resources and services. Thus, mineral deposits, natural populations of animals and plants, freshwater pools that support water, fertile soil, etc are the components of natural capital. In addition to useful products 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 the air and water, waste absorption, recreational facilities, etc.

Thus, the income from natural capital includes natural products and natural service, and man-made industrial capital can not replace the natural capital. In contrast to classical market economy, which provides the possibility for replacement of natural capital with a equivalent artificial capital, ecological economics considers a natural, human capital only partially replaceable, 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. Mankind must establish maximum limits for the economy, determine the acceptable level of pressure on the environment (both from exploiting of natural resources, and from the waste and pollution). And only after the establishment of these frameworks the usual mechanism of the free market starts working within them, but within a pre-defined limit loads on the biosphere.

The market will continue to perform its functions to provide optimal spatial distribution of productive forces, labor and capital, promote technological progress and growth of individual welfare, etc. But all this will take place only within the «quota» determined not by the market, but by the objective possibilities of biosphere to meet the needs of humanity in resources and «environmental services." The role of the free market in environmental economics can be explained by analogy with the ship: possibilities of biosphere define the «waterline», the level above which the ship can not be loaded, in order not to sink, and the role of the market comes down to the most rational distribution of cargo in the hold of the ship, within the limits of given «maximum weight».

The transition from the so-calledneo-classical economics to environmental economics is a necessary condition for the survival of a mankind. If our common ship sinks, who will benefit from the fact that the goods have been placed in the hold very well…

Ecotax reform: the transition to a green economy through the market

With fundamental change of outlook (this is required by the replacement of classical economics with environmental) first steps are always difficult. One of the strengths of ecological economics is the ability to implement its principles into practice with the tools and mechanisms of the market economy.

One of the biggest factors 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. Through the tax policy the society may signal enterprises about desirable and undesirable trends, from the point of view of the common goods, by reducing taxes to stimulate the industry which is recognized «more socially useful." Conversely, by increasing the tax burden to warn of the need for changes in enterprises whose activities harm the public interest.

For most people, it is understandable and even clear that an increase in a number of jobs and wages is a positive effect on society, whereas the depletion of natural resources and pollution of the environment is negative.

However, analysis of the tax systems of most countries shows that the main tax base is exactly work and wages. The share of labor and capital in the total tax revenue for the OECD countries is an average of 62% (from 42% in Mexico and 70% in Japan and the U.S.). However the share of environmental taxes, even in the broadest sense of the term (including both fees and fines for pollution, and the rent for the use of resources) is an average of 7% (from 3.5% in the U.S. and 3.9% in Canada to 10.5% in Denmark and 15% in Turkey).

Thus, the current tax system in most countries has been formulated on the basis of outdated world view, when natural capital was considered «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 to reduce the number of jobs, hence promotes unemployment.

Now we have 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 the concept of «ecolabour tax reform." The essence 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 triple 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 creates 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. Third, a fair approach to taxation contributes to a healthy moral atmosphere in society.

Ecolabor tax reform: the experience of the European Union

Ecolabor tax reform has been 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% of the total amount of taxes «for the ecology».

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.

After such a reform in Denmark the marginal tax rate on incomes has been reduced by 10% and payroll taxes to the pension fund were also significantly reduced. Experience in Denmark is also interesting because the state has returned up to 30% of received «green» taxes to the enterprises. They were returned only in the form of grants for the implementation of energy-saving technologies, which was an additional incentive for owners to promote clean technologies. This practice has successfully been implemented by Netherlands.

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.

Ecotax reform proved to be effective in practice.

The degree of greening 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). Though with total capital Russia, Ukraine and Kazakhstan are among the twenty richest countries in the world. Therefore, for the countries of the former Soviet Union there is a need of the transition from an industrial economy to a green economy by introducing ecotax labor reform.

For CIS countries to be on par with the European Union, it is necessary not to catch up with it but to overtake it. Therefore, it is needed 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.

Eco-taxes are a recovery tool for the environment, for the spiritual and physical health of the nation. The company pays as many taxes as it is necessary to eliminate damage to the environment and human health caused by the enterprise, and businesses that benefit the environment and the people receive a support from the state.

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 in the interest of present and future generations.