Editor's note
William Nordhouse was awarded the 2018 Nobel Prize in Economics . Before winning the award, he had been working in the field of environmental economics for more than 50 years. In addition, Nordhouse also co-authored "Economics" with Paul Samuelson , which is one of the most classic textbooks in the field of economics.
"Green Economics" is a popular book written to most public rather than professional scholars, but it embodies the essence of Nordhouse's lifelong research ideas, and covers recent academic progress in the field of environmental economics, as well as the core research topics of this major. On this basis, this book also has many new ideas, such as making innovative interpretations of green thinking and putting forward new ideas to ensure economic prosperity and growth under the general goal of environmental protection.
This article is excerpted from Chapter 17 of "Green Economics". From the perspective of green thinking, it discusses the benefits, costs, long-term goals, practical operations, etc. of green taxation based on many examples from real life. Nordhouse pointed out that green taxes are actually a benefit tax, and their social and economic impacts are benign and healthy because they are "replace taxes on good goods with taxes on bad goods."
article | William Nordhouse
t3 Taxes have always had a bad impression. George Washington became the first president of the United States by relying on the anti-tax movement. He said: "Taxes will more or less increase inconvenience or unpleasantness." Jimmy Carter said: "The federal income tax system is a shame for mankind." And Bush Sr. once shouted: "Listen to me, I won't collect new taxes." In addition, the high inheritance tax imposed on the wealthiest Americans is called the "death tax."
However, economists have a different view on taxation: Taxation is the price we pay for public services. If you need to provide children with good public education, provide health care services to everyone, environmental protection, and infrastructure upgrades, you need to pay for these services. As Justice Oliver Holmes said: "Taxes are the consideration of civilization."
Some taxes may cause less harm and pain than others, and in fact, some taxes may even be beneficial. One way to express this view is: "There are some taxes that are benefit tax . They replace taxes on good goods with taxes on bad goods."
Tax efficiency
For more than a century, economists have been paying attention to the efficiency of taxes. The basic analysis of taxation by economic principles is explained as follows: When a commodity or service is taxed, the price obtained by consumers increases accordingly, and the price obtained by producers decreases accordingly. This price change will reduce the product's production. For example, studies have shown that high cigarette taxes can reduce smoking.
If taxes are imposed on inputs (such as labor or capital), it will reduce the after-tax benefits of those inputs, resulting in a decrease in supply. Therefore, companies tend to transfer their businesses to countries with lower tax revenues, the so-called "tax haven", such as Ireland . Therefore, the net effect of taxes or subsidies is to distort input and output levels, turning them from taxable activities to non-taxable activities. However, the degree of distortion of taxation is not static. Taxation of capital, especially in a world where investment is open and capital flows freely, is often the most distorted. If high corporate income tax is imposed, real estate investment (lower tax rate due to special terms) will increase, while manufacturing investment (higher tax rate because there are almost no tax benefits) will decrease, which will result in too many housing and too few factories in the entire economy.
has a smaller distortion effect on taxing labor income. study found that people tend to maintain working hours when taxes lead to a drop in after-tax wages. is different from capital, people tend to stay where they are and not migrate casually. People are unlikely to immigrate from the United States to Ireland because of high payroll taxes, so the distortion effect of payroll taxes is less than that of capital taxes.The less distorted is the rental tax, which is the reward for land and similar supplies of fixed items. Because the land is completely unmovable, no matter how much it earns, it will "work". This means that land tax will not affect the supply of land at all, and land rent tax will not cause any distortion. This theory has been applied to the income of high-income individuals, such as baseball players and business tycoons. Whether after-tax income rises (as it has been in the past 20 years) or falls (if wealth tax is imposed on billionaires), these high-paying people work hard.
Green Tax
Environmental Tax is in the tax sequence with the highest degree of distortion (tax capital) to the lowest degree of distortion (tax land)? In fact, it is not within the range of the above sequence at all. The reason is that environmental taxes can reduce the activities that society wants to reduce. For example, imposing high environmental taxes on sulfur dioxide emissions will reduce the “output” of these emissions, thereby reducing their harm. This means that green taxes are benefit taxes, in other words, such taxes improve the economic efficiency of , and unlike other taxes, they reduce economic efficiency.
If green taxes are beneficial, what should be the appropriate tax level? Should they be set at a level that can maximize government revenue, or should they be set to a fixed ratio of required fiscal revenue (needed revenues)? This is where the optimal pollution theory can work. Our discussion of optimal pollution levels requires setting the price of pollution to equal its marginal damage. In the case of green taxation, the most efficient result is that the tax paid by the enterprise for its pollution is equal to the external damage caused by the pollution. So if public health experts have determined that the social cost of sulfur dioxide emissions is $3,000 per ton. Then, as a starting point, the effective tax on sulfur dioxide would be $3,000 per ton.
This leads to the core issue of green taxation. When the tax rate is set to be equal to the marginal damage of pollution, it can achieve optimal resource allocation between goods, services and emission reduction, that is, it internalizes externalities. green taxes will not cause distortion. Instead, they reduce distortion because they reduce inefficient pollution. Assuming that proper taxation on sulfur emissions can reduce coal-fired power plants’ production and even close highly polluted coal-fired power plants, this tax reflects the external costs of sulfur emissions to communities not only reduces distortions caused by pollution, but also improves overall welfare.
For traditional taxes, raising the tax rate so high that it will be a stupid fiscal act, because it will both cause high distortion and reduce income. In the case of green taxation, the optimal tax rate may be higher than the tax rate corresponding to the maximum tax revenue. Think of the goal of many environmentalists - to reduce carbon emissions to zero, and you can know the logic behind this. Perhaps the $500 carbon emission tax can achieve this. At a tax rate of $500, income will be zero. So, we may see that the tax revenue at the optimal green tax rate is zero.
Pricing of traffic congestion: Theory and Practice
One of the most interesting applications of green taxation is pricing of traffic congestion, which is a topic that economists have paid great attention to for many years. It was first proposed by Professor William Vickery (1914-1996) of Columbia University. In 1952, he proposed these principles when he proposed the construction of New York Metro , and in part he won the 1996 Nobel Prize in Economics.
A key concept here is the externality of congestion. For example, when the road is empty, the first incoming car does not slow down any vehicle, so the external cost imposed by the first car on others is 0. However, as traffic flow increases, for every 1 car added, the rear car has to slow down. Suppose I drive onto the road, the traffic time of the 120 cars behind will increase by 1 minute each.If people's time value is $10 per hour, then the external cost I incurred is 120×(1/60)×10=$20. The more cars there are, the longer the waiting time, the higher the external costs imposed.
The basic idea of Vikri is that people should pay for public resources such as utilities, roads, airports and other departments just as they pay for personal belongings such as food, shelter and entertainment. Furthermore, prices should reflect their external costs, i.e., costs imposed on others. According to Vikri, this fee should vary at any time depending on the level of congestion and should be charged to everyone without exception. He also envisioned a wonderful charging technology at that time, which is now common in electronic charging systems.
Vicri admits that his ideas are not popular with public policy makers. "People think it's a tax increase, and intuitively, it's true. But if you take into account the driver's time, it's really a saving behavior." He insists that the idea is not to reduce traffic, but to increase traffic by dispersing it more evenly.
Nowadays, congestion fees are mainly used in major cities such as Singapore, Milan, London and New York. But most of them are very primitive and do not follow Vickery’s idea: they are just completing the work of a “toll station”, that is, vehicles need to pay to enter the city. For example, in London, between 07:00 and 18:00 Monday to Friday, there is a charge of £11.50 (about $13) per day for driving a vehicle in the paid area. There are similar systems in New York. Singapore has taken the closest steps to the Vikri model, installing an advanced system that includes hundreds of electronic toll stations and toll systems that are constantly adjusting based on vehicle type, time of day and real-time congestion.
People often complain that it would be useless to impose congestion fees. However, rigorous research shows that in fact, congestion charges not only reduce traffic during peak hours, but also increase traffic speed. Perhaps the most valuable point to the public is that the income from congestion fees is used to increase public transportation, which further reduces traffic congestion and pollution.
Vicri proposed a congestion fee plan that was decades ahead of schedule. Like other ideas that can address major externalities, it may have to wait many years to gain recognition from the green elite and the public. However, as more cities and government agencies adopt it, and as people's lives become more comfortable, we can see the dual benefits of congestion expenses: it not only reduces waste of time and energy, but also provides more public services by increasing income.
The potential of green taxation
Compared with the large number of literatures that study traditional taxation, there is a smaller number of literatures that study environmental taxes. What are the main potential sources of green taxation? By sorting out the research on this field, we can find that the externality pricing in many fields is too low. However, evaluating what the right price proved to be extremely difficult, so we can only make rough calculations. The main areas where the environmental taxes are effective are those where externalities (such as pollution) are well measured, areas where there are convenient taxation conditions in the production process, and areas where management costs are smaller than revenue, such as greenhouse gas emissions (especially carbon dioxide ) and fuels such as gasoline, air pollution and scarce public water resources. Here are a few of the most noteworthy taxes, which are mainly concentrated in the United States (because the United States has ample data and a lot of environmental damage). Other tax types are either relatively small in tax base or are much more difficult to implement.
Carbon tax
Among the possible environmental taxes, the most important thing so far is the carbon tax. This tax has a large tax base, and the so-called tax base refers to the value of the activity on which the tax is based. The reason why the carbon tax base is large is that the United States has huge carbon dioxide emissions per year. As I will further explain in discussing climate change policies, the carbon tax is not only a very attractive policy to mitigate climate change, but also an important environmental tax.
The following shows an approximate estimate of U.S. carbon tax revenue. In 2019, industrial carbon dioxide emissions were about 5 billion tons, and other gases such as methane and were about 1 billion tons of carbon dioxide equivalent. We can use the U.S. government estimates of marginal damage, which is $40 per ton. If emissions remain unchanged, the total revenue would be 6 billion tons × US$40/ton = US$240 billion. But emissions may fall; at this price, emissions will fall by 25% to 4.5 billion tons per year. This will generate about $180 billion in revenue each year, slightly lower than 1% of GDP in 2019 or 8% of federal revenue.
If policy makers want to increase taxes over time, such as to $100 per ton, then this tax rate will increase revenue to around $400 billion per year, with a maximum income of about $500 billion. Therefore, a carbon tax can at least generate a considerable income stream until the tax rate reaches a higher level, so that it can reduce almost all emissions, and of course, the carbon tax revenue will also be reduced to zero at this time.
Finally, I want to remind everyone that carbon tax is only the wish of environmentalists and financial experts at the moment. Today, the actual carbon tax revenue in the United States and most other countries is completely zero.
sulfur dioxide and other air pollutants
Another potential source of income is some other traditional air pollutants , which includes not only sulfur dioxide, but also nitrogen oxides, carbon monoxide and particulate matter.
The United States is currently issuing pollution permits for free, but financial experts recommend that these permits should be sold through auctions because these permits are as valuable public property as oil or wood. Potential income from auctions or taxes on sulfur dioxide can be estimated by examining sulfur dioxide emissions and trading prices. We can calculate implicit revenue as revenue from auction emission permits, i.e. emissions multiplied by transaction price. From 1994 to 2007, the average implied income was close to $5 billion per year. After that, the price fell sharply as actual emissions were well below the regulatory ceiling, so the hidden revenue of also dropped significantly.
However, these numbers are below the ideal value because the transaction price is much lower than the estimated value for marginal damage. It is estimated that the marginal damage per ton of sulfur dioxide is about US$3,000, while the average price of sulfur dioxide from 1994 to 2007 was only US$300 per ton. If the sulfur emission price is set to marginal damage, emissions should see a significant drop earlier. At current emissions and $3,000, revenues will be close to $10 billion per year.
The revelation here is that the imposition of sulfur dioxide tax will have a high potential income, but it is far lower than the imposition of carbon tax.
Data on other pollutants is more difficult to determine because they are relatively small in quantity. There is also a trading plan for nitrogen oxides. The implicit revenue here was around $1 billion a year from 2005 to 2010, and the price dropped sharply after that. The most expensive pollution control is the regulation of automobile exhaust emissions, which in 2010 had a compliance cost of approximately $26 billion per year. If emission taxes are used instead of regulatory measures, it may increase revenue by tens of billions of dollars each year, and of course the calculations here are not accurate.
Traffic externalities and gasoline tax
Environmentalists scoff at cars. According to a study, externalities generated by automobiles include health damage, traffic jams, traffic accidents, air pollution, noise, climate change, habitat fragmentation, visual interference, natural and environmental degradation, water pollution, soil pollution, energy dependence, and obesity. Although it is possible to impose environmental tax on the above effects separately , it may be more convenient to impose centralized taxes on an activity with a large number of harmful side effects.
The best way to tax the mileage. However, this is both difficult and aggressive, so most countries will focus on taxing fuels such as gasoline and diesel. Such practices seem to be related to carbon dioxide emissions, but are not very clear in connection with other spillover effects.The study found that the total external effect brought by a car is US$1-4 per gallon of fuel, which is far higher than the fuel tax in the United States, and is close to the EU tax rate.
Automobile fuel tax has huge revenue generation opportunities. Currently, the average tax rate in the United States is about $0.50 per gallon, generating about $80 billion in fuel tax revenue each year. If the tax rate increases to $3 per gallon, annual revenue will increase to about $370 billion.
So, just like the carbon tax, there are gold mines in the gasoline depot. However, unlike carbon tax, gasoline tax is not an ideal green tax. While it reduces environmental issues closely related to oil consumption (such as air pollution), it will not help others (such as traffic congestion or obesity).
Auction of scarce public resources
Several other potential areas may also be favorably affected by green taxation (or more general resource pricing). The most obvious one is airport congestion, which can be solved almost overnight. If you have ever flown over busy airports such as New York Kennedy, Chicago O'Hare or Los Angeles International Airport , you must have experienced a long flight waiting to take off. "Hello, everyone, I am the captain of this flight. We are the 34th flight waiting for departure. We wait in line first and take off in about 45 minutes. I will update the dynamic information at any time." The problem of
is not difficult to solve. Auction of the 60 departure hours from O'Hare Airport from 5:00 to 6:00 pm. Small or uneconomical flights to Milwaukee will choose not to fly, while large jets to London can easily digest the fee. You can take the train to Milwaukee without much time delay, but other modes of transportation from , Chicago, to London are hard to find.
Assuming that airports can earn $1 billion in revenue per year, their net benefits include reducing ground waiting time and the ability to promote modernization of facilities. This money can be called infrastructure relief fee.
Other fields can also benefit from environmental resource pricing. One is the water shortage in the western United States. There, water is modern gold, and the country is actually irrigating low-value agricultural products with water. If scarce public water resources are auctioned to the highest bidder, they will be used most valuablely, and the land can also be used for other purposes.
More common is that, looking around, the scene we can see is that the value of public resources is almost underestimated. This includes not only air, water, climate, underground minerals, grazing rights and public land, but also some other less obvious projects such as tarmacs, public highways and parks. Here, applying the green tax principles can improve their efficiency and increase taxes.
However, the second reality to consider is that the fiscal revenue of these public resources may not be that much, and the opposition must be very fierce. Ensuring the ability to price public resources requires a hard fight against anti-tax groups and those who are short-sighted or want to leave “free” public resources to themselves.
Effects on Inequality
A standard problem with green taxation is that they are regressive, that is, relatively poor families are more affected. The fundamental reason for regression is that low-income households account for a higher proportion of spending on energy and other environmentally sensitive goods and services than high-income households.
Although green taxes are regressive, financial experts provide a simple remedy. The income from green taxes can be partially returned to the household to offset its regression. Gilbert Metcalf has done a brilliant job of studying the possible combination of green taxes and tax returns to identify a taxation program that is neutral to different income groups. He found that if the income from green taxes is returned to the family by reducing payroll taxes and personal income taxes, the impact of a package of green taxes on income distribution can be basically negligible.
Summary of green taxation
Green taxation is one of the clearest and simplest examples of green thinking promoting the health and prosperity of the country. Green tax reform allows countries to improve the environment while increasing their incomes.
However, countries rarely realize the prospects of green taxation, so they basically ignore this new tax system with powerful functions. Apart from gasoline tax (which is valuable but is only indirectly related to environmental goals), there is basically no green tax at this stage. The most useful single environmental tax is the carbon tax, which can serve core environmental goals and is easy to measure and implement, while potentially leading to huge potential revenue. Other examples, such as taxing conventional air pollutants, congestion, water and other resources, are also useful, but more complex and have less impact on income.
Green taxes are one of the most promising innovations in recent years. This tax achieves the sacred "Tripe" of environmental policy goals: to fund valuable public services, effectively achieve our environmental goals without distortion. Few policies can receive such enthusiastic support and support from us.
"Green Economics", written by William Nordhouse (US) and translated by Li Zhiqing and others, CITIC Publishing Group, June 2022.
(This article is excerpted from Chapter 17 of "Green Economics", slightly deleted and modified, the title is added by the editor; Editor: Zang Bo)
