Eco Taxes article (originally posted on an old blog of mine about ten years ago, but still relevant today)
Eco-taxes (along similar lines to the way VAT works in the UK), could be used to both manage demand for eco-intensive goods and services and provide government revenues for investment in sustainability developments that otherwise wouldn't obtain investment funding because of market failures.
For example, if eco-taxes were levied on each distinct stage of the manufacturing and supply chain, the payment of eco-tax could be based on the difference between "input-eco-footprints" (ie footprints of all inputs) and "output-eco-footprints" (ie footprints of all outputs from that stage). Other (ie existing) taxes could be adjusted to prevent the effects of the eco-taxes falling disproportionately on the poor.
To avoid the accusation that "taxes are best suited to kill the middle class and starving the less favoured", in my view, it's extremely important that state welfare systems are adjusted alongside any changes in tax systems, so that the poorest and most vulnerable are protected from any financial impacts on a net basis.
For anyone who has concerns about VAT being a cost to the end-consumer rather than a cost to the polluters, this is because, in effect, the final seller is mandated (by law) to charge VAT to the end-consumer, who has not added any value but just consumes the product and pays (to the seller, not the government) the full VAT of the entire supply chain, thus reimbursing the supply chain for the VAT it (ie the supply chain) has had to pay over to the government. This is a weakness in the design of VAT.
However, I don't think VAT was designed on a 'polluter pays' principle, whereas an ecotax system could be designed for this. VAT has also been 'tweaked' over the years to achieve other objectives - for example to make children's clothes cheaper to help poor families - this was an example of mixing multiple objectives for political reasons and we have seen it again more recently in the UK in the mixing of measures to address energy efficiency in buildings and fuel poverty. In my view, a better way to have helped poor families would have been to increase welfare payments to poor families rather than fiddle with the VAT system.
The polluter pays principle could apply with a VAT-like ecotax. Some products and services don't have VAT applied to them (and, indeed, even where they do apply, there are various rates of VAT). An ecotax, on the other hand, could be related to the embedded eco-footprint at each stage in a supply chain where a product or service was passing from one entity to another. Even in VAT, the VAT is collected (by Government) from each entity in the supply chain in proportion to the material inputs the paying entity has put into that product or service, for example from the point it bought in components, applied heat, light, water and energy , to the point it sells the product to the next entity in the supply chain. At the earliest point in the supply chain, for example a farmer producing cotton as a raw material, the farmer pays to the government an amount of VAT on the cotton it sells, but can also claim against it the VAT on VAT-able inputs from other entities (eg a water company that sold the farmer water). The farmer only pays to Government the VAT on the 'value added' by the farmer. So, the VAT has been collected by government from each of the 'value-adders' to the extent that they have done something with the inputs they have turned into outputs. In the same way, an ecotax could be constructed so that it is collected from each entity in a supply chain based on the eco-print of its activities in turning inputs into outputs. I think where an ecotax could differ from (and improve on) VAT is just to take away the requirement to tax the final consumer (who doesn't add any further ecofootprint but just consumes the final product). This would then leave it totally free to the final seller to decide whether they pass on any of the 'pollution' costs to the end consumer.
Reflecting further on the above - the farmer is in a difficult position with an eco-tax, because many of his/her inputs have come from nature, or the global commons, and because they have not come from a 'tax-registered supplier', he/she could not claim much 'input-ecotax' as a deduction from the 'output-ecotax' payable to government on the sale of the agricultural produce to the next entity in the supply chain.
However, the farmer would have to reflect this in setting his/her selling prices. One way or another, in an economic, market-based system, the cost of externalities, if made transparent by an ecotax (or by carbon taxation, for example, on all carbon inputs to the supply chain) would be borne by members of the supply chain, and each would have to decide whether to pass those costs on to the end-consumer.
At the end of the day, the end-product would probably reflect the true cost, including all externalities. A future sustainable world might be a very expensive world, but this is not necessarily a bad thing - it would influence behaviours across the whole supply chain that bring the total human system within One Planet Living. If (as I say above) welfare systems adjust accordingly, then the poor can still be provided with the means of basic subsistence and the rest of society will be encouraged (through market mechanisms) to live a more eco-efficient life and cut down on the things that are carbon-profligate, like flying on foreign holidays etc.
The effects of ecotaxes on the poorest members of society could be addressed by adjusting welfare payments, and this could be paid for by adjusting income tax rates to provide a just and fair distribution of the tax burden on citizens.
The Planetary CFO - working towards a sustainable World Balance Sheet.