Ecotax

An ecotax is a market-based environmental policy instrument that has been implemented in different forms in many countries all over the world. The idea behind ecotaxes is that economic activity leads to environmentally harmful external effects (e.g., carbon dioxide emissions produced by factories or car traffic), and these external effects lead to “external costs” that have to be paid mostly by the entire society rather than the polluter himself. An ecotax, therefore, should help as a price signal to confront polluters with the ecological consequences of their economic action and follows, more or less, the “polluter pays” principle.

Ecotaxes can be levied on emissions like carbon dioxide (carbon taxes), on the consumption of energy (e.g., on fuels, power consumption), or on dangerous goods like batteries or fertilizers like nitrate. In general, ecotaxes are levied with the aim that prices “speak the ecological truth” (Ernst Ulrich von Weizsäcker, former member of the Club of Rome).

Scientifically, ecotaxes have been discussed in economics. In the 1920s, the British welfare economist Cecil Arthur Pigou argued that economic action leads to external effects and external costs. In response to this, he suggested that we “internalize external costs” by raising taxes as an instrument that represents exactly the external costs of economic action. One [Page 142]problem of this so-called Pigouvian tax is that in practice it is impossible to accurately assign external costs to all possible external effects in nature caused by economic action (e.g., which costs do polluted rivers cause, or the health problems of people living near factories?). The Pigouvian approach can be characterized as the theoretical root of all ecotax discussions without the possibility of actually being implemented in political practice.

On the basis of these theoretical ideas, the environmental economists William J. Baumol and Wallace E. Oates formulated the standard price approach in the 1970s. The standard-price approach states that the state should first set environmental standards like specific reduction goals for carbon dioxide emissions. Second, the state should levy taxes on emission-relevant actions that lead to a reduction of emissions as a result of the polluters' prevention reactions to increasing prices. Such a policy could encourage enterprises to invest in newer technologies for emission reduction or consumers to buy smaller cars. Ecotaxes are also seen as drivers for innovations. The standard set by the state can be fulfilled by the appropriate prices manifested in higher taxes. In contradiction to the Pigouvian approach, taxes are not oriented toward the “real external costs,” which are very difficult to estimate, but to standards set by a government's environmental policy goals. The standard price approach can be labeled as the scientific background of environmental policy discussions about ecotaxes.

Problems of ecotaxes include that it is very difficult to estimate in advance which tax rate actually leads to the desired reduction of emissions. The implementation of goal-oriented and palpable ecotaxes is therefore a trial-and-error process, and as a result the tax is extremely controversial.

One important discussion asks whether tradable permits might be a better market-based environmental policy instrument in general, since emission goals can definitely be reached by emissions trading. Another, more politically oriented, criticism questions whether ecotaxes are really applied to reach environmental policy goals, or to simply raise revenues for the state. An important study by R. W. Hahn shows that in most countries where ecotaxes have been introduced, they fulfilled a function for raising revenues for the state, whereas the stimulus for changing environmentally related behavior was too small to really gain positive ecological effects. So in political debates, many critics of this instrument accuse the state of just implementing ecotaxes for raising revenues without being really interested in a change of ecological behavior. Another potential problem with ecotaxes in political practice is that it is very difficult for politicians to implement market-based instruments that lead to higher prices for consumers and enterprises: Higher taxes are no support for politicians' interests of earning votes, so in political debates, ecotaxes may not be a popular instrument to be pushed by politicians who want to be elected. This leads from an environmentalist's point of view to the problem that ecotaxes with tax rates high enough to really change the polluters' behavior cannot be enforced in the political process because of the vote-earning interests of politicians and strong opposition by powerful lobbyists from industry. In addition, ecotaxes that can be applied might be too low to gain any substantial ecological effects.

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