|Steering Business Toward Sustainability (UNU, 1995, 191 pages)|
|Part two: Incentives|
|8. Ecological tax reform|
Although ecological tax reform uses price as the policy instrument (price plus tax), the major goal is to limit quantity of throughput to a sustainable scale. A secondary goal is to raise public revenue. In practice, one should begin with an acceptable quantity of throughput in mind, and set the tax so as to likely result in that quantity. That tax would then represent a rough internalization of the previously externalized cost of excessive scale. If the tax bears on resource use in general then there will not be much room to avoid the tax by substitution, and resource demand will be inelastic, so revenue raised will be large. If the tax is aimed at inducing substitution away from the taxed activity (e.g., emissions of toxic wastes) then there will be a trade-off between revenue raised and success in inducing substitution. As with the present tax system, some fine-tuning would be required from time to time.
The relation among the three goals is clearest in the design of tradable permits schemes. These utilize a socially and ecologically set limit to the total annual depletion or pollution in a given area or sector of the economy. The right, say, to pollute was previously a free good because it was unlimited. With limits it becomes an economic asset. Who owns the new asset? It could be anyone, but it is best to vest ownership in the government and require firms to purchase the rights at auction from the government. The scarcity rents arising from scale limits are thus captured by the society as a whole and become public revenue. Once purchased, these permits can be freely traded among firms. Sustainable scale is served by the limited aggregate number of permits. Equitable distribution is served by initial public ownership of the new asset. Efficient allocation is served by allowing exchange of the new asset among firms.
Once an overall throughput scale limit is fixed as a social goal, one can thus fix that right quantity directly and let the market indirectly determine the corresponding right price. It is also possible to set the price (tax) directly and allow the market to find the corresponding right quantity. In both cases the target is the right quantity, and the "right" price is the price that leads the market to that quantity. Both procedures assume that there is a strong social preference for a sustainable aggregate scale, and that a market directed only by individualistic preferences and maximizing behavior cannot incorporate that social value.
The great virtue of the tradable permits scheme is that it forces us to distinguish three separate policy goals and to recognize that they require three separate policy instruments. The goals are:
(1) Allocation - the division of the resource flow among alternative product uses;
(2) Distribution - the division of the resource flow, embodied in products, among different people;
(3) Scale- the total volume of the resource flow, the matter-energy throughput taken from the environment as low-entropy resources and returned to the environment as high-entropy wastes. Scale is relative to environmental carrying capacity.
Economic theory tells us that relative prices formed by supply and demand in competitive markets lead to an efficient allocation. Economic theory also tells us that there is a different efficient allocation for every initial distribution of ownership, so that justice or fairness of distribution is a separate goal from efficiency and requires use of separate policy instruments - transfer payments such as welfare, social insurance, inheritance taxes, etc. As for scale, it is largely ignored by standard economic theory, which has implicitly assumed that environmental sources and sinks were infinite. Consequently there is in traditional economic theory no policy instrument for keeping scale within carrying capacity - nothing analogous to the Plimsoll line or load limit mark on a ship.
The scale limit, the economic Plimsoll line, is evolving in practice ahead of theory. The beauty of the tradable permits scheme is that, first, the society must face the scale question and draw a Plimsoll line at the amount of aggregate pollution (or depletion) that is ecologically sustainable. Second, rights to pollute (or deplete) up to that limited amount become a valuable asset and their ownership must be initially distributed in some politically acceptable manner. Only after these two political steps can market trading attain the efficient allocation. The market is "free" only after its ecological and distributional boundaries have been politically established.
The distribution and scale questions are just as "economic" as the allocation question, in that they all involve the comparison of costs and benefits. But the dimensions in which costs and benefits are defined are different in each of the three cases. Allocative prices cannot measure the costs and benefits of scale expansion, nor can they measure the costs and benefits of a more equal distribution of wealth. The three different optima require three different policy instruments. In each case an optimum is formally defined by the equality of falling marginal benefits and rising marginal costs. But the definitions and measures of costs and benefits in each of the three cases are different because the problems to whose solution they are instrumental are different. The relative price of shoes and bicycles suffices to allocate resources efficiently between shoes and bicycles, but is clearly not sufficient for deciding the proper range of inequality in wealth, nor for deciding how many people consuming how much per capita of natural resources gives the optimal scale relative to the ecosystem.
Distribution and scale involve relationships with the poor, the future, and other species, that are more social than individual in nature. Homo economicus, whether the self-contained atom of methodological individualism or the pure social automaton of collectivist ideology, is in either case a severe abstraction. Our concrete experience is that of "persons in community." We are individual persons, but our individual identity is defined by our social relations. Our relations to each other are not just external, they are also internal - i.e., the nature of the related entities (ourselves in this case) changes when relations among them change. We are related not only by the external nexus of individual willingnesses to pay for different things, but also by relations of kinship, friendship, citizenship, and trusteeship for the poor, the future, and for other species. The attempt to abstract from all these relationships a Homo economicus, whose identity is constituted only by individualistic willingness to pay, is a gross oversimplification of our concrete experience as persons in community an example of what A. N. Whitehead called the "fallacy of misplaced concreteness. "
The prices that measure the opportunity costs of reallocation are unrelated to measures of the opportunity costs of redistribution, or of a change in scale. Any trade-off among the three goals (e.g., an improvement in distribution in exchange for a worsening in scale or allocation, or more efficient allocation resulting from the harsher incentives of a less equal distribution of income), involves an ethical judgment about the quality of our social relations, rather than a supposedly simple willingness-to-pay calculation. The contrary view, that this choice among the three separate policy goals, and consequently the social relations that help to define us as persons, should be made on the basis of individual willingness to pay, just as the allocative trade-off between chewing gum and shoelaces is made, seems to be dominant in economics today. It is part of the retrograde contemporary reduction of all ethical choice to the level of personal tastes weighted by income.
The omission of the scale of the macroeconomy from economic theory has several explanations. The most obvious is that when the theory was first devised, the scale of the economic subsystem was small relative to the environment; the world was "empty," so it seemed reasonable to treat the environment as a free good. Those days are clearly past, and we now live in a relatively "full" world. The second explanation is more complicated. Basically it is the doctrine that all we consume is value added, and all value added is the product of the human agents of labor and capital. This notion is examined in the following section.