Chapter 12: Saving the Planet

1. Chapter 12: Saving the Planet By: Chris Balkaran and Braden Hutchins

2. Nudge: Brief Overview • Traditionally, governments have sought to limit the effects of emissions through command-and-control initiatives, such as establishing thresholds that certain types of emissions cannot exceed • E.g. Acid Rain Agreements, California auto regulations • The costs involved sometimes are higher than anticipated (Regulation is expensive and cumbersome) • However, because we cannot monitor and reason with every polluter (including all of us!), we must expect some form of government intervention

3. Nudge: Brief Overview • Two main reasons for environmental degradation: • Tragedy of the Commons • Little (if any) feedback on environmentally damaging actions • E.g. Thermal Inertia • Solutions: • Taxation • Cap-And-Trade System

4. Nudge: Brief Overview • Tax: • Places a value on natural resources to take into account negative externality • E.g. Carbon • Pros: • Easy to implement - acts like any other tax • Consumers must take tax into account when making purchases • Cons: • Taxes are unpopular • Does not limit actually emissions

5. Nudge: Brief Overview • Cap-and-Trade • The ‘rights’ to pollute within a given amount are bought/sold in a market • Pro: • Actual limits to emissions set • Easier for big industry to adjust to • Cons: • Continual monitoring needed (more expensive) • Not feasible for individual consumers • Need a large enough market

6. Nudge: Brief Overview • Both a tax and ‘cap-and-trade’ provide incentives and allow for choices for taking into account negative externalities • These types of incentives allow for individuals and firms to see how polluting impacts their bottom line - it provides immediate feedback. • E.g. 50 liter gas tank filled up once a week • 50 liters x 7.23 cent Carbon Tax Per Liter x 52 weeks in a year • $3.62 per fill up • $188.24 in carbon tax paid per year

7. Article for Analysis • Environmental Tax Reform: The European Experience • By J. Andrew Hoerner and Benoit Bosquet • Written For: The Center For A Sustainable Economy • February 2001

8. Summary of Article • Looks at Environmental Tax Reform (ETR) • ETR is when revenue from taxes on pollution or resource depletion is used to lower taxes on economic activities (e.g. labour) - also called revenue neutral

9. Summary of Article • In 2001, eight countries had implemented ETR • Denmark, Finland, Germany, Italy, Netherlands, Norway, Sweden, United Kingdom • Typically reduce the tax burden placed on labour by cutting income tax or social security contributions paid by employers • Most focused on greenhouse gas emissions • Not all environmental tax is revenue neutral • E.g. In the Netherlands green taxes constitute 9% of all tax revenue, only 0.5% is revenue neutral

10. Policy Implications • Market-based approach to environmental control • Allow greater flexibility in deciding where, when, how or to what extent to cut pollution emissions, thereby reducing cost to the economy and increasing personal freedom • If designed properly, national market-based systems allow reductions of total national pollution emissions with greater flexibility and lower cost than with less flexible and comprehensive approaches

11. Policy Implications • “When the revenues of environmental taxes are used to reduce other distorting taxes, the economic outcome is better than if those revenues are not so distributed, in terms of impacts on both employment and GDP” • E.g. 87% of 104 economic simulations predict that ETR will create employment.

12. Policy Implications • Of 100 simulations, 75% predicted a negligible impact on GDP.

13. Policy Implications • However, how money is redistributed makes a difference. • Social security contribution reduction: • 86% chance of increased employment. • 65% of simulations showed GDP gains • Income tax reduction: • 35% chance of increased employment. • 25% of simulations showed GDP gains

14. Policy Implications • All eight nations adopted measures to promote new clean energy technology when implementing carbon tax • E.g. Tax incentives for energy efficient technologies and electrical plants • In all cases, the economic net benefit of a carbon tax along side the other measures was preferable • Policy packages that use a portion of the tax to finance energy efficient or renewable energy improvements are more likely to result in positive employment and GDP impacts, as well as more emissions reductions/savings

15. Case Study: Denmark • 1992 - CO2 tax introduced: initially proposed at DKK 100/metric ton, but later reduced to DKK 50/metric ton • If companies undertook new environmentally-efficient technologies to heat office buildings for example, the Danish government would give a tax refund (an incentive)

16. Case Study: Denmark • Other ways tax revenues were ‘recycled’ into the economy: • A large pool of funds was set aside to assist small companies and agriculture • Reduced employers’ contributions to social security • The Danish government also reduced income taxes, particularly those in the low-income tax bracket

17. Case Study: Denmark

18. Sweden • In 1991, the first major shift in the tax base from traditional factors of pollution • New tax on carbon dioxide and sulpher dioxide • Reduced energy tax on fossil fuels • Income tax scaled back

19. Sweden • In 1993, big industry complained that the tax hurt their comparative advantage in Europe • Carbon Tax reduced • In 1997, political attitudes changed again - carbon tax raised • Now, the carbon tax is adjusted annually in line with inflation • In 2000, the scope of the carbon tax increased • More fuels included (E.g. Diesel) • Money used to finance continuous education of the work force - goal to help shift economy from primary skills (e.g. resource extraction) to secondary or tertiary skills.

20. Sweden • Money returned to individuals and firms through income tax reductions and cuts to social security contributions • Key Exemptions limit effectiveness: • Energy production • Some agriculture

21. BC Carbon Tax • Applies to 70% of fossil fuels purchased or used. • 22 types of fuel are covered. • Currently 2.41 cents per liter (for gas) • Scheduled to rise annually until 2012 when the price reaches 7.24 cents per liter. • Personal and corporate income taxes scheduled to fall incrementally over the next five years.

22. BC Carbon Tax • Affected by world oil prices • E.g. $140 a barrel vs. $38 a barrel • Certainty of price, uncertainty of emissions • Time frame to short • Total revenue neutrality limits alternatives • Regressive or progressive? • Exemptions • E.g. Exporting goods, inter-jurisdictional shipping and aircraft, aboriginals, visiting military and diplomats, aluminum and cement manufacturing

23. Conclusions • A carbon tax provides an incentive for individuals to take into account emissions when making purchases • If revenue neutral, can be used to encouraged employment • Will have negligible effect of GDP • Hard for many big businesses to adapt to • Does not provide actual limit on emissions • But is cheaper to implement than a cap-and-trade • More importantly, it provides more freedom and flexibility that a command and control system