The future of pollution

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If countries wish to increase employment, is it not odd that they should tax it heavily? And if they wish to cut pollution, is it not odd that they tax at a low rate some things that create pollution, while actually subsidising some heavily-polluting activities?

Ask these simple questions and the inappropriate nature of taxation systems is glaringly obvious. Yet up to now the whole idea that taxation should be reformed to promote employment and cut pollution has too often been seen either as crankiness, or yet another way for people to attack the Government. Naturally there are practical problems, as there must be whenever one contemplates a substantial change in taxation. But what ought to be a mainstream discussion about the best way of effecting change has only taken place on the political fringes.

This is not a particularly British issue, though we share with other developed countries a tax system that is singularly ill-fitted to economic needs. In some ways the UK tax system is more appropriate than that of many other countries, for our payroll taxes are low by European standards. And we are belatedly increasing taxation on energy use, by putting VAT on domestic fuel and increasing petrol duty in real terms.

But much, much more could be done. As it is, in Britain at least, environmental taxation is attacked from the left as being unfair to the poor (witness Labour's opposition to VAT on fuel) and from the right as being one more way of increasing taxation. Earlier this month a paper from the Institute of Economic Affairs actually recommended against taxation to restrain the use of fossil fuels on the grounds that if increased carbon dioxide led to global warming this might be rather a good thing.

So it was with a touch of evangelicism that environmental consultant WBMG held two seminars yesterday designed to bring the whole debate into the mainstream. In the view of one of the speakers, Ernst Ulrich von Weizsacker, director of the Wuppertal Institute, all energy prices should be increased by 5 per cent a year and the money used to cut income tax and VAT. (These ideas are further discussed in his book Earth Politics, published today by Zed Books.)

There are a host of practical problems that need much more discussion. What are the social implications that arise from the inevitable redistribution of taxes? What might the overall economic impact be, even if the shift to environmental taxation were revenue-neutral? How do countries which bring in environmental taxes stop putting their industry at a disadvantage against countries which do not? As countries come increasingly to see tax policy as a weapon to increase their national competitiveness, is it possible to get international agreement on environmental taxation?

This last point is a serious problem for as both labour and capital become more mobile, governments face the probability that their revenue will be cut away. But this is a problem for all taxation, not just for environmental taxes. Indeed taxes on energy are quite hard to avoid. People can fill up their station wagons in Calais with a year's supply of cheap booze, but they cannot fit a year's supply of fuel in their tanks. With improved telecommunications people may no longer need to live in the country where they earn their money and so cut their income tax, but they cannot avoid paying heating bills for their homes.

The great dilemma, though, is that the more successful environmental taxes are in cutting pollution, the less successful they will be in raising money. If people simply adapt to higher fuel prices by running smaller cars, then the higher taxation fails to increase revenues very much. Taxes on tobacco have reached the point where a rise in the duty may actually cut the revenue.

Despite the problems, the facts remain that taxes on pollution are the one big new area of potential revenues for the governments of the developed world. There are no others. Put up taxes on income and you cut employment. Put up taxes on consumption and people buy goods abroad. This alone will ensure that environmental taxation will come to be increasingly important. If a political coalition could be built between the greens (who want to cut pollution), the right (who want to cut income tax), and national Treasuries (which want to cut their deficits), it would be a powerful lobby indeed.