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Tax Reform


Tax Reform: Key to Environmental Change

Reforming the tax system, by shifting taxes to reward positive environmental practices and punish negative ones is a key to large-scale environmental change.

In recent years, Saskatchewan's government has taken a number of small steps in this area, such as a PST rebate on energy efficient appliances; introducing a number of environmental charges to cover the costs of recycling products such as oil, tires and bottles; lowered taxes on ethanol blended fuels.

So far, the scale of environmental "tax shifting" worldwide has been small-about 3 percent of tax revenues can be described as environmentally related. But evidence shows that using taxes to change environmental practices is effective and many countries are beginning to recognize the power of tax restructuring to reach environmental goals.

In most jurisdictions, environmental taxes are "revenue neutral". They do not take more money from taxpayers pockets, in total; instead, they shift taxes from one area to another. For example, Germany, a leader in tax shifting, has implemented environmental tax reform in several stages by lowering income tax and raising energy taxes. In 1999, the country increased taxes on gasoline, heating oils, and natural gas, and adopted a new tax on electricity. The revenue was used to decrease employer and employee contributions to pension funds.

Environmental taxes are consistent with market theories. Currently, governments provide about $600 billion in subsidies for environmentally destructive practices, including many energy, forestry, and agricultural subsidies. At the same time, prices for things like energy, paper, lumber, and agricultural products, do not reflect the environmental costs incurred in their production and use. Tax shifting can help to eliminate these market distortions, by reducing subsidies and making prices reflect environmental realities.

One of the main objections to environmental tax shifting is the fear that it may affect the international competitiveness of industry. However, OECD data show that where tax shifting has been used it has not affected competitiveness; most tax shifting involves households and transportation, with exemptions in place where tax shifts might hurt industrial activities.

Instead of being harmful to industry, intelligently implemented tax shifting can have positive economic benefit. One example is the emergence of a world-leading wind turbine industry in Denmark. Denmark now produces a significant portion of its power using wind energy, and also exports its technology around the world. The success of this industry is one result of increased Danish taxes on fossil fuels and electricity, which are among the highest in the world. These measures have also spurred sales of energy-efficient appliances and encouraged other energy-saving behavior.

OECD statistics show that European countries have been the most enthusiastic in adopting environmental tax reform. Denmark now gets five percent of its revenues this way. Canada and the US lag behind; Canada gets about 1.5 percent and the US less than 1 percent of revenues from such taxes. In both Canada and the US, the percentage of revenues from environmental taxes is actually dropping.

Building acceptance is a key condition for effective green tax reforms. OECD recommends that countries pursue several complementary efforts, including identifying-simply and clearly-the objectives behind an environmentally related tax; disseminating information; and allowing sufficient time for public hearings or other forms of consultation. This could include the creation of "green tax commissions." A reasonable period for consultation enables public and private stakeholder groups to influence policy and the government to explain wider policy objectives behind contemplated reforms. Such involvement can lend public legitimacy and support to environmental efforts.

The goal of tax restructuring is to get the market to tell the ecological truth, according to the Earth Policy Institute. Thus far, tax shifts have been limited in scope and have produced positive, if modest, results. Creation of an eco-economy calls for tax shifts on a broader scale, and of much larger magnitude, in order for prices to incorporate environmental costs and to produce the requisite changes in individual and collective behavior.

Additional tax measures that could be taken by Saskatchewan to facilitate a greener economy include: