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Reconciling economic and environmental goals.

Faster economic progress is compatible with better environmental quality, as the Clinton-Gore campaign asserted. But achieving both these objectives will require the new administration to resolve the country's economic problems with policies that promote rather than sacrifice environmental goals. The new administration has pledged to raise investment, improve education and health care, reduce the deficit, and ease the economic burden on ordinary people. Doing all of this will require raising additional government revenues, but fairly and in ways that don't depress the economy.

Taxes may be inevitable, but there's nothing inevitable about what we tax. We could reduce the burden of the tax system by making more use of so-called "green fees"--charges on pollution and other kinds of environmentally damaging activities. Because most people don't think about the damages such activities impose on others, environmental damage is excessive. The economy suffers hundreds of billions of dollars of losses each year from illness, natural-resource damage, and higher industrial costs as the result of pollution, congestion, and inefficient resource use. Green fees can address many of these problems more efficiently than command-and-control regulations and simultaneously raise tens of billions in additional government revenues.

Shifting the tax burden in this way promises a double economic benefit. At present, nearly 90 percent of federal revenues comes from taxes on payrolls, incomes, and profits. By weighing so heavily on everyone who works, saves, invests, or runs a successful business, these taxes penalize the very activities that make our economy productive. It would be far preferable to inflict a penalty on those who cost the economy money through their environmentally harmful actions or wasteful use of energy and natural resources.

Taxes on income and profit sap the economy in many ways. By lowering take-home pay, income taxes discourage some workers, who either put in fewer hours or stop working entirely. Payroll taxes depress job creation by prompting employers to find cheaper alternatives to hiring new workers, such as automating or moving operations overseas. Taxes on income from investments induce people to seek tax shelters or to save less. Tax shelters divert capital from more productive investments, and lower savings rates diminish capital formation. For these reasons, each additional dollar in government revenue raised through higher income-tax rates lowers private income by $1.40 to $1.60.

The logic of environmental charges is powerful for state and local governments as well. The recession has forced them to cut spending and raise taxes, but tax increases spell double trouble for their economies. Besides discouraging work and investment, as federal taxes do, state and local tax hikes trigger the flight of labor and capital to areas with lower taxes. Raising revenues through measures that improve local environmental quality--while reducing the government's expenses for environmental cleanup and enforcement of regulations--makes more sense than raising taxes that drive business and workers away. So far, although 43 states use environmental charges to some extent, their potential has barely been tapped.

What's more, in many cases, such a tax shift can protect the environment better and more cheaply than the current command-and-control system can. Studies have shown that the current bill for environmental protection--over $120 billion per year--could be reduced by one-third to one-half if more effective market-based policies were used. Regulations don't work if too many people are contributing to a problem or if conditions are changing so fast that regulation can't keep up. Traffic, trash, and carbon dioxide emissions are three such problems, and environmental charges can help solve them.

Our analysis of green fees for these and other environmental problems shows that the U.S. economy could shift as much as $100 billion to $150 billion in federal, state, and local revenues away from "goods" such as income and investment and onto these "bads." As a result, the economy would reap dividends of $50 billion to $80 billion per year, in the form of reduced environmental damage and greater economic productivity.

Cutting trash down to size

Landfills in many U.S. cities are filling up with trash or closing down for environmental reasons. The pace of new landfill construction has slowed as environmental standards and community resistance have toughened. As a result, landfill-disposal costs are dramatically higher than a decade ago.

Because trash disposal is funded out of property taxes in most communities, it costs households nothing to put out an extra trash bag, even though the community may be paying more than $100 per ton to deal with solid waste. Thus, people have little reason to care how much they discard and communities are forced to spend too much on waste services.

This problem can be corrected by charging households the full incremental costs of waste disposal through a "pay by the bag" system. Roughly 100 communities already charge households for the amount of trash they discard. High Bridge, New Jersey, has seen the volume of collected trash fall by 25 percent since January 1988 when a pay-per-bag program was put in place. A similar system in Perkasie, Pennsylvania, spurred a 50 percent decrease in trash and a 30 percent increase in recycling. In Seattle, solid-waste generation fell by about 20 percent once pricing and recycling programs were implemented.

Several studies, based on experience in communities with household charges in place, have shown that collection charges tend to reduce the volume of household waste. A typical community that raised its collection fee per 32-gallon bag from zero to $1.50 would reduce solid waste volume by 18 percent, or by about 30 percent if it also added a curbside recycling program. For this combination program, the savings from lower landfill costs would more than offset the costs of recycling programs. Economic models suggest that if such programs were adopted nationwide in communities where landfill costs are moderate or high, they would generate revenues of $6.3 billion per year and net savings of $432 million.

Unclogging traffic

It's obvious to everyone who drives that traffic is getting worse all the time. Two growth curves explain at a glance why this is so: Between 1970 and 1989, the number of miles Americans drive per year grew by 90 percent, while urban road capacity grew by less than 4 percent. Stop-and-go conditions now prevail in nearly 70 percent of the nation's rush-hour traffic--a 30 percent increase since 1983. In Los Angeles, perhaps the worst case, a 10-mile trip that took 20 minutes just two years ago now takes 30 to 35 minutes. A study done at Texas A&M University estimated that the cost of time and fuel wasted due to traffic congestion in Los Angeles came to almost $6 billion in 1986--$3 a day for every vehicle on the road. According to the Department of Transportation, Americans are already wasting 8 billion hours a year stuck in traffic. If current trends continue, there's no relief in sight. But urban areas could hold the line on gridlock by enacting "congestion tolls," which would encourage driving at off-peak times and discourage people from making unnecessary trips, while generating nearly $100 billion in state or local revenues.

Again, the principle is to make the people who do the damage pay for it. As it stands, they don't even see it. Drivers entering a crowded highway may fume about how long it takes to get where they're going, but they ignore the fact that their cars delay everyone else and make accidents likelier. Tolls based on what each added car costs all the other drivers on a crowded highway would allocate road capacity more efficiently.

Our analysis, based on a theoretical model originally developed at the Department of Transportation that we brought up to date with 1989 highway statistics, shows that tolls set to reflect the costs of traffic delays would range from zero to $2.10 for a typical 10-mile trip and reduce road use at peak periods by 11 percent on the busiest highways. Such tolls would generate annual revenues of $44 billion and net savings exceeding $4 billion in reduced travel time, over and above what it costs drivers to adjust their travel schedules. Of course, wasted time isn't the only loss caused by heavy traffic. To cover all costs, including road accidents, which now cost the nation almost $275 billion per year, peak-period tolls on the busiest highways would be about $3.60 for a typical 10-mile trip. At this rate, congestion tolls would reduce peak-period road use by 22 percent, generating revenues of $98 billion and savings of $11 billion per year.

Fortunately, congestion tolls can be implemented cheaply and efficiently using off-the-shelf technologies. Hong Kong has already tried one all-but-foolproof system as a demonstration project. Electronic sensors embedded in toll roads record data from an electronic number plate, a device about the size of a cassette tape installed on the underside of cars. The sensors relay vehicle identification to roadside devices linked to a central computer, which then computes charges for each vehicle and periodically bills the owner. To deter cheaters, television cameras record the license plate numbers of cars without electronic number plates as they pass over the sensors. Ultimately, Hong Kong rejected the system, not because it didn't work but because of the fear that the Chinese government would misuse the system's tracking abilities when it takes over Hong Kong in 1997.

Cities such as New Orleans, San Diego, Detroit, Philadelphia, Dallas, and New York City are already using high-tech systems to collect regular tolls. In most such systems, electronic toll stations transmit signals to "smart cards" in the vehicle, deducting a certain amount of the card's prepaid toll charges. Devices similar to supermarket bar-code scanners read the cards of passing cars and record a vehicle's point of entry to and exit from the highway. With a few modifications, the cards would work just as well for congestion tolls. The card can be debited directly at rates depending on trip length, route, and time of travel. Once the card's credit is exhausted, its owner could no longer drive on toll roads without tripping an alarm or having license plates picked up by television cameras.

We could, of course, reduce peak traffic by the same amount by building more roads, at an estimated cost of nearly $50 billion over the next six years, but that would sap resources perhaps better spent on health care, education, or other pressing needs. Besides saving that $50 billion, congestion tolls would generate the added billions needed to pay for upkeep of our existing transportation infrastructure. A 1991 Department of Transportation study rates 643,000 of the 1.2 million miles of U.S. highways as either "poor" or "low fair." Worse yet, the study ranks 226,000 of our nation's 577,000 bridges as either "structurally deficient" or "functionally obsolete." Earmarking part of congestion-toll revenues for the repair of aging roads and bridges would help

make the case for the new charges.

Slowing climate change

Carbon dioxide is the leading greenhouse gas, and the United States is far and away the leading producer. Now that the Senate has ratified the international climate treaty agreeing to reduce greenhouse-gas emissions, carbon dioxide is a prime target for reductions. Again, using environmental charges to deal with the problem promises economic as well as environmental benefits. Potential environmental damages from global warming include coastal erosion from sea-level rise and the destruction of wetlands and other ecosystems. If the worst forecasts come true, the expense of building coastal defenses and new water-supply and drainage systems, meeting new energy demands, and making good the loss of agricultural and fisheries harvests would be enormous. By holding the line on carbon emissions and thus curbing the eventual magnitude of damage, we can avoid these expenses.

An efficient way to reduce emissions is to tax fossil fuels, with rates pegged to carbon content, which means that coal, oil, and natural gas would be taxed at different rates. A carbon tax would provide market incentives for all users to find the best mix of fossil and nonfossil fuels and energy conservation for their particular circumstances, avoiding the inefficiencies of regulatory mandates.

How big should a carbon tax be? Optimally, the tax rate would be set so that damages averted by eliminating the last ton of carbon removed from the atmosphere equals the economic cost of doing so. But this point is hard to find, because the relative risks of emissions and warming are neither well understood nor easy to cost out.

Alternatively, the tax level could be set to achieve some preselected level of carbon dioxide emissions. For example, one proposal in the U.S. Congress would phase in a carbon tax of about $30 per ton over five years with the goal of stabilizing U.S. emissions at 1990 levels by the year 2000, generating revenues of $36 billion by the fifth year. This tax would fall somewhat more heavily on lower-income households, but offsetting cuts in income and payroll taxes could make the package equitable. Since a carbon tax's main impact would be to reduce the growth of coal consumption, measures may also be needed to offset the impacts on such states as West Virginia, Kentucky, and Wyoming, where coal production is concentrated.

Most macroeconomic models suggest that the economic consequences of such a tax would be either fairly small losses or outright gains, depending on how the tax revenues were recycled into the economy through other tax cuts. But these models ignore what it would cost to defend against the adverse changes that global warming could usher in, and they also overlook such other carbon-tax benefits as fewer oil imports and less air pollution.

To avoid detrimental impacts on trade and competitiveness, carbon-tax strategies should be weighed in an international context. This is why the European Commission's proposed Community-wide carbon tax is contingent on adoption of similar taxes in the United States and the other major industrialized countries. But even adopting a carbon tax unilaterally, as several European countries have done, would benefit the U.S. economy if coupled with tax reform. Importing less oil would improve our balance of payments, and exempting key industrial sectors would allay concerns about competitiveness. In the long run, the key to competitiveness for any nation is improving the productivity of its work force, which requires, among other things, adequate capital investment. Coupling a carbon tax with broader tax reforms could create incentives for such investments.

Other green fees

Environmental charges could be deployed against any number of other targets as well, from toxic wastes to land degradation. Among the possibilities are effluent charges on toxic substances and vehicle emissions, recreation fees for use of the national forests and public lands, and product charges on ozone-depleting substances and agricultural chemicals. Another tack would be to charge fees that are closer to market value for mining, logging, or grazing livestock on public lands. Our estimate is that a reasonable package of green fees based on these options would reduce a wide range of damaging activities while raising over $40 billion in revenues.

Some states and cities are already experimenting with environmental charges of one kind or another. California has enacted the nation's highest permit fees for air pollution, which cost the biggest polluters $2 million or more per year. In Maryland, developers are charged from $11,500 to $58,000 per acre for damaging or destroying wetlands, and the state uses the fees to buy other wetlands and restore or enhance them. Rhode Island taxes motor oil and uses the revenues to pay for used oil collection. Ten states require deposit fees on car batteries. All but four states have imposed taxes on fertilizers, using the revenues to help pay for environmental protection and research. In the two years since Oregon mandated deposits on soda and beer containers, roadside litter has decreased by about 80 percent.

Salutary as these efforts are, most existing environmental charges aim at raising revenue, not deterring pollution. Pegging rates to the actual costs of environmental damages would accomplish both ends. In sum, it's clear that restructuring our revenue system to provide a more rational framework of market incentives can simultaneously improve environmental quality and make the U.S. economy much more competitive.

Would a "green" tax shift be politically feasible? The concept is novel in the United States, where paying for things that have customarily been free goes against the grain. Even in these tax-averse times, though, many are coming to see that government cannot deal with our country's urgent social problems, much less reduce the deficit, without more revenue. When asked whether they favor higher taxes, most Americans answer with a resounding no. But if the question were whether they would rather be taxed on their energy use and their trash generation than on their earnings and investments, the answer would very likely be yes.

At present, the only way most of us can pay less in taxes is to earn less. Environmental charges would give us the option of reducing our tax bills by acting on our principles--by saving energy, recycling, or bicycling to work, for instance. In that scenario, virtue is its own, but not its only, reward.

Robert Repetto is a vice president and senior economist at the World Resources Institute in Washington, D.C. Roger C. Dower is a senior associate and director of WRI's Climate, Energy, and Pollution program. This article is adapted from the recent WRI report, Green Fees: How a Tax Shift Can Work for the Environment and the Economy.
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Title Annotation:environmental charges
Author:Repetto, Robert; Dower, Roger C.
Publication:Issues in Science and Technology
Date:Dec 22, 1992
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