Chapter 11. Tools for Restructuring the Economy: The Fiscal Steering Wheel
Fiscal policy is an ideal policy instrument for building an eco-economy because both taxes and subsides are widely used and work through the market. By relying primarily on these two tools to build an eco-economy, we capitalize on the market's strengths, including its inherent efficiency in allocating resources. The challenge is to use taxes and subsidies to help the market reflect not only the direct costs and benefits of economic activities but the indirect ones as well. If we use fiscal policy to encourage environmentally constructive activities and to discourage destructive ones, we can steer the economy in a sustainable direction.
Some environmental goals—such as limiting the catch in a fishery or properly disposing of nuclear waste—can be achieved only by government regulation. Edwin Clark, former senior economist with the White House Council on Environmental Quality, observes that some of the other tools discussed here, such as tradable permits, "require establishing complex regulatory frameworks, defining the permits, establishing the rules for trades, and preventing people from acting without permits." In some cases, it is simply more efficient to ban environmentally destructive activities than to try to tax them out of existence. While the advantage has shifted toward the use of tax policy in achieving environmental goals, there is still a role for regulation to play.2
A major weakness of the market is that while nature's goods—lumber, fish, or grain—move through the market, many of nature's services do not. Since there is no bill rendered for pollinating crops, controlling floods, or protecting soil from erosion, these services are often thought of as free. And because they have no apparent market value, they are often not protected. Fiscal policy can be used to compensate for this shortfall as well.
A market that tells the ecological truth will incorporate the value of ecosystem services. For example, if we buy furniture from a forest products corporation that engages in clearcutting, we pay the costs of logging and converting the logs into furniture, but not the costs of the flooding downstream. If we restructure the tax system and raise taxes on clearcutting timber so that its price reflects the cost to society of the resultant flooding, this method of harvesting timber likely would be eliminated.
Taxes designed to incorporate in their prices the environmental costs of producing goods or providing services enable the market to send the right signal. They discourage such activities as coal burning, the use of throwaway beverage containers, or cyanide gold mining. Subsidies can be used to encourage such activities as planting trees, using water more efficiently, and harnessing wind energy. Environmental taxes and subsidies also can be used to represent the interests of future generations in situations where traditional economics simply discounts the future.
The advantage of using fiscal policy to incorporate the indirect environmental cost is that economic decisions at all levels—from those made by political leaders and corporate planners to those made by individual consumers-are guided by the market. It has a pervasive influence. If it tells the ecological truth, it minimizes the information that individual decisionmakers need to make an environmentally responsible decision.
2. Edwin Clark, letter to author, 25 July 2001.
Copyright © 2001 Earth Policy Institute