In due time market ideas of Adam Smith had revolutionary impact on human thought, just now the idea of ecological economics, first formulated in 1996 by Herman Daly in his work “ Beyond growth: economic theory of sustainable development”, paves its way for a general recognition.
According to ecological economics, economic system of humanity is regarded not as a “thing in itself”, but as an open subsystem within a larger system – the biosphere of planet. Biosphere is a system, open to solar energy stream, but closed out and balanced to circulation of substances. Mankind economy, as a subsystem of the biosphere, is open for substance and energy. The economic activities of mankind is regarded by ecological economics as the creation and consumption of wealth in the process of substance’s transformation with energy use; both substance, and energy are taken from environment. The energy and the substance come back into environment by man, but in amended form – energy of chemical bond is converted in thermal energy (unsuitable for the further use) and the substance is removed from environment in low-entropic form of biomass and mineral resource, but returns in the form of high-entropic waste.
Thus, it is clear that to determine the real value of any good it’s not enough to take into account the market demand for it (i.e. its deficit at this particular time within an open subsystem – the human economy). In such an approach, the price of goods and services should include not only the costs, directly incurred by a person at their production and consumption, but also the costs of the biosphere. It is necessary to consider its cost for the system as a whole – the cost of energy and material resources, which were spent on its production (including their deficit not only for humans, but for the biosphere), and the cost of environment “services”: the disposal of waste from its production and consumption, restoration of used resources.
“Natural capital” is the key concept of environmental economy. It is based on the classic definition of capital, as the fund, which produces a stream of useful goods and services, natural capital – a fund that produces a stream of natural resources and services. So, deposits of minerals, natural populations of industrial plants and animals, freshwater pools, fertile soils and others are the main components of natural capital. In addition to useful products-resources, natural capital offers people a range of services like restore of soil fertility, photosynthesis and oxygen regeneration, the circulation of substances in nature, self-cleaning of air and water, absorb of waste, recreation services and many others.
Income from natural capital includes natural products and environmental services, when man-made capital cannot replace natural capital. Unlike classical market economy, which implies the possibility of replacing natural capital equivalent in value of artificial capital, ecological economics considers natural and human capital only partially commute and, in most cases – mutually and indispensable.
The aim of classical market economy is the full development of production through the unlimited exploitation of natural resources (the only factor that determined the consumption of natural resources, were technological limitations), and both optimal (in terms of unlimited growth of production) in the space distribution of productive forces, capital and labor. Free market, indeed, give in fairly good fit instrument for this purpose.
The purpose of ecological economics – to ensure balanced development of human society, when the needs of present generations don’t threaten the needs of future generations.
It’s known, that classical economics wanted to avoid any restrictions on production and reach its unlimited growth. Ecological economics, on the contrary, finds it necessary to start with determining the natural limits of growth, determined by the intensity of energy flow and a period of substance circulation in the biosphere. Mankind has to set maximum limits for the economy – to determine the acceptable level of environmental load (as by the exploitation of natural resources, and through the waste and pollution). Only after the framework’s establishment begins to work normal free market mechanism – only within a predetermined limit loads on the biosphere. In this case market continues to perform its inherent functions – to ensure optimal spatial distribution of productive forces, capital efficiency, promote technological progress and growth of individual welfare and so on. But all this happens only in the “quota”, as defined by current market, and the objective possibilities of the biosphere to ensure the needs of humanity as a resource and “environmental services”. The role of free market in ecological economy can be explained by analogy with the ship: defining features of the biosphere “ship’s waterline” – a level, above which ship cannot be loaded because it will drown; the role of the market is the most rational arrangement of cargo in the ship hold, within pre-specified “maximum weight”.
Transition from so-called neoclassical economics (which is essentially the same to the economy of Adam Smith, the only armed with modern mathematical apparatus) to environmental economics – prerequisite for long survival of mankind and consequently prolonged the survival of free market. If our common ship will sink, few people will benefit from the fact of successful placing of cargo in hold …
ECO-TAX REFORM: TRANSITION TO ENVIRONMENTAL ECONOMY THROUGH MARKET MECHANISMS
At basic change of attitude (that is required by replacement of classical economics to environmental) first practical steps are always the most difficult. One of the strengths of environmental economics is the possibility of enforcing its principles with market economy instruments and mechanisms.
One of the important levers, that allow to direct vector of economic development in a certain way, without direct governmental regulation, is a tax policy.
Although initially taxes performed mostly fiscal function, in modern economy they are imposed by the regulatory and incentive functions. Through the tax policy community can signal to enterprises about preferred and undesirable trends (from the standpoint of the common welfare): by reducing taxes to stimulate the industry recognized “more socially useful”, and vice versa, by increasing the tax burden to warn the companies, whose activities harm the public interest, about requirement to change.
For the majority of people it’s quite clear and even obvious that increasing of the job’s number and increasing of wages is a positive effect for society, while the depletion of natural resources and environmental pollution is a negative phenomenon.
However, analysis of tax systems in the most countries of the world shows, that main base of taxation is identical everywhere: it is labor and salaries. Share of labor and capital taxation in total tax revenue for countries (the members of OECD) averages 62% (from 42% in Mexico to 70% in Japan and USA). However, the fate of environmental taxes, even in the widest sense of the concept (that include both fees and fines for pollution, and rent for use of resources), averages 7% (from 3,5% in the USA and 3,9% in Canada to 10,5% in Denmark and 15% in Turkey).
Thus, the current tax system in the most world’s countries is formed on the basis of an outdated worldview, when natural capital is considered as “free”. It’s obvious that such a tax structure promotes the exhaustion of natural resources and environmental pollution. However, this tax structure encourages the employers to save as much as possible at the opening of new jobs and wages, promotes reducing of job’s number, as a result – unemployment.
There is paradoxical situation: tax policy promotes phenomena, which are considered by society as dangerous and harmful, and inhibits the processes, that society considers useful. Such illogic of traditional taxation structure has led to the development of the concept of “eco-tax reform” in the countries of European Union. The essence of this reform is simple and clear: shifting of the tax burden from labor and capital to the stream of resources.
Double dividend is one of the greatest strengths of eco-tax reform. First, consumption taxation is a strong incentive to reduce consumption; taxation of resources’ stream will promote new, less resource intensive, technologies, implementation of energy efficiency measures, pollution prevention and many other things. These “environmental” benefits (which are called “green dividend”) are obvious. However, contrary to popular idea among businessmen, in the case of eco-tax reform costs “on the environment” doesn’t become an additional burden that is administratively “hanging” on the industrial sector. Since the growth of “environmental” taxes accompanied by a parallel decrease in taxes on labor and capital, generally the employer has the same cost as before, but gets an incentive to open new jobs and increase salaries. The second, social eco-tax dividend from reform has not less social value than benefits for the environment.
For the purpose of reduction of political opposition to reform, in the process of eco-tax planning they suggest to follow so-called “fiscal neutrality”, that is new green taxes implementation should be compensated by fully tax reduction on labor, and total sum of tax revenues to the state budget should remain unchanged.
ECO-TAX REFORM: EXPERIENCE OF THE EUROPEAN UNION
Currently eco-tax reform was officially completed in nine Western European countries (Denmark, Italy, Netherlands, Germany, Norway, Britain, Switzerland, Sweden and Finland). Belgium and Austria have not formally announced the implementation of economic and labor reforms, but also actually change the tax system in favor of increasing eco-taxes and reducing taxation on labor.
The scale of received dividends is quite proportional to the scale of reforms (which is very different, depending on the strength of political resistance to reform from the large fuel- and energy companies and other not interested in the reform groups; thus, in Italy as a result of the reform only 0,1% of the overall tax burden was redistributed from labor on pollution and the resources’ stream; while Denmark has reallocated “on the environment” at once 6% of the total amount of taxes).
The most notable was the experience of Germany, where eco-tax reform had brought to the state budget over 20 billion of “green taxes”. According to the principle of “fiscal neutrality” 90% of these funds were used for reducing taxes on employment and personal income, as a result – creation of 250 000 new jobs. And this – together with the direct environmental consequences of reform: reducing of carbon dioxide emissions to 2,4% (on the scale of German economy it reaches millions of tons annually), and the growing demand for environmentally friendly technologies (thus, only selling of cars on gas fuel increased by 10%).
The consequences of the reform in Denmark were reducing of the marginal tax rate on income by10%, and marked reduction of deductions from salaries to the Pension fund. During this implementation new “green taxes” (primarily taxation of emissions of carbon dioxide and sulfur oxides) compensated not only state losses from reduced tax revenues from income tax, but additionally brought more than 6 billion DKK annually.
The experience of Denmark is also interesting, because the state refunds to 30% of obtained “green” taxes. But these funds were returned only in the form of grants for implementing of energy- and resource-saving technologies, and it was an additional incentive for owners to implement environmentally friendly technologies. This practice also has been successfully introduced in the Netherlands. Great Britain was the first who introduced the tax on landfill and waste disposal and lowered the tax rate of contributions to the social insurance funds by received funds.
In general, all eleven countries carried redistribution of the tax burden, but in different scale. It was implemented a tax on consumption, especially energy, on pollution (especially emissions of substances that affect the climate), the disposal and dumping. In all the countries received funds were used to offset tax cuts to labor, first of all – taxes on income and contributions to pension funds and insurance funds. In the most of countries the part of funds was returned to the entrepreneurs in the form of target grants for energy and resource conservation. In most cases it was possible not only to comply with the principle of
fiscal neutrality, but even to increase total revenues, easing tax burden on incomes and stimulating new jobs’ creation. Eco-tax reform has proved its efficiency in practice: it was received both environmental, and social dividend.
WHO PAYS TAXES IN UKRAINE AND FOR WHAT: STIMULATION OF SQUANDERING, UNEMPLOYMENT AND “SHADOW” ECONOMY
Meanwhile, the tax system of Ukraine is still based on outdated approaches: more than 80% of revenues of the consolidated budget have only four major taxes – income tax, personal income tax, value added tax and excise tax. Apparently, the most important of them are taxes on labor and capital.
In Ukraine the tax charge on employee’s wages reaches 39%. Every day we face with the result of this fact – salaries in “envelopes”. Introducing overwhelming payroll taxes, the state damages society in double: drives significant part of payroll in the informal sector (reducing the real tax base and real income to the budget) and encourages employers to cut jobs.
However, the share of environmental taxes in the total tax revenue in Ukraine is only 3-4%. In fact, over 90% of this little sum is the royalties of mining companies for mineral resources’ mining. Actually, the “green” taxes, that is, payment for pollution, including fines, charges and energy charges for the use of expendable resources, in different years is only 0,3-0,5% of the revenues of the consolidated budget. In fact, such a tax structure encourages entrepreneurs to receive enormous profits by increasing exploitation of natural resources (as the stream of resources is not actually taxed), while minimizing salaries. There is a strange redistribution: losses, sustained by energy- and material-intensive productions are not covered by enterprises-polluters, and distributed as a burden on the society, while the profits, derived from nature destruction, settle in the pockets of harmful production owners. Actually, one of the tasks of eco-tax reform is to correct this obvious injustice through the so-called “internalization of externalities”, i.e. inclusion of the cost of damaged environment restoration (which is a burden on the shoulders of all society) directly on the value of goods of companies-polluters.
It seems obvious that in Ukraine the need of eco-tax reform is even more urgent than in EU countries. Meanwhile, they have already implemented this reform, while the votes of Ukrainian “green” economists and politicians still remain the voice in the desert…
WHAT ADVANTAGES WILL BE GIVEN TO UKRAINE BY REFORM’S IMPLEMENTATION:
WHO WILL WIN AND WHO WILL PAY FOR IT?
The main objection to eco-tax reform in Ukraine is that the implementation of taxation on pollution and exploitation of natural resources will blow to the main budget “donors” – the heavy industry and the chemical industry. In fact, the share of so-called “core industries” – electricity, steel and fuel production, is over 45% in the economic structure of Ukraine, and any “encroachment” on their profits is perceived almost as undermining of the country’s economic fundamentals.
However, having serious consideration of this issue, we have to note, that this structure of production is abnormal. “Basic” areas are so well named, because they have to be the basis for the production of consumer products – in light industry, agricultural and food industry, the technology industries and others. In modern industrialized countries the share of “basic” industries is 5-10%, everything else is a dynamic superstructure above them. Even in the structure of the Ukrainian SSR the share of basic areas was only 25%. Deformation of the national economy structure was performed in the nineties, when light industry and mechanical engineering of Ukraine came in deep decline. In that time “basic” areas managed to survive thanks to their export potential, and now export of production supports them to be “afloat”. Thus, the share of “basic industries” in Ukrainian export is over 60%. It easy to understand, that this structure of economy differs a little from the raw economics of the “third world”, but in this case not “raw” stuff is exported, but the products of the primary, the most primitive process.
Reorganization of the national economy is the long-standing need in Ukraine.
We need to increase the share of mechanical engineering, to develop its own light manufacturing, high tech and intellectual production. But public interest in the development of these industries comes into conflict with super profit export-oriented basic industries.
On what is this super-profit based? First of all, it is based on excessive and unpunished exploitation of natural resources and “free” environmental services. The researches spent by the experts of Professional Council on Productive Forces of Ukraine showed, that profit of Ukrainian enterprises is proportional to their consumption of energy and resources. Such industries as mining, petro-chemical and metallurgical have the best profitability indexes, and at the same time they are the most energy- and resources-intensive. But as for the number of jobs per unit of production, these branches take the last place. In the structure of “basic” industries salaries are very small component of the total costs (from 2% to 9%), in contrast to the machinery and light industry (10-20%), especially to the IT-industry and other high-tech industries (up to 85%).
Throughout the 1990’-s – 2000’s in Ukraine it was observed the increase of material-intensive branches at the expense of reduction of the share of labor-consuming branches. Thus, it was observed the growing of unemployment and increasing of energy cost of manufactured goods, along with increasing of pressure on the environment. Today in Ukraine the average energy intensity of GDP is 0,89 kg of standard fuel per 1 dollar of GDP, while the world’s average index is 0,39kg of standard fuel per 1 dollar of GDP. It means, that our economy is more than in twice prodigal than the world’s one, and this imbalance continues to grow.
Obviously, that extremely low rates of environmental taxes and payment for the resources’ use, promote the super-profits of “basic” industries and deep the deformation of the production’s structure, which was created in 1990-ies. At the same time the excessive taxation of wages reduces the competitive ability and hinders to development of labor-consuming industries.
Thus, eco-tax reform in Ukrainian conditions can become not only an instrument for solving of variety of environmental problems, but also facilitate the reorganization of the national economy by reducing the tax burden on labor-intensive branches of industry through the taxation of material-intensive and energy-intensive industries.
There is a question: whether our budget will fail in the “pit” for as long as labor-intensive branches have not time to develop enough yet, and basic economic branches will appear under the strengthened tax pressure? Out of this situation is to carry the eco-tax reform in stages. Taxation of the stream of resources should rise gradually each year for 10 years, but all marginal tax rates should be announced in advance. So, the enterprises of basic economic branches will have time for adaptation to new conditions, having the prevention of the future increase of expenses. Proportionally to eco-taxes’ increasing, the rates of deductions from payment fund and citizens’ income should go down annually.
Another mechanism for softening of the transition to the new taxation – returning to the enterprises of a part of paid eco-taxes in the form of state grants for implementation of energy- and resources- saving technologies. No less serious problem for Ukraine, than the reorganization of production, is population aging. One of the consequences of aging is reduction of able-bodied population, as a result – reduction of filling of a Pension fund. This is an objective problem and to solve it within existing solidary system of pensions’ provision, which is based on social payments from a Wages fund, will become increasingly difficult.
Meanwhile, the consumption of resources, especially energy, will always be significant. Taxation of this stream of resources with sending of received income to the Pension fund, would provide the pension system with a reliable source of income, independent of demographics, yet would significantly reduce the payments to the Pension fund from the Wages fund, which are excessive and brake new job creation.
Finally, another feature of eco-taxes – their transparency- has special importance in Ukraine. Consumption of resources can be easily controlled by simple devices, therefore it will be much harder to avoid eco-taxes, than to avoid income taxation. In the country, where “shadow” economy, by some estimates, is comparable in scale with the “official” and where there is a whole industry of tax evasion, opportunity to ensure you receiving of eco-tax (along with the ability to accurately forecast revenue from this source) can be a powerful argument for eco-tax reform, especially at the time, when issue of national budget filling is very serious.
THE NEW TAX CODE
Among the positive innovations of the new draft code is introduction of tax on carbon dioxide emissions. Carbon tax has already been tested in many countries, and found its effectiveness as a powerful incentive to reduce emissions, i.e. as a tool to struggle with climate change. Also, this tax in all countries, where it was implemented, proved itself like a serious source of state budget, because CO2 is accompanied by burning of any fuel. Money, obtained from the carbon tax, allowed to reduce the rate of pension contributions in some EU countries. In Ukrainian conditions decrease of rates in pension gathering is very actual (topical).
However, a simple calculation shows that at this rate the state receives for “carbon” 60-70 million USD per year, i.e. not more than 0,01-0,02% of GDP. At this scale it is difficult to talk about regulatory or catalytic role of the said tax.
In industrialized nations they consider that carbon tax rate of 40 dollars per ton of CO2 is reasonable. However, the introduction of such a significant rate at once would be a shock to many industries, that’s why it’s planned to raise the rates of carbon tax in phases by 2030.
The calculations of Professional Council on Productive forces of Ukraine (Veklych O.O., Maslyukivska A. P.) convincingly argue that under our conditions the carbon tax is more or less effective only at the initial tax rate of 1 USD per ton of CO2 in 2011, with annual rising of the rate by 90% in 2012-2020 and further growth of 5 % annually during 2020-2030. With such a tax rate carbon tax will be 0,7-0,8 % of GDP in 2011, in 2015 – up to 2% of GDP, in 2020 – from 7 to 14% of GDP, in 2030 – up to 18% of GDP. Mentioned figures strictly convince, that the carbon tax in Ukraine can become a source of state budget (including pension funds) and an important lever of influence on production towards the implementation of clean technologies. However – not at those rates, which are in the draft Code.
As to other climatic agents, such as sulfur oxides, new Code does not provide their taxation, as taxation is not provided for water consumption, the consumption of all fossil fuel, electric power consumption.
WITH WHAT TO BEGIN?
Nevertheless, the adoption of new Tax Code is the right time for implementation in Ukraine at least of some elements of eco-tax reform. The first step would be to increase rates of carbon tax for the above mechanism (from 1 USD in 2011 with annual rate increase by 90% by 2020 and then by 5% in 2020-2030).
Similarly, it is necessary to raise significantly taxation rates on emissions of harmful substances and waste disposal. As well as with the carbon tax, already now it is necessary to provide rates about 5 times higher than suggested in the bill, and to predict a further annual increase of these rates by 50%.Then these taxes will become a real impetus for the introduction of clean production.
It is necessary to complete the list of “eco-taxes” with taxes on consumption of water, electricity and all fossil fuels. These taxes are applied on a progressive scale, and also should grow annually over the next 10 years.
Finally, it is necessary to provide annual reduction of the taxation of enterprises’ profit, personal income and added value proportionally to the increasing of “eco-taxes”.
We go to the European Union of tomorrow’s day, but not yesterday’s day. We need to catch up with European neighbors have already done, and to predict our way to that Europe, which will be in 2020-2030. Eco-tax reform is such a way, and we can start it today, in the process of completing of the draft Tax Code.
The concept is prepared by experts of Risk Reduction Foundation.
http://www.greenparty.ua/en/news/news_23694.html
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