“Cap-and-trade” permitting schemes and taxes on greenhouse-gas (GHG) emissions are widely recognized as key to addressing climate change, because they establish a visible price for emissions. But the prospect of new taxes or new regulatory limits will seem a depressing backward step to many in the private sector.
Entrepreneurs can be excused for suspecting that the costs of doing business are about to rise again thanks to the current alarm over global climate change. The fear may be justified, but if all parties – business leaders, alarmed voters and government – respond intelligently, climate change could be the catalyst for a substantial improvement in the way governments raise revenue. “Cap-and-trade” permitting schemes and taxes on greenhouse-gas (GHG) emissions are widely recognized as key to addressing climate change, because they establish a visible price for emissions. But the prospect of new taxes or new regulatory limits will seem a depressing backward step to many in the private sector, who were looking forward to a bit more tax relief and who certainly don’t need more red tape to deal with. Yet addressing climate change by taxing GHG emissions and access to natural resources could, paradoxically, actually lighten the present income-tax burden on many productive taxpayers – businesses and individuals alike. If government shifted a greater part of taxation onto GHG emissions – and onto above-average ecological footprints in general – it could reduce or eliminate a good deal of our present tax burden. Efficiency gains from reduced personal and corporate taxes could be substantial and would offset many, if not all, of the newly recognized costs of reducing GHGs. Carbon taxes will certainly hurt the bottom lines of major emitters initially, but the gradual, steady introduction of tradable permits and carbon taxes would induce vital, valuable technological changes across the whole economy. Increased taxes for the heaviest GHG emitters and increased levies for access to public resources would be a reversal of our current tax system. Income tax, GST, PST and corporate and municipal property taxes are taxes on added value; they tax success. Why discourage the adding of value? Pollution, GHG emissions and depletion of difficult-to-replace resources are what need to be discouraged. Indirect taxes such as the GST and PST are ecologically superior to income tax in one sense: they tax consumption. But much better yet are taxes on the materials to which the value is added. More stringent taxation on the depletion, and particularly the abuse, of our natural resources would allow for significant reductions in corporate and personal income taxes and make it much less necessary to tax consumption as well. Most B.C. businesses would benefit from this tax-shifting, even though some firms wouldn’t see the benefit right away. If these tax-shifting policies were introduced gradually, sufficient time will be provided for the laggards to adjust. Much of our natural “capital” – assets such as clean fresh water, standing timber or pristine marine inlets – have no existing private-sector owner who is motivated to hold out for the highest bidder. The idea that natural-capital assets should be valued on any balance sheet is itself novel, so their undeveloped value tends to be heavily discounted. As a result, when they are developed to produce cash flow, the net benefits typically appear much larger than they really are. But is development of that kind necessarily good for the economy? If a natural-capital asset can be utilized non-destructively to create new value in private hands, it might be (think eco-tourism). But if the asset is simply undervalued and gets irreversibly converted to cash by a short-sighted new private-sector owner, the net long-term cost to the economy can be substantial (think clear-cutting). Present accounting systems do a poor job of measuring inventories of natural-capital assets or the costs of depleting them. But the vigorous new fields of ecological economics and environmental accounting are showing encouraging signs that this can be fixed. The late Nobel Prize-winning economist Milton Friedman was reputedly fond of saying that “there is no such thing as a free lunch.” There is a huge global opportunity cost to irreversibly depleting natural capital, even if it is hard to estimate its magnitude precisely. So let’s better recognize the value of our stock of natural capital and not tax people and the work they do so heavily. We can tax the rocks and trees (or at least the uprooting of them) instead. Michael Barkusky is an economist and CGA, and is secretary-treasurer of the Canadian Society for Ecological Economics. These views don’t necessarily represent CANSEE policy. Comment on this Big Idea using the comment form at the end of this article. Email us at firstname.lastname@example.org if you have a Big Idea that you would like to share with us.