Comments on: Bold Tax Reform Idea – Footprint Tax

By: Dave On Fire

Dave On Fire — Sat, 27 Jan 2007 21:26:49 +0000

While a tax on the footprint is too cumbersome to implement, it is certainly possible and desirable to directly tax the behaviours that contribute to a large footprint. With carbon markets too, we are only saying that the current implementation is fatally flawed because it is incomplete. A complete carbon market could do wonders.

There are forms of behavior that we know contribute to global warming. We can limit these specific forms of behaviour quite effectively through market-forces. With carbon emissions, for example, we set a target for the level of carbon we want to be emitted this year. We then produce carbon “shares” that add up to this target and distribute them as we see fit. Then, in order to emit a ton of carbon, a factory must own carbon shares that add up to a ton. If it doesn’t have these shares, it can buy them. Furthermore, if someone can demonstrate that they can take a ton of carbon out of the atmosphere, they are granted a ton of carbon shares, which they can sell. The trading of these shares allows effective carbon emissions regulation within a free economy, and controlling these emissions at source means there is no need to charge consumers – the market will take care of it.

The trading approach could work for other types of quantifiable behaviour besides carbon emissions, but there are many types of environmentally and socially damaging corporate behaviour that are not easily quantifiable. The employee healthcare is not really an example of this – the government could simply impose a minimum level of employee healthcare – but imagine that the activities of a company destroys an environment upon which people depend, for example by draining or poisoning the water table.

It is very hard to quantify the damage of this kind of behaviour, beyond the scale of tax regulations. Rather, it should be a matter for the courts. If a system of laws is drawn up that allows citizens to accuse companies of such behaviour and sue for damages, then juries could decide this based on evidence from both sides. The threat of costly lawsuits acts as a market-based incentive, but it is possible to go further, by making some crimes punishable by jail sentences. There is a widespread reluctance to punish white-collar crime in this way, but it could work.

Of course, to be truly effective corporate environmental crimes need, like political and military crimes against humanity, to be legislated and enforced globally, but there is no need why those countries which are able shouldn’t lead the way. Indeed, there has been serious discussion in the EU for a while about legislating against “crimes against the planet”, and I see no reason why this could not be complemented with laws on “crimes against society”. I think that this is the best way to deal with specific and complex corporation actions, as it allows each case to be judged in detail and both sides – the corporation and the aggreived community – to present all the evidence and ensure it is considered.

By: vijtable

vijtable — Sat, 27 Jan 2007 20:19:49 +0000

Okay… So footprint tax is too cumbersome to implement, and carbon markets suffer as a weak check on environmental footprint. I’m trying to figure out ho we can actually start orienting the economy to be based on impact rather than purely income.

How’s this? A two-fold approach…
1) There is a social impact from companies not paying their employees enough, or providing good enough health insurance benefits. How about assessing a tax on these impacts? For instance Wal-Mart is taxed a certain amount based on the expense to society each employee (working more than 20 hours) has to society in terms of government-funded safety nets?
2) Assessing a tax on general categories of consumer goods based on the source material of those goods? So, if something is a petroleum-based product, it is taxed a little more. If it is from recycled paper, the tax will be lower (or negative). Limit it to say twenty categories, and it doesn’t get too unmanageable. Companies are already tracking this data.

I’m not married to any of these ideas, but the concept of government recouping costs of rectifying problems caused by high-impact activities is important to me. It also restores a clear notion of social-responsibility to both government and personal acts.

By: Dave On Fire

Dave On Fire — Sat, 27 Jan 2007 16:11:17 +0000

Thanks for clarifying Dan. My mistake was that I assumed that you were already talking about carbon markets – rereading your post I can see that this is not the case.

By: danlewer

danlewer — Sat, 27 Jan 2007 16:06:36 +0000

Hi Dave – sorry if I was not specific:

By “including the price in the market” I simply meant that same as you when you wrote “internalise cost of socially and environmentally damaging behaviour”.

http://inbalance.wordpress.com/

Dan

By: Dave On Fire

Dave On Fire — Fri, 26 Jan 2007 11:45:38 +0000

Ultimately, I think any system that relies upon calculating a company’s footprint will be too complex to be effective and, as Dan says, will be wide open to abuse.
Taxes and regulations need to the internalise cost of socially and environmentally damaging behaviour, and then the markets will look after minimising such behaviour. As long as you make sure that the company that damages an environment or community pays for it, those costs are automatically passed on to consumers and investors. Taxing the consumers and investors directly would be innefficient and unreliable.
As to your specific questions:

Why not use a footprint tax to replace all taxes?

There are two broad types of tax – taxes that serve to raise money, and taxes that serve to modify behavior. If the govt. needed to get a certain amount of money from the footprint tax, it would set them with arbitrary severity or lenience based on its own needs. This, again, would fundamentally undermine the behavioural effect and would furthermore be very unpopular. Also, taxing wealth and income is really the only fair way for a government to raise money, and when other forms of tax are preponderent over these it increases inequality.

Can we accurately determine a “safe” amount of carbon emissions and how much carbon gets absorbed annually?

Not with any degree of certainty, but scientists are more confident on global warming information like this than is generally perceived. The most important thing is ensuring that the “safe” targets are set by real climate scientists, not by industry leaders out to preserve the status quo.

By: vijtable

vijtable — Fri, 26 Jan 2007 06:50:53 +0000

Dave, S’s D, and Dan, thanks all for the comments. I’m still digesting all your thoughts… One major thought… Why limit this to environmental footprint? Why not use a footprint tax to replace all taxes?

Footprint can also entail impact on society. If I’m a wealthy investor, the footprint of a Wal-Mart would be greater than that of Malden Mills simply because the healthcare, unemployment, and other safety net expenses would be saved by governments (ignoring company size for the moment). If I’d be taxed more for investing in “takers” rather than “givers”, I will have an economic imperative to change my investment practices, thus creating positive market forces in favor of responsible business. Or, to use a more complicated example, Starbucks’ social practices to its employees is potentially offset/overwhelmed by the coffee purchase practices.

SWP’s already calculate the costs of people to society, and there are people already calculating the environmental value of an acre of trees. I’m wondering why we can’t create an omnibus footprint code. I’m also wondering if there are small steps we can take towards footprint/impact-based method (besides the previously-mentioned carbon markets).

A smaller question…

Can we accurately determine a “safe” amount of carbon emissions and how much carbon gets absorbed annually?

By: Dave On Fire

Dave On Fire — Fri, 26 Jan 2007 00:25:46 +0000

@Dan:

If an organisation is taxed or regulated, the extra costs are still passed on to it’s customers.

Proponents of carbon taxing argue that it is a simpler and more transparent system than regulation. This is an important argument – complex systems are expensive and often lead to corruption because powerful organisations find opportunities to influence officials.

Absolutely! Furthermore, simple systems engender a much more powerful market dynamic than those which are needlessly complex. But what do you mean by this:

Including the price of carbon in markets is very important

What’s “including the price in the market”? Isn’t the price determined by the market in the first place?

By: danlewer

danlewer — Fri, 26 Jan 2007 00:16:15 +0000

Hi Vijtable. This is an interesting idea, but I think the administration of the SWPs would be prohibitively costly. An organisation’s emissions are simpler to measure than the emissions generated by a product on its journey to the consumer. If an organisation is taxed or regulated, the extra costs are still passed on to it’s customers.

Proponents of carbon taxing argue that it is a simpler and more transparent system than regulation. This is an important argument – complex systems are expensive and often lead to corruption because powerful organisations find opportunities to influence officials.

Including the price of carbon in markets is very important, as the Stern Review in the UK recently showed. But it must be done in an efficient and transparent way.

http://inbalance.wordpress.com/

Dan

By: Dave On Fire

Dave On Fire — Wed, 24 Jan 2007 12:49:23 +0000

@Sieg’s Daddy:
Carbon trading is another example of a great idea badly practised.
Where do the carbon credits come from?
The government can create a certain arbitrary amount and sell them, reducing the total number of credits so that less carbon is emitted. This is great; it allows centrally-driven reduction of total carbon levels within a dynamic free market.
But a carbon market based solely on emissions is only half a market. The net increase in atmospheric CO2 is a the difference between emissions and absorbtions, so if the market does not cover absorption as well as emission it can only be so effective.
That’s where offsets come in. When a company pays to absorb a certain amount of carbon from the air, it gets the (transferable) right to emit a corresponding amount of carbon. Thus the carbon market is complete and all is well. In theory.
In practice, the offsets are a complete shambles. Most offsets come from reforestation projects and investment in sustainable energy. Both of these are extremely good causes, and if anything more money should be going into them, but neither of them offsets emitted carbon. To use them as offsets distorts the market to the point of being meaningless.
The distinction, especially with reforestation, is tricky so allow me to elaborate. Planting a sapling acheives nothing with certainty or immediacy. If that sapling survives to become an adult tree, then it will start to absorb carbon. It’s contribution as an offset can only be counted as it absorbs this carbon – not on the assumption that it will one day absorb the carbon. So a carbon offset should be part of the ownership (or perhaps custody is a better word) of a tree, not as a boon for planting a tree.
A tree that is planted may one day become a carbon sink, so there remains an economic incentive for reforestation – especially as investor-gardeners can hope to see the value of their offsets increase over the tree’s lifetime. But while this approach doesn’t make reforestation any less attractive, it also promotes the conservation of existing forests.
Mature forests make far more difference to the environment than new, growing ones. They are arguably one of the most precious resources on the planet, yet economically they tend to be a liability. If, as would be the case in a complete and functional carbon market, their contribution was quantified and traded, there would suddenly be a strong economic incentive to keep them. This would make a huge difference to national parks etc. in the developed world, and even more of a difference to poorer countries that, under the current system, are so often forced to choose between their forests and their economy.
So why hasn’t this happened? Why do all the major carbon trading schemes create distorted markets by valuing tokenism over real carbon absorption? It’s all politics. The schemes in place allow corporations to continue business as usual. Their costs may increase, but the balance of power does not. A true carbon market would change everything; it would give national parks and especially the people of developing countries a real way to resist environmental degradation, which would make the corporations’ lives much more complicated. And what do you expect when the markets are conceived by the business lobbies of Europe and America? To get a fair and effective system needs import from all those affected – which means everyone affected by climate change, which means everyone, especially in the third world.
That’s my 2p ( ~ $0.04 ;) ), hope it helps.
I applaud your approach to markets in general, by the way – it frustrates me to see people defining themselves as either pro-market, blinded by faith in capitalism, or conversely seeing markets as fundamentally evil. Neither of these philosophies is especially productive. What’s needed is a rational, pragmatic approach.

By: Sieg's Daddy

Sieg's Daddy — Wed, 24 Jan 2007 01:16:49 +0000

This is essentially what carbon-offset markets like the Chicago Climate Exchange are doing: converting environmental costs and investments into financial ones. (Wikipedia on Carbon offsetting) With participation in a carbon market, anyone from an individual to a corporation can live and work "carbon-neutral" by buying credits to offset what is effectively their resource consumption. Now, participation in carbon markets in the USA is currently voluntary, which mostly relegates it use to those providing offsets (by planting trees, providing renewable energy, and other means) and a few ecologically conscious buyers of those offsets. Now, I believe that the EU has recently placed mandatory caps on net carbon output, forcing companies to buy offsets or take other means of carbon reduction to meet the limits set by law. While I am far from a "markets will solve everything" person, I do like the simplicity of the legislation that would be involved in such a scheme in comparison to the tax idea in the post above. For the carbon-offset system it is as simple as legislating that all corporations "must be carbon neutral" and letting the "how they achieve that" to those affected. I would worry that a tax system as described above would quickly become overly complex and therefore ripe for loopholes. With offset-markets, those who are selling the credits (and others who buy them) become intrinsically vested in ensuring compliance with the law so that the continue to have a market (much like the RIAA [excessively] checks for copyright compliance to stay in business). I worry that a tax-based system would simply be resisted by most corporations (since they are first beholden to their shareholders) and would never become that effective. My $0.02. - Sieg's Daddy