ECONOMY

Dinosaur of economic system threatens sustainable growth

The price mechanism, the heart of the resource allocation system in the market economy, is seriously at fault and requires radical rectification in order to prevent further degradation of the environment, according to the European Environmental Bureau (EEB), a Brussels-based non-governmental organization funded in part by the European Commission. «Sustainable development will be just an illusion if market incentives continue to stimulate wasteful consumption and production habits and make environmentally sound changes appear costly and non-competitive,» John Hontelez, the EEB’s secretary-general told a two-day international conference on «Environmental Fiscal Reform» (EFR), hosted by Elliniki Etairia in Athens over the weekend. The EFR campaign, based on the «polluter pays» principle, is not new. The Commission put forward a proposal for a Council directive restructuring the EU framework for the taxation of energy products in 1997 but negotiations have made little progress, mainly due to the large number of exemptions asked by member states. «Our economic system still considers the environment a free good to be used or abused at will and environmental costs are swept under the carpet as externalities… The accounting, auditing and tax systems do not recognize natural and human capital as legitimate or equal to economic capital. They allow for the depreciation of the latter but make no allowance for the replacement of natural capital or provision for the enhancement of human resources,» said Yiannis Paleocrassas, the former EU environment commissioner, responsible for the Commission’s White Paper on Growth, Competitiveness and Employment that first formally set out the idea of taxation of energy products at European level almost 10 years ago. The central target of EFR is getting the prices of the factors of production right. The unchecked use of natural resources has increased awareness of its so far «hidden» or unaccounted-for environmental and social costs, gradually revealing the limitations of the industrial system in ever-augmenting prosperity through mass production and giving birth to the concept of sustainable development. «Our current economic and social system is a latter-day dinosaur struggling to survive in the mega-crisis of the 21st century… The main element of the institutional framework, which packs a lot of inertia into the dying dinosaur, is the tax system. In the European context, tax revenues represent over 40 percent of gross domestic product. In their vast majority, they are derived from the taxation of human effort and only a small fraction is derived from environmental taxes… It is almost schizophrenic to tolerate a tax system that penalizes employment and subsidizes environmental degradation,» said Paleocrassas. Encouraging tech research Citing the Greek experience, he noted that taxes on human effort (VAT, income tax and social insurance contributions) represent 62 percent of all public revenue, but environmental taxes (on fuel and transport) only 6.7 percent. Making resource users pay the «right price» would also encourage technological research. «After the energy crises of the 1970s, fuel prices rose sharply in Japan far more than the price of imported crude oil, as a result of certain fiscal and environmental measures… This triggered an immense leap forward in Japanese technology, which developed the lean motor car, securing a 15-year boom for the Japanese automotive industry,» he said. Also, over long periods, the EEB has called for a fiscally neutral 10 percent tax shift from human effort to natural resource users by 2010, which would help protect the environment and boost employment. Two examples appear to lend credence to such a proposal. First, over long periods, economies with relatively advanced environmental taxation (Sweden, Finland, Denmark, the Netherlands) also have good economic and employment performance; a net gain of 28,000 jobs was registered in Denmark as a result of «greening» the economy. Second, employment generation propensity for every unit of GDP growth has been shown to be the highest in the US and the lowest in Europe, while labor taxation is in the reverse order. Nevertheless, promoting EFR into the institutional framework seems a politically monumental task. The shifting of taxes onto resource consumers would have a direct effect on charges for electricity, car owners, water and waste. Paleocrassas suggests rebates to low-income households and the staggering of social insurance contributions in favor of lower incomes. It is necessary to get away from the established view that prosperity is the biggest polluter, that you need to be rich to afford pollution control, said Professor Ernst von Weizsaecker, chairman of the German Bundestag’s Environment Committee. «We need a vision for the decoupling of prosperity from resource use. Pollution control is no longer the central issue… Increasing resource productivity is possible,» he insists, citing pioneering research by the Wuppertal Institute which shows that many applications need only a fraction of the energy presently consumed. According to von Weizsaecker, as the nation state, under massive pressure for more prosperity, can no longer deliver alone, an understanding of globalization is essential for promoting sustainability. «As the classical turf of politics about redistribution of income does not provide an answer to the sustainability problem, we need global institutions, a ‘rules-based’ international community,» he said. This would entail a rebalancing of public and public actors, with civil society working toward the creation of public goods. Paleocrassas now chairs a working group set up by Elliniki Etairia (www.ellinikietairia .gr) last year with the intention of promoting a public debate on the subject. It includes members of the European Parliament and representatives of the trade union, business and academic communities. Its proposals include a tax on irrigation water, which would seem guaranteed to ignite new dynamic protests by Greece’s disgruntled farmers who have repeatedly blocked national highways in recent years.