Reliable prosperity
Society | Nature | Capital

True Cost Pricing

Brochure describing tax credits for resource conserving projects.
Image by Oregon Office of Energy.

The tax code and government subsidies support social and ecological practices that are disadvantageous to the health of the environment and society. The prices of goods and services do not currently reflect the actual social and ecological costs and benefits of their production. This provides market signals that are greatly skewed against reliable prosperity, slowing its diffusion and adoption.

True Cost Pricing makes it possible to enhance nature, society, and capital by reducing existing taxes on good things like personal income and replacing them with new taxes and fees on bad things like pollution, natural resource consumption, unjust working conditions, and so on. Such a tax shift is revenue-neutral. It does not increase the overall tax burden — it will likely reduce it substantially over time — but simply reallocates it to create efficient markets. By using carefully calculated taxes to incorporate social and ecological costs and benefits into prices, it is possible to create a level playing field for bioregional economies.

Green taxes are intended to cover the costs of environmental "externalities", unintended environmental damage to third parties that occurs during the production or consumption of a product or service. As the economist Pigou demonstrated in the 1920s, externalities create market failures in which unfettered economic activity makes society worse off rather than better off. The situation can be corrected by charging a tax per unit equal to the cost borne by society as a whole per unit. If an additional ton of carbon dioxide emissions causes $300 in crop losses, increased air conditioning loads, hurricane disasters, etc. for the planet's citizens, then a green tax of $300 per ton of emissions should be charged. The imposition of such a tax could be rendered revenue-neutral by repealing income taxes in the lowest brackets to balance the new revenue from the carbon tax.

When prices for socially and environmentally destructive products do not reflect the externalities created during their production, they send false market signals. When pollution of air, water, and soil is essentially free, products that pollute heavily will be over-consumed relative to cleaner products. When poor labor practices are essentially free, products that employ them will be over-consumed relative to those produced fairly. Ignoring externalities leads to systemic problems — environmental contamination, unsafe neighborhoods, urban sprawl, degradation of forests, fisheries, and farmland, etc. — because each individual has pursued the cheapest prices rather than minimizing the actual cost to society.

True Cost Pricing greatly favors the products and services of reliable prosperity. By imposing green taxes on the degradation of nature, incentives for resource efficiency, renewable energy, and better materials cycles are generated. Gradually reducing existing subsidizes for dams, water-extravagant agriculture, highways, mining, and grazing would create additional incentives.

True Cost Pricing is, by a great margin, the policy change most conducive to catalyzing reliable prosperity. Even small tax shifts are extremely beneficial. While Denmark, the Netherlands, Germany, and the U.K. have all instituted tax shifts, replacing 1 to 4 percent of their income tax revenue with pollution tax revenue, tax shifts have been extraordinarily difficult to implement to date in the United States.

Fortunately, there are also opportunities for states and provinces, agencies, municipalities, and other levels of government within the bioregion to adopt a tax shift in the collection of their revenues. Development impact fees, which cover the costs of new infrastructure and development, are now in common use. The Oregon Office of Energy offers a 35% tax credit on Oregon state taxes for renewable energy, recycling, energy efficiency, and alternative transportation projects.

As we learn more about the advantages of reliable prosperity, it will become easier to design equitable, creative, and effective systems of taxes and fees at all scales which shift consumption from destructive to regenerative forms.

At each level of tax assessment, from town to nation, shift taxes so that they accurately reflect true social and ecological costs and benefits. Stop taxing good things like employment and begin taxing bad things like pollution.


Case Studies
Examples of this pattern in action:

Market-Based Environmental Laws: 100 Ways to Use Prices to Prevent Pollution

Center for a Sustainable Economy
The Center for a Sustainable Economy is a non-profit, non-partisan research and policy organization that promotes innovative tax and other market-based approaches to achieving a sustainable economy — one that integrates long-term economic growth, environmental quality and social fairness.

Ecological Tax Reform: Composting the Gridlock
Tax reform is all the rage these days, and proposals abound. Even the flat tax (dismissed as silly when proposed by presidential candidate Jerry Brown in 1992, now taken quite seriously when proferred by Dick Armey) is getting serious scrutiny. Not because they're the best ideas, not even because taxes are too high (they're lower in US than any industrialized country) but because the tax system is perceived as out of control, and people want to do "something." …

Taxpayers for Common Sense
Taxpayers for Common Sense is a non-partisan advocate for American taxpayers. They are dedicated to cutting wasteful spending and subsidies in order to achieve a responsible and efficient government that lives within its means.

Organizations whose work incorporate this pattern:

Friends of the Earth

Worldwatch

W. Alton Jones Foundation

Redefining Progress

References:

Durning, Alan Thein, Yoram Bauman and Rachel Gussett. Tax Shift: How to Help the Economy, Improve the Environment, and Get the Tax Man Off Our Backs. Northwest Environment Watch. Seattle, WA. 1998.

von Weizsacker, Ernest U and Jochen Jesinghaus. Ecological Tax Reform: A Policy Proposal for Sustainable Development. Zed Books. London, UK. 1992.

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