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Executive Summary

When Will Business Want Environmental Taxes?

February 2000
By Gary H. Wolff

The question asked and answered in this paper is: "When might a group of businesses desire--even lobby for--an environmental tax or an environmental tax reform (ETR)?" An ETR uses revenues from the environmental tax to reduce existing taxes. This question is important given the win-win rhetoric so prevalent among environmental and business advocates of "market mechanisms" for the solution of environmental problems.

The answer is based on simple economic analysis and extensive discussion with interested parties--including presentations and discussions at the April 1999 Coalition for Environmentally Responsible Economies (CERES) conference in New York City; the April 1999 Industrial Ecology conference in Santa Cruz, California; and the June 1999 Business Environmental Leadership and Learning (BELL) conference in Ann Arbor, Michigan. Representatives of Nike, Coca-Cola, Monsanto, a wood products company in Northern California, several electric utilities, and others provided feedback on the presentations from their unique business perspective and experience.

The Swedish Example

The paper's starting point was the Swedish nitrogen oxide tax on power plants over 10 megawatts (MW) in size. Nearly all revenue from this tax is returned to the participating power plants in proportion to the number of kilowatt-hours of electricity they produce. This version of ETR--also called a "feebate" by some or a refundable emissions payment system by others--was designed to blunt the competitiveness impact of the nitrogen oxide charges on Swedish industry. That is, Swedish industry was concerned that solving an environmental problem in Sweden would make Swedish products that use electricity less competitive. This policy is referred to as a sectoral ETR.

Lessons Learned

The Swedish system seems to work admirably. Nitrogen oxide emissions have declined significantly and the price of electricity has not increased measurably, on average, due to nitrogen oxide policy. This is useful information because many European ETRs involving energy have exempted or applied reduced rates for some economic sectors because of issues around competitiveness (e.g., Denmark and Germany). The Swedish example suggests that a tax and rebate "bubble" over the exempted industries--rather than an exemption--can offset the competitiveness concerns and create incentives to reduce energy use within these industries. This means that competitiveness concerns can be addressed by careful design of sectoral ETRs. There may not be much reason for businesses to lobby for such ETRs, but equally important, there may be no reason for businesses to be opposed.

Analysis finds that the Swedish example could be followed in the United States. Some organizations in the U.S. (e.g., the Natural Resources Defense Council and Resources for the Future) are investigating this policy for application in the U.S. This paper's main question goes beyond blunting the competitiveness concern often expressed by business to the issue of when businesses will want such policies adopted. It finds that businesses would be in favor of sectoral ETRs in theory if either of two conditions were met:

  1. Positive externalities at the industry level are funded by the rebate. Positive externalities exist when a mutual benefit exists that can't be captured by individual businesses acting alone. Chambers of Commerce and other industry associations represent this type of situation. So do advances in technology funded via cooperative, industry-wide, arrangements (e.g., work of the Electric Power Research Institute).
  2. A regulatory action is inevitable and an ETR with revenues kept within the industry is the lesser of the evils facing the industry. Recently proposed federal regulations for confined animal feeding operations, for example, sparked reforms in the industry.

The Swedish example suggests that a tax and rebate "bubble" over the exempted industries--rather than an exemption--can offset the competitiveness concerns and create incentives to reduce energy use within these industries. This means that competitiveness concerns can be addressed by careful design of sectoral ETRs.

Although these conditions are not terribly difficult to meet in theory, practical considerations suggest they are not very easy to meet in practice. The case of regulating pollution from electricity production illustrates that industries may wish to avoid any new regulation, regardless of whether it will "only hurt a little." The case of regulating pollution from confined animal feeding operations underscores the fact that sectoral ETR may only be attractive to an industry when regulation of its polluting activities has become a public policy priority. The paper uses two examples to illustrate these practical concerns--pollution from electricity production and pollution from confined animal feeding operations. Thus the answer to the question--"When will business lobby for sectoral ETRs?"--is, unfortunately, "rarely."

This conclusion is preliminary, however. And even if verified by further investigations, significant real-world exceptions may be found as the effort to craft ETRs at the state and local level in the United States expands. This paper explores the theoretical and practical conditions under which businesses might lobby for a particular sectoral ETR. Environmentalists and business people should understand them because any opportunity for win-win environmental-business policy should be pursued.

If you are interested in learning about how ETR might create net benefits for the entire society, be sure to read "Tax Shifting and the Likelihood of Double-Dividends: Theoretical and Computational Issues."

Download "When Will Business Want Environmental Taxes?" (38 pp. / 228 kb)