Tax Shifting


Even corporate executives are geared up for a green levy.

Lawson Hunter

the chief executive officers from some of Canada’s most influential
corporations encourage government intervention to tackle climate
change, you know change is in the air. And in this case, the change
involves a tax shift, a green tax shift, that is.

classic economic terms, a tax shift involves the linear movement of
taxes from one source to another, or from one payer or item to another.
The Goods and Services Tax illustrates how a tax is shifted in a
straight line from producer to manufacturer to consumer. Linear
economic models, however, run counter to the cyclical nature of
ecological systems, which replenish resources to counteract the loss of
the original resource.

Taxes, some argue,
should be similarly cyclical. This is the idea behind a green tax
shift. The revenues generated by these taxes aren’t additional;
instead, they are shifted to reduce other taxes (e.g. income tax), or
even offset the green taxes themselves. Furthermore, green tax schemes
involve a shift from taxing good things (e.g. income, profits) to
taxing bad ones (e.g. pollution, wasted resources), in order to
encourage more environmentally sound behaviour.
to Alan Thein During and Yoram Bauman in their book Tax Shift, “In
general economics tells us that when you tax something, you get less of
it. … Our problem is that we tax things we want more of, such as
paychecks and enterprise, instead of things we want less of, such as
toxic waste and resource depletion.” They conclude, “… tax shifting is
a revolt that makes sense: it gets taxes off our backs and onto our
Peter Victor, a professor in the
Faculty of Environmental Studies at York University, points out another
feature of green taxes: “Economists will tell you that the ideal tax is
one that does not change behaviour. I would say that green taxes are
mostly about changing behaviour.” He points out that there is a
disconnect between green tax shifting and traditional economics. “As
soon as you put these things in the hands of ministers of finance, they
set the green tax to meet a revenue target instead of a behaviour
This tendency by government comes
about because most economists put their faith in the market. But
markets, according to Paul Hawken, author of The Ecology of Commerce,
are ill-suited to protect the environment. In his seminal book, Hawken
asks, and answers, this question: “If the free market is so efficient,
why, as it affects the environment, is the overall economy so
inefficient? The answer is simple: Markets are superb at setting
prices, but incapable of recognizing costs.”
Health care expenses,
land remediation, waste disposal and other intangible consequences of
commerce, for instance, are not included in the price of products.
Similarly, we take freely from the atmosphere and oceans, and then use
them as our dumping grounds, oftentimes at no cost. Then we’re appalled
when money spent cleaning up environmental disasters contributes
positively to the Gross Domestic Product (GDP), as in the case of the
Exxon Valdez spill, which improved Alaska’s GDP.
it is this perverse market behaviour that prompted some European
countries to alter their taxation policies. In the early 1990s,
Finland, Sweden and Denmark implemented new taxes and revised existing
environmental taxes to shift the revenue they raised from polluters to
reducing income and capital taxes. Almost a decade later, in 1999, a
second wave of tax shifting appeared in Germany, France, Italy and the
UK. The success of these schemes proves that tax shifting can work.
shifted taxes from labour to energy, thereby lowering fuel use by five
per cent. Finland’s carbon tax reduced emissions by seven per cent in
eight years. Sweden raised taxes on carbon and sulphur emissions,
thereby cutting taxes on personal income and shifting two per cent of
the country’s total tax revenue. Finally, Denmark is a leader in that
it collects over six per cent of its total tax revenue from green
Although several governments have
added green taxes in recent years, since the flurry of activity in the
1990s, few jurisdictions have shifted them. Dr. Hans-Jochen Luhmann of
Germany’s Wuppertal Institute for Climate, Environment and Energy,
explains that creation of the European Union (EU) dampened Europe’s
appetite for tax shifting. Under EU rules, any domestic energy taxation
may constitute a trade disadvantage. As a result, emission trading,
rather than taxation, has become the primary tool to address climate
change in that part of the world.
In Canada,
the situation is different. William Rees, a professor of Community and
Regional Planning at the University of British Columbia and co-author
of Our Ecological Footprint, observes, “After three decades of trying
to convince the public of the evil of taxes, governments are loath to
talk seriously about large tax increases in some areas (e.g.
consumption taxes, resource depletion taxes, carbon taxes) even if, as
in most tax shifting schemes, these were compensated by lower income
and value-added taxes, and the whole process would benefit the economy
in myriad ways.”
Furthermore, because many governments fail to
understand tax shifting, they often fall short on implementation.
Revenue raised by Ontario’s tire tax, for instance, goes into general
revenues, rather than being directed at environmental initiatives. This
experience contributes to public skepticism and resistance to the use
of taxation for environmental protection.
don’t believe in the word ‘shift’,” declares Herman Daly, a University
of Maryland professor and self-described eco-economist who has been
studying ecological economics for over 40 years. “You say ‘tax shift’
and they hear ‘additional taxes.’ There’s a lack of faith in the
government to deliver on the tax cut side. They’ll just add taxes.”
a skeptical public isn’t the only challenge to the adoption of green
tax shifting. Others include concern about its effectiveness to modify
environmental behaviour, combined with the perception that any
environmental taxation would interfere with international
However, polls taken in the late 1990s in both the
United States and Europe, according to David Malin Roodman, author of
The Natural Wealth of Nations, show overwhelming support (70 per cent)
for the concept of tax shifting, once it is explained. “People must see
the results,” advises Amy Taylor, an economist with Alberta’s Pembina
Institute. “There needs to be a whole lot of communication accompanying
any tax policy. That’s just good policy design, whatever the policy
change is.”
Europe’s experience demonstrates that an environmental
tax shift, if implemented gradually, will give consumers and businesses
time to adapt, improve efficiencies, seek substitutes and realize the
benefits of the balancing effect of the reduction of labour and payroll
taxes. Additionally, most tax systems throughout the world have
reductions or exemptions for international sectors. These should
mitigate most fears of competitive disadvantage.
governments in Canada, according to the National Round Table on the
Environment and the Economy’s 2002 report, Toward a Canadian Agenda for
Ecological Fiscal Reform: First Steps, have shown a readiness to use
the tax system as a primary tool to support certain environmental
policy objectives, especially when it is coupled with a reduction in
Last March, the TD Bank
Financial Group issued a report titled Market-based Solutions to
Protect the Environment. With its release, many in the business world
took notice of the environment-economy relationship for the first time.
Beata Caranci, a senior economist with TD Bank Financial Group,
explains the intent behind the report: “We wanted to pull together
various options to address environmental issues from an economic
approach as opposed to regulations and policy. We discovered that while
there is no ‘silver-bullet’ environmental policy, what makes economic
sense – changing the price structure of pollution to the user – can
help achieve environmental goals.”
The report states, “Most
economists, including ourselves, believe that any injury inflicted on
Canadian jobs, incomes, competitiveness can be mitigated through
reliance upon market-based policies that change the price structure to
pollution. Doing so serves two purposes. It ensures that polluters pay
for the social cost of their actions. And, it alters behaviour when the
price for pollution becomes steep. Polluters will seek alternatives,
thereby spurring innovation and reducing the need for further, more
intrusive and costly environmental policies.”
believes that the report is a step in the right direction. He is
resigned, however, to the fact that the concept is slow to be adopted.
“The problem is that we’re so hung up on growth as the be-all-end-all
that we haven’t realized that that’s not a sustainable situation. We
just can’t keep growing.”
Although they may
not agree with Daly’s concern about growth, 33 members of the Canadian
Council of Chief Executives have climbed aboard the green taxation
bandwagon. In an October 1, 2007, declaration issued by some of the
country’s largest corporations, including Alcan Inc. and Suncor Energy
Inc., these powerful business leaders urged the federal government to
use market-based mechanisms, including “environmental taxation,” to
tackle climate change. Recognizing that behaviour must change and that
the best way to bring this about is through government intervention,
the CEOs declared, “Policies aimed at changing behaviour through price
signals must deliver positive environmental outcomes in ways that
foster an innovative economy and strengthen Canada’s competitive
The key to acceptance for a
green tax shift policy seems to be the degree of awareness of business
and the public of both the concept of a revenue-neutral approach and
the environmental problems it seeks to address. The benefits of the
action and the dangers of inaction need to be laid out clearly and
communicated effectively. And finally, the pace of transition needs to
be slow enough for adaptation, yet quick enough for citizens and
governments to see results.

a tall order. But as Mike Nickerson, author of the book Life, Money and
Illusion, notes, “Few things inspire creativity and ingenuity like
avoiding taxes.”

A member of the International Society for
Ecological Economics and the Policy Co-ordinator for the Green Party of
Ontario, Lawson Hunter is a freelance writer.

Pembina Institute’s Fiscally Green site considers many forms of ecological fiscal reform:

Talk back in the Tax Shift Blog.


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Alternatives is a bi-monthly journal dedicated to in-depth analysis of environmental issues and, in particular, to the connections among ecological, social and economic dimensions. It combines the learned rigour of an academic journal with the accessible style and format of a general audience magazine, making a unique hybrid. Alternatives has been Canada’s cutting-edge environmental magazine since 1971. It is published by Alternatives Inc., a registered charity.

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