Why the North Must Act First 3

Some people doubt that there is any price elasticity in the consumption of "basic" commodities. However, they normally think of short-term elasticity only. Long-term elasticities could be observed when we look at different countries which maintained different price levels over a reasonably long period. Figure 7 shows the per capita petrol consumption of different OECD countries plotted again the petrol price. The negative correlation is striking.

Let us have a look at the effect an ecological tax reform may have on different budgets. Energy costs in German industry (which are higher than in most other countries) are estimated to represent some 3.5% of the total costs. If energy prices rose by 5%, that would mean cost increases of 3.5% x 5% = 0.175%. For private households the figure would be about 0.25%.

We can further assume that macroeconomic, i.e. systemic energy productivity gains are achieved of some 3% per year. This is a very modest estimate considering the existing technical potential of 100% -300% productivity gains, depending on the special case and on the definition of substitutability. If, therefore, energy consumption may decrease by 3% per year without sacrifice in energy services, the annual energy cost differential would be reduced to 5% minus 3% = 2%, and the total cost differential for industry would fall to an insignificant 0.07% per year. And if simultaneous tax reductions worth some 0.2% of total costs were added, we see that the whole operation results in economic benefits for industry as a whole. For energy intensive sectors including some chemical firms, some transitory arrangements may be found to at least secure a full depreciation of existing installations.

For countries like Bangladesh, Egypt or Nicaragua, an increase in energy productivity should be economically even more beneficial than for Germany or Japan. For Mauritania or Iran, a drastically increased water productivity (which would result from a rational water pricing policy) would be infinitely more important than for Britain or Canada.

The benefits are real also for a different reason. Energy productivity gains help to avoid environmental costs; and they help to avoid construction costs of power plants and other costs involved in energy production.

Obviously, I am not advocating an abandonment or even a stand-still of command and control policies. For fighting dioxin or CFC emissions, a chlorine tax is not enough. Certain highly toxic substances have to be banned altogether. Accident prevention and landscape planning require other legal measures than just prices.

* * * * *

However, some classical waste and pollution problems are likely to just disappear once the ecological tax reform has worked for a certain period of time. Much of the present "waste" would be turned into "secondary raw materials" once energy and raw material prices have gone up sufficiently. Dioxin loads would be substantially reduced when chlorine ceases to be cheaply available. Eutrophication of surface waters would recede as the influx of nutrients (e.g. from overseas) is reduced as a result of rising energy prices.

Hence I would not be surprised if a new generation of environmental legislators after some ten or twenty years of an ecological tax reform will begin to "clean up" the thicket of regulations that is now annoying the corporate world without actually preventing further ecological destruction. In particular many of the sudden and unpredicted regulations could disappear which had their origin in the response to a local scandal and which subsequently caused many headaches for company managers.

Further reading:

Cairncross, Frances. Costing the Earth, The Economist Books, London, 1991.
Pearce, David, Anil Markandya, Edward B. Barbier. Blueprint for a Green Economy, Earthscan: London, 1989.
Pearce, David et al. Blueprint 2, Greening the World Economy, Earthscan: London, 1991.
Schmidheiny, Stephan (ed.) and the Business Council for Sustainable Development. Changing Course, Cambridge (USA), 1992.
von Weizsäcker, Ernst U. and Jochen Jesinghaus. Ecological Tax Reform -- Policy Proposal for Sustainable Development. ZED BOOKS: London, 1992.
von Weizsäcker, Ernst U. Earth Politics After the Earth Summit, ZED BOOKS: London, 1994.

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			Table of Figures
	Introduction		Fig.1 People Polluting the Environment
	"The North is the Polluter"		Fig.2 CO2 Emissions
	Halving CO2 emmisions		Fig.3 Pollution costs, what polluters pay

	Switching policy emphasis, pricing input		Fig.4 Economic performance v. energy prices
	Costs of pollution		Fig.5 Fossil & nuclear energy prices
	Revenue neutral energy taxes		Fig. 6 Impact of energy tax on profits
	Systemic energy productivity gains		Fig.7 Fuel consumption v. price