Stakeholders and Going Beyond Profit Maximization

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68 WALKING THE TALK

nities (CEC 2001: 13) intends to propose in 2002 a framework for transport charges 'to ensure that by 2005, prices for different modes of transport, including air, reflect their costs to society'. This is a move in the right direction, which, combined with tax reform, subsidy shifts, and the enforcement of effective property rights, will help ensure that markets begin to reflect ecological truths.

In the South, meanwhile, where little primary research is being conducted on full- cost pricing, South African utility Eskom is filling the gap through an extensive study of how consideration of externalities might improve decision-making on corporate environmental expenditure. Says Thulani Gcabashe, Eskom chief executive:

It isn't possible to simply use the numbers or ranking that have been devel- oped elsewhere in the world, due to our unique environmental endow- ments and socio-economic framework. Research has [therefore] been initiated in Eskom to try and establish a robust methodology to examine impacts of externalities of various options for meeting future electricity demands (Eskom 2000).

Tax shift is another phrase that is frightening to most business people, because we tend to focus on the word 'tax' and forget the word 'shift'; and it is true that govern- ments have a track record of adding taxes in one area without the 'shift' of decreasing taxes in another area. We are worried that environmental taxes, sloppily devised and applied, could hurt our nations' economic competitiveness. But our appropriate cau- tion ought to ba balanced by an. appropriate outrage against a system that taxes— and thus discourages—things that all citizens want, such as jobs, while failing to tax—and thus discourage—things that we do not want, such as pollution and waste. Environment-related taxes can be applied to resources and inputs, imports and exports, or to waste and polluting emissions (UNEP 1999: 206).

Acceptance of the logic of a tax shift does seem to be gaining ground. Led by Scandinavia, Europe has been among the early adopters. Energy taxes have been introduced in Denmark, Finland, Norway, Sweden, and the Netherlands, and France, Britain, Germany, Italy, and Switzerland have similar policies in the pipeline (Holliday and Pepper 2001: 34). Under an energy products tax directive the EU intends to develop 'ambitious environmental targets for energy taxation aiming at the full internalization of external costs' (CEC 2001: 10).

'Green taxes' can be extremely effective market instruments. Sweden's 1991 sulfur tax, for example, led to a drop in the sulfur content of fuels to 50% below legal requirements and stimulated power plants to invest in abatement technology, and Norway's carbon tax, also levied in 1991, lowered emissions from power plants by 21% (OECD 2001 c). Significantly, no reductions in competitiveness appear to have occurred as a result of the taxes, although this may be accounted for by the often sizeable exemptions applied to energy-intensive industries (OECD 2001 c).

This experience reminds us of Harvard Business School "Professor Michael Porter's argument that countries that apply high environmental standards also experience

2. THE RIGHT FRAMEWORK 69

high rates of competitiveness (Porter and van der Linde 1995b). This is borne out by Germany and Japan, both of which have instituted substantial energy taxes, as wit- nessed in their high respective rates of taxation applied to regular unleaded gasoline. Far from injuring competitiveness, the tax has resulted in higher energy productivity while lowering CO2 intensity. The German economy grew by 1.1% per annum between 1990 and 1994, whereas energy consumption actually decreased by 1.5% per annum. In China, in contrast, where energy is subsidized, energy productivity (as measured by GDP per kilogram of energy used) is almost ten times lower (Pearce and Barbier 2000: 1 74).

More leadership could be shown by governments in so-called 'ecological tax reform'. In 1997 an early US state-level attempt at such a tax shift was made by a group called Minnesotansfor an Energy-Efficient Economy (ME3). Their proposal was to tax carbon emissions, with a net offsetting reduction of existing property taxes. Extensive economic modeling showed that the tax would help squeeze waste and inefficiency out of industrial processes and improve competitiveness while lowering taxes on property. However, the proposal failed to garner enough political support, largely because of fears over competitiveness. ME3 concluded that such a sweeping structural shift in the tax system would require a stronger strategy for engaging important constituencies (WRI 2001). The collapse of the ME3 initiative highlights a fundamental problem facing policy-makers: how to raise support for unilateral action. Says Eugenio Clariond, president of Mexico's Grupo IMSA:

Since Changing Course, we've been talking to governments about a tax shift from 'goods' to 'bads'. The problem is that although these ideas are good, it's very hard for one country to apply them in a vacuum. It's always seen as promoting an uneven playing field.

Along with revenue neutrality, any tax instrument should be pre-announced and introduced gradually, giving market players time to plan, and exemptions should be phased out gradually, with compensatory measures where necessary. Last, tax reform should involve extensive stakeholder consultation (Ribeiro 1997). If properly designed, tax reform can be a powerful tool for steering the economy in the right direction (Box

4). In Chapter 1 we explained how subsidies disrupt international trade and work

against sustainable progress by penalizing developing countries. As we noted, sub- sidies are not necessarily perverse and harmful but, when poorly designed, without clear sunset clauses, they can end up perpetually propping up uncompetitive compa- nies and processes, harming markets and the environment nationally as well as

internationally. UK economists David Pearce and Edward Barbier point out that the worst perverse

subsidies occur in developed countries. They note, 'it is interesting that advanced countries often criticize the poorer economies for bad management of their econo- mies, when the rich countries persist in some of the worst forms of mismanagement through subsidization' (Pearce and Barbier 2000: 153).

There have been some notable successes in removing subsidies at the national level, of which New Zealand's elimination of agricultural support is perhaps the most renowned. Russia, Eastern Europe, China, and India have all reduced their subsidies for fossil fuel; Brazil has eliminated subsidies for ranching; and the USA, Mexico,