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Part two: Incentives

7. The role of government
8. Ecological tax reform
9. New concepts of fiduciary responsibility

7. The role of government

Development of new and future-capable product
Closed-cycle economy and ecological enterprises
From nuclear to solar industry
Ecological pioneering

Monika Griefahn

We begin this section on incentives for business to move toward sustainability with a chapter on the role of government, and to do so we have chosen Germany as an example of a country in which governments, both at the national and state (Land) levels, play significant roles in environmental affairs. In fact, their roles must be seen as outright activist by the standards of most industrialized countries, and German governmental measures to promote sustainability are far in advance of those elsewhere.

This strong environmental role of government in Germany is a consequence of a long and successful tradition of environmental activism. Since the mid-seventies the so-called "alternative scene," which strongly embraces ecological values, has become an integral part of German cultural life; and since the early eighties Green politics has been a stable feature of the political landscape. Although the number of Green voters in local, regional, and national elections rarely exceeds 10 percent, the popular support of the Green agenda is much higher, and the "Greens," as they are commonly called, have succeeded in strongly influencing the nature of the political dialogue.

From the beginning, one of the most ingenious strategies of the Green movement has been to operate both inside and outside the political structures - inside as parliamentarians and government representatives, and outside as part of the global network of NGOs. Monika Griefahn personifies this strategy in a unique way. A former leading Greenpeace activist and founding member of the Green Party, she subsequently joined the Social Democratic Party and became Minister of the Environment in the state of Lower Saxony (Niedersachsen), the state that will host the World Expo dedicated to technology and the environment in the year 2000. Griefahn is a politician with a strong ecological vision who remains loyal to her ideals and has managed to implement many of them within the local government, industry, science, and society at large.

From her unique vantage point as an activist turned government official, Griefahn explains in this chapter the approaches taken and under consideration in her area, which include: advanced research on product redesign; reorientation of energy policy; and forums bringing together problem-solving groups drawn from management, labor, science, the environmental movement, and the political world. The vision emerging in Germany is of modernized, highly advanced industries linked in closed-cycle relationships, moving toward renewable energy sources and greater conservation.

Twenty-five years of environmental politics in Germany have yielded sobering results: the destruction of the environment continues and has already reached dramatic proportions. Undesirable developments in economy and society have piled up our ecological debts to such an extent that even our health is increasingly affected. This has involved children, in particular, for quite some time, for whom allergies, asthma, and neurodermatitis are no longer exceptions.

What is also appalling is the damage to the environment: two thirds of the German forests have been damaged so far. Our land development is as high as ever so that even the last few natural habitats in Germany are in serious jeopardy with the consequence that more and more domestic species of flora and fauna are dying out. In addition, numerous pollutants poison our air, our water, our soils, and our food every day, at the same time increasing the hazards to the environment on a global scale by boosting the greenhouse effect and thinning out the vital ozone layer. Although this is a description of conditions in Germany, it is highly likely that the situation is similar in most of the other industrialized countries.

Anybody who - like many people in business - demands a moratorium in the field of environmental politics or even a weakening of environmental standards shows a lack of responsibility. Rather than a standstill in or withdrawal from environmental politics we need an extensive ecological reorganization of the economy and society. In order to initiate or promote this modernization process, environ mental politics must be accorded priority as an across-the-board task, i.e., environmental politicians have to take interdepartmental action. It must be our aim that the decisions taken in all political fields from economic through transportation to foreign policies must be reviewed for their ecological impact.

Modern environmental policy, as I see it, must no longer restrict itself to removing waste or to reducing the pollution of water, soil and air by means of filters or catalytic converters - for these pollutants will only reappear elsewhere. Environmental politics must be preventive politics and aim at developing and enforcing products and production procedures incorporating the idea of environmental soundness "from the cradle to the grave." This will help to avoid the generation of many pollutants from the very beginning, and any residues will be recycled in an environmentally friendly way.

In 1984, former German chancellor Willy Brandt outlined the priorities of the ecological modernization concept, which is to take up three interrelated challenges: unemployment, threats to the environment, and technological change. The solution he offered was that we must create a framework in which environmentally useful and sophisticated production procedures and products are developed. That would help the environment and at the same time create secure jobs with a promising future. What is necessary, according to Brandt, is a profound economic reform resulting in an industrialized society using raw materials and energy economically and efficiently. Such an ecologically oriented modern economic policy will strengthen the prospects of the economy.

Today, these statements are more topical than ever. Ecology must not be defined as an add-on to economics, but must be recognized as the basis of any responsible economic activity. Business activities must be guided by what is ecologically required. In the medium term only goods should be manufactured and used which are in line with the principle of natural ecological cycles.

Thus the ecological reorganization of our economy extends from the product concept through the manufacturing process to consumption and recycling and the completion of substance-related cycles. It requires an ecological assessment of the substances, compounds, and processes used and includes all forms of energy production and energy conversion.

A suitable way of enforcing such production and consumption principles is the use of the instruments of the market economy. The levying of taxes or specific fees on certain environmentally harmful manufacturing processes, products or services can often bring about their replacement by environmentally friendly alternatives faster than sole application of administrative regulations. In Lower Saxony, the introduction of two environmental taxes has already achieved considerable controlling effects within a short period.

The waste tax levied by the state of Lower Saxony is based on the principle that those who protect the environment will be rewarded while those who pollute or consume it have to pay. According to the law governing waste taxes, it is intended as a control designed to promote waste avoidance and utilization of residual materials by trade and industry. The tax has to be paid by the generators of waste requiring special supervision and by the operators of waste disposal facilities importing such waste to Lower Saxony. The tax rate is coupled to hazardousness, avoidability, and recyclability of the waste. The revenue from the tax will also be used to fund avoidance and recycling technologies as well as the clean-up of polluted areas.

A similar objective is pursued with the water withdrawal tax. Its aim is to promote water-saving efforts and the installation of closed water cycles. The tax rate is coupled to the purpose and origin of the water withdrawn or discharged. This tax is intended to finance not only the compensatory payments for restricted use of farmland in water reserve areas, but also water and nature protection measures, a river banks renaturalization program, information on water protection, and a water-saving program.

However, it should be emphasized that the German constitution does not give the state governments much leeway in promoting ecological behavior by applying economic instruments. Therefore, the possibilities available to the state governments need to be complemented on a national level by an ecological tax reform making labor less expensive by cutting incidental wage costs while making the consumption of the environment more expensive by means of higher taxes on energy and raw materials. Within the scope of an ecological reorganization, the following major objectives have to be achieved:

1. Development and introduction of new ecological products and processes
2. Ecological reorientation of trade and industry
3. Profound reorientation of the energy policy from nuclear to solar energy

Development of new and future-capable product

For the ecological modernization of the economy we need future-capable and long-life products which require a minimum of material and energy to be manufactured, which contribute to waste avoidance, and which do not leave behind any pollutants. In this context it is the task of politics to create a climate favorable to innovation by pursuing economic, research, and environmental policies which are strictly in line with ecological requirements. So far there has been a lack of investments in environmentally friendly and innovative products which are suited to secure industrial production. The government must create a framework in which companies that adapt their production or services to ecological requirements can swiftly launch their products and achieve economic success.

Unlike Germany, Japan has long since recognized the importance of such an ecologization of the economy. It is essential to capitalize on the Japanese experience: the Japanese Ministry for International Trade and Industry (MITI) and industry itself founded - in 1990 - the Research Institute for Innovative Technology on the Earth (RITE). This institute is concerned mainly with the development of products and production methods that contribute to climate protection. Their projects include research in the fields of carbon dioxide absorption, new cooling agents, or compostable plastics. For certain projects, RITE cooperates also with private enterprises and other institutions. One notable feature of this institute is the close cooperation between the government and industry in the joint development of environmentally friendly production processes and substitute substances. In Germany, on the other hand, companies often do this only under the pressure of law and then in fierce competition among each other. The result is that in Germany about seven companies are developing the same number of CFC substitutes whereas the Japanese are jointly working on the development of a single substance. This, of course, saves money and time - time which is used for the launching of advanced ecological products.

Another example is fuel-efficient cars. The Japanese have announced plans to introduce an 80-mpg car within three years. Efforts are also being made in this field in the United States. Together with General Motors, the energy expert Amory Lovins has been developing a new car within the scope of the "Super Cars" project for several years. According to Lovins, a quantum leap might be possible in this field. An efficiency of 394-448 mpg for a four-person car and a 100-to 1000-fold reduction of emissions could be achieved by an appropriate design of the body, by a marked reduction of weight and air resistance, by a marked reduction of transmission losses in the engine, and by a new hybrid electric drive. Lovins thinks that this might result in a realistic improvement of the overall efficiency by a factor of five to fifteen. Mass production could start in the year 2000.

For a future-capable industry this can only mean expediting corresponding projects and launching the resultant products. There are two important measures that might help facilitate such innovations:

1. Founding research and development institutes for promising pro ducts such as degradable and environmentally friendly plastics;

2. Establishing standing fore where companies, labor unions, scientists, politicians, and citizens jointly work out the general conditions for innovations.

In Lower Saxony, we have now gained some experience with such a forum in which representatives from management and labor, on the one hand, and from science, environmental associations, and politics on the other discuss the general conditions for the reorganization of production. The subjects dealt with are the reappropriation of research funds, type and objective of tax incentives, quality control, and ecological balance sheets, as well as problems of public relations and marketing. The first forum involved the plastics-processing industry. After an experts' meeting, a round table of company representatives, scientists, and representatives from labor unions and environmental associations continued the talks, discussing in particular all the problems with regard to plastics - from production through utilization to disposal. All parties involved are aware of the fact that forward-looking strategies must be developed not only for solving ecological problems but also for securing the future of the chemical industry in Germany. Even today, mass-produced plastics like PVC are manufactured at lower costs in the former Eastern Bloc countries or in Saudi Arabia than in Germany. DM 1.20 must be spent to produce one kilogram in Germany whereas the same quantity costs only DM 0.80 in Asia. The consequence is that such products will be imported in the future so that soon nobody will be able to make money or provide jobs with them in Germany. However, we are determined to and will prevent the chemical industry from slipping into the same kind of crisis as the steel industry. Another aspect is the high energy costs for plastics. Here, too, we are at a crossroads: Which plastics will we need in future? Cheap products with high disposal costs or high-quality special products and biologically degradable plastics which may be more expensive to produce but easy to recycle or dispose of?

The answer is obvious: What we need is an innovative boost in the development and launching of environmentally friendly and internationally competitive products and services. To achieve this, close cooperation among government, industry, science, and society will be indispensable.

Closed-cycle economy and ecological enterprises

For this reorganization industry requires incentives - in terms of both money and concepts. A forward-looking concept is the realization of a closed-cycle economy which - from the biological as well as the technological point of view - can take back almost anything it has produced and put it into the production cycle again, the consumer being the only interim user. Most consumer goods fit into one of three categories: non-durable goods, durable goods, or goods which finally end up as waste. The last must be the smallest quantity in the future. Non-durable goods that are used up completely or are subject to wear and tear in the course of time such as shampoo, detergents, shoes, or tires must be fully biologically degradable. Durable goods are not purchased for their own sake but for the specific service they offer: cars, razors, TV sets, or computers. In the future they will have to be designed in such a way that they can be fully disassembled. Above all they will have to be taken back directly by the manufacturer. This will be the only way to ensure that the manufacturers change over to environmentally friendly production methods.

At present, those durable goods stand for a gigantic waste of raw materials. A TV set contains more than 4,000 different chemicals resources as well as pollutants. The production of a TV picture tube alone requires as much energy as the production of all glass vessels the average consumer hauls to the public glass collection bins in the course of his/her life. In the future this material must be reused by the manufacturer, who must also be responsible for disassembly.

If this kind of product responsibility becomes general practice, the next step will only be logical: the manufacturer will remain the owner of his/her product from the outset. Durable goods such as TV sets or computers will then not be purchased any more, but leased. For the consumer wants to take advantage of the utility value only, not of the material value. He or she wants to watch TV. Today, however, when buying a TV set consumers automatically become the owners of plastics, cathode ray tube, and manganese, i.e., expensive reusable material or hazardous wastes that are of no use at all to them.

What is therefore urgently required is improved environmental liability as well as extended product liability and responsibility. In addition, tools like eco-leasing need to be developed and put to use.

In the ecological modernization of the economy a key role is played by waste policy. For instance, multiple-use systems can and must be promoted more intensively in many fields. What is basically required is a closed-cycle economy law which really deserves this name because it not only controls the flow of waste but also requires substances and products to meet certain standards. The compromise negotiated by the German Bundesrat and Bundestag with regard to the Closed-Cycle Economy Act proposed by the former minister for the environment, Klaus Toepfer, constitutes merely an improved waste disposal act. Improvements could be achieved only through the initiative of those federal states governed by the SPD. For example, waste avoidance is accorded absolute priority. What remains to be done now is to further develop waste management into ecological substance management governed by the principle of sustainable development and aiming at a reduction in the quantity of substances, a multiple and efficient use of substances, the deceleration of the flow of substances, and the closure of substance cycles. This can really help to avoid waste and establish utilization cycles. Ecological substance management is made possible via the product responsibility of the manufacturers. In developing and realizing an ecological substance policy, we will utilize the findings of the German Bundestag commission of inquiry into the "Protection of Man and Environment," which has furnished many ideas and suggestions.

What is important for the ecological modernization of the economy is, of course, the ecological orientation of the enterprises themselves. In this context, there are many positive approaches which must be improved, promoted and broadened. In the last few years "ecological pioneers" from trade and industry have founded organizations such as the "Bundesdeutscher Arbeitskreis fur umweltbewußtes Management B.A.U.M." or "Future." Together with those organizations we intend to further develop and apply instruments for the ecological orientation of company policies such as the ecological audit regulation of the European Union or environmental controlling. In Lower Saxony a research project investigated the environmental management information system. Among other things, this study revealed that environmental controlling not only highlights widely known environmental problems in the companies, but also offers approaches for cutting costs and increasing production. The introduction of such systems in individual enterprises, especially in small trade firms, must be promoted.

In this context it would be useful to further develop - together with science and the appropriate associations - other instruments for ecological modernization such as ecological balance sheets for individual products or product line analyses. While ecological balance sheets provide an analysis of the entire life cycle of a product and its ecological impact, assessing the resultant substance and energy requirements as well as the resultant environmental pollution, product line analyses also cover the socio-economic effects. They register, analyze, and assess the benefits of the products concerned.

From nuclear to solar industry

Since Chernobyl, nobody seriously doubts that relying on nuclear energy means following the wrong track. This allegedly clean and safe way of generating electrical power has presented us with dilapidated reactors in Eastern Europe, a still-unsolved final disposal problem with huge amounts of radioactive waste, dangerous transports of plutonium around half the globe, and a flourishing black market in radioactive substances that has assumed alarming proportions. The further use of nuclear energy would be irresponsible, as new disasters cannot be ruled out. Nuclear technology is a dinosaur technology which, with its large-scale power plants, does not support energy-saving efforts and which, because of its capital intensity, ties up major financial resources required for a rational environmentally friendly energy system. Funds and research capacities employed so far for nuclear energy can and must be put to better use elsewhere: future energy supply must be based on regenerative energies such as wind, sun, and biomass. This is where the course must be set in the next few years. Therefore the Lower Saxony government intends to pull out of the use of nuclear energy and calls upon the federal government to substitute a Nuclear Energy Replacement Act for the Nuclear Energy Act. A corresponding Bundesrat initiative rejects the construction of new nuclear power plants.

What is necessary instead is to begin using renewable energies, in particular solar energy. So far, renewable sources of energy have met only a minor part of our energy requirements, but as in many other countries this can be traced back to the fact that they were paid little attention under research and technology policies that prevailed in Germany during the last few decades. Nevertheless, renewable energy sources have been booming in Germany for some time:

• The electric capacity generated by wind energy has doubled within one year. In 1993 alone, 600 new wind power machines were built. Lower Saxony is trying to optimize the economic utilization of wind energy by promoting projects such as the 1,000-megawatt wind power program. This has resulted not only in new environmentally sound energy sources, but also in new jobs. (For example, in a Lower Saxony company that had as few as 20 employees in 1985, the number of personnel rose to approximately 400 in less than ten years due to the boom in demand for wind-power plants.)

• Associations in the solar energy trade and industry are registering a steady rise of 25 percent per year in the number of orders for solar energy systems, with corresponding profits achieved not only by the manufacturers but also by the sellers and craftspeople who increasingly extend their business activities to the field of solar energy technology. Unlike Germany where the so-called 1,000-roof project introduced in 1991 has long since expired, Japan can serve as an example in this field. The Japanese government recently decided on a 70,000-roof program, paving the way for a new solar energy industry that creates new jobs, particularly in medium-sized businesses.

• Therefore, the German Social Democratic Party has suggested that the German federal government should introduce a 100,000-roof program to promote solar energy technology. The production of solar energy systems will become an important branch of industry and an element of competition in the world market. Within the next 20 years, hundreds of thousands of new jobs can be created through the production of solar cells, solar collectors, and wind-power plants. Buildings equipped with solar energy systems will also offer excellent opportunities for workshops and medium-sized businesses. The same applies to the utilization of wind energy. The funding of such forward-looking promotion and launching programs would be ensured by part of the revenue from an ecological tax reform.

• In addition, measures must be devised that promote the rational use and conservation of energy. Energy consumption continues to rise on a global scale. Germany ranks fifth among the energy consumers worldwide and first among the European Union countries, where our per capita energy consumption exceeds the average by twenty-two per cent. Much could be achieved politically in the field of energy by changing the general conditions: an investment program designed to promote the rational use of energy and renewable energy sources could counteract this development and foster the construction of combined heat and power plants and the launching of renewable energy sources. In addition, the law governing the feed-in of electric power from renewable energy sources needs to be improved and administrative obstacles blocking the use of renewable energy must be eliminated. Changing the appropriate building laws could promote both passive and active use of energy, with public buildings and federally financed low-cost housing being important sectors. Finally, renewable energy sources would have to be given priority in research and development policies. Of course, this applies also to the EU as a whole; the focus of research must be shifted from fusion research to renewable energy sources and a corresponding program launched for the European market.

In Lower Saxony, ecological reorientation of business is being promoted by a number of concrete measures. One instrument is the so-called "ecological fund for economic development." To realize its environmental objectives the Lower Saxon government has complemented its fund for economic development with an ecological aspect, extending economic development beyond growth and job considerations to promote environmental protection measures for the ecological reorientation and modernization of production processes. Promotion takes place in close coordination between the Lower Saxon Ministry for Economy, Technology and Transport and the Lower Saxon Ministry for the Environment in order to do justice to the interconnection of the portfolios of Environment and Economy.

Under a binding procurement guideline, all authorities administering public funds in Lower Saxony must ensure that any equipment or material procured meets the criteria of environmental compatibility. When placing contracts the authorities, who in total play a significant role on the demand side, must contribute in an exemplary way towards reaching the aims of avoiding waste, minimizing pollutants in the waste, recycling substances, and saving energy and water. In the field of federally financed low-cost housing, buildings which meet high standards of energy conservation are eligible for special government grants.

In order to reduce environmentally harmful motorized individual traffic the Lower Saxony government has offered all employees cheap tickets for buses and trains, thus setting an example which has been copied by several companies and public authorities. Finally, an energy program and an energy institute provide instruments to promote energy conservation measures and regenerative energy sources. While the energy institute has the primary task of providing concrete support to enterprises, local authorities, housing companies, and utility companies by giving advice and developing pilot projects for the ecological reorganization of energy supply or utilization, the energy program is designed to promote the pull-out of nuclear energy use without a rise in carbon dioxide emissions.

Ecological pioneering

An ecological modernization of the economy is also vital for global environmental protection to control the greenhouse effect and protect the ozone layer. It is in particular the OECD countries which must meet their international commitments and no longer delay in adopting national climate protection programs. As is well known, Germany has undertaken to reduce the carbon dioxide emissions by at least one quarter by the year 2005. However, this objective will only be achieved if the measures for the ecological modernization of economy and society are consistently geared towards reaching the overall aim of sustainable development. It was as long ago as 1987 that the UNCED Brundtland Report defined that aim roughly as follows: "Sustainable development means development which satisfies the needs of the present without running the risk that future generations are unable to satisfy their own needs."

To be able to preserve our natural basis of living we need sustainable development all over the world. The industrialized countries, in particular Germany, must pioneer in the ecological modernization of the economy. Because the way of life in the rich industrialized countries is a decisive factor for the chances of survival of humankind, we are determined to initiate a policy of sustainable development in our own country. Germany is one of the countries responsible for conserving the global natural environment and ensuring sustainable development in the countries of the South. The commitments made at the UNCED conference in Rio must be met. What is necessary is a better orientation of the international institutions towards this overall objective, including the convening of an international debt conference. An ecological modernization of our economy will also generate the know-how required for sustainable development all over the world. In his book Earth in the Balance: Ecology and Human Spirit, U.S. Vice-President Al Gore sets out the principle of the necessary course correction, which governs our activities as well: "We must make the rescue of the environment the central organizational principle for civilization."

8. Ecological tax reform

Introduction: Tax labor and income less, and tax resource throughput more
Allocation, distribution, and scale
Consumption and value added
Policy implications

Herman E. Daly

The ecological pioneer companies mentioned throughout this book have managed to make big strides toward sustainability while at the same time being successful in terms of the bottom line. In our present economic system, such an integration of economics and ecology is not easy, because it is strongly discouraged by current tax policies.

In most industrial countries today, we tax what we should encourage jobs and real income - and we reward what we should discourage pollution and resource depletion. These tax policies give business strong signals to maximize energy use and waste, favor virgin materials over recycled ones, and seek quantitative rather than qualitative growth - all of these leading away from ecological sustainability and toward ultimate ecological and economic collapse. In addition, by taxing labor and income, governments reduce employment and help create social instability.

Herman Daly is a distinguished economist who has argued for several decades that it is possible to design a radically different economic system, one that incorporates the basic principles of ecology. Daly was Senior Economist in the Environment Department of the World Bank from 1988 to 1994 and is currently Senior Research Scholar at the School of Public Affairs of the University of Maryland. He is cofounder and associate editor of the journal Ecological :Economics (Elsevier), has authored over one hundred articles in professional journals and anthologies, and is the author of several widely acclaimed books, including his classic Steady-State Economics (1977; second edition 1991) and For the Common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future (1994; co-authored with John Cobb).

In this far-seeing chapter, Daly provides a careful analysis of an ecological tax reform of the type that is now under study in several European countries. He demonstrates that economic arguments can be used not to reinforce the status quo, but to create a tax system that would provide powerful incentives for business to move toward sustainability.

Introduction: Tax labor and income less, and tax resource throughput more

In the past it has been considered desirable for governments to subsidize resource throughput* to stimulate growth. Thus energy, water, fertilizer, and even deforestation are still frequently subsidized. To its credit the World Bank (1992) has generally opposed these subsidies, but they remain widespread. It is necessary, however, to go beyond removal of explicit financial subsidies to the removal of implicit environmental subsidies as well. By "implicit environmental subsidies" I mean external costs to the community that are not charged to the commodities whose production generates them.

Economists have long advocated internalizing external costs either by calculating and charging Pigouvian taxes (after economist A. C. Pigou, who advocated taxes which when added to marginal private costs make the price equal to marginal social costs), or by Coasian redefinition of property rights (after Ronald Coase, who advocated property rights extensions such that values that used to be public property, and thus not valued in markets, become private property whose values are protected by their new owners). These solutions are elegant in theory, but often quite difficult in practice. A blunter but much more operational instrument would be simply to shift our tax base away from labor and income onto throughput. We have to raise public revenue somehow, and the present system is highly distortionary: by taxing labor and income in the face of high unemployment in nearly all countries, we are discouraging exactly what we want more of. The present signal to firms is to shed labor and substitute more capital and resource throughput to the extent feasible. It would be better to economize on throughput because of the depletion and pollution associated with it, and at the same time to use more labor because of the high social benefits associated with reducing unemployment.

More fundamentally, as we have moved from an "empty" to a "full" world, the remaining natural capital has more and more come to play the role of limiting factor, a role previously played by manmade capital. Our economizing effort must always focus on the limiting factor, according to economic theory. The theory has stayed the same but the identity of the limiting factor has changed. To economize on natural capital we must raise its price relative to man-made capital. We must do this by policy, such as ecological tax reform. There are many reasons why the market will not automatically bring about the needed increase in price on natural capital:

• Natural capital, for example, is the stock of trees in a forest that yields a flow of cut timber, or the population of fish in the sea that yields a flow of caught fish. The annual flow of cut timber and caught fish would be "natural income." Natural capital also provides a flow of natural services such as CO2 absorption, nutrient recycling, regulation of temperature, rainfall runoff, etc. Natural capital is common property, and lack of private ownership means it is unpriced.

• On the source side the running down of natural capital stocks and inventories increases short-run supply and lowers price. If all ranchers decided to liquidate their herds over the next five years and go out of business (in order, say, to invest in chickens), we would not be surprised to see falling beef prices for five years. That will not hold, however, in the sixth year.

• There are possibilities for substitution of abundant resources for scarce ones, within limits not yet reached.

• Externalizing costs of extraction and production keeps resource prices lower than they otherwise would and should be.

• Demand as well as supply affects price, of course, and ruling the demands of many interested parties out of the market keeps prices lower. For example, future generations do not bid in today's markets, and even the present's provision for the future is cut short by the practice of discounting. The survival needs of nonhuman species, like those of future humans, are not expressed in markets.

• Investment by the North in technologies to speedily extract resources in the South results in lower resources prices and a transfer of value from South to North.

• As will be discussed more in the next section, market prices only solve the problem of efficient allocation - and do so only by taking prior solutions to the problems of just distribution and sustainable scale as given. To count on market prices to solve the scale problem is a "category mistake," like trying to drive a screw with a hammer.

There is a growing consensus among a broad range of stake holders in the U.S., and even more so in Europe, concerning the need to reform tax systems to tax "bads" rather than "goods." Taxes have substantive incentive effects which need to be considered and utilized more effectively. The most comprehensive proposed implementation of this idea is coming to be known under the general heading of "ecological tax reform" (von Weizsäcker and Jesinghaus 1992, Costanza and Daly 1992, Passell 1992, Repetto et al. 1992, Hawken 1993, Costanza 1994). Earlier discussions of similar schemes were given by Page (1977) who considered a national severance tax, and Daly (1977) who discussed a depletion quota auction which is roughly equivalent.

Shifting the tax base to throughput induces greater throughput efficiency, and internalizes in a gross, blunt manner the externalities from depletion and pollution. True, the exact external costs will not have been precisely calculated and attributed to exactly those activities that caused them, as could theoretically be accomplished with a Pigouvian tax that aims to equate marginal social costs and benefits for each activity. But those calculations and attributions are so difficult and uncertain that insisting on them would be equivalent to a full-employment act for econometricians and bureaucrats, and prolonged unemployment and environmental degradation for everyone else.

Politically the shift toward ecological taxes could be sold under the banner of revenue neutrality. However, the income tax structure should be maintained so as to keep some progressivity in the overall tax structure by taxing very high incomes and subsidizing very low incomes. But the bulk of public revenue would be raised from taxes on throughput, which could be levied at the depletion or pollution end, or both. To minimize disruption, the shift could be carried out gradually by a pre-announced schedule. This shift should be a key part of structural adjustment, but should be pioneered in the North. Indeed, sustainable development itself must be achieved in the North first. It is absurd to expect any sacrifice for sustainability in the South if similar measures have not first been taken in the North. Later we will return to the theme of a North/South bargain as the international context for national policies of ecological tax reform.

The basic goal of ecological tax reform is to limit the throughput of resources to an ecologically sustainable scale and composition relative to the ecosystem, a goal until recently neglected. But the more traditional goal of efficient allocation of resources is also served by this instrument because it raises the tax on bads and lowers the tax on goods - it internalizes externalities in a blunt general way, without getting stuck in the morass of calculating Pigouvian taxes and fretting over secondary general equilibrium consequences. Another economic goal, of distributive equity, is both helped and hindered. The throughput tax is basically a capturing for public purposes of the scarcity rent to natural capital as economic and demographic growth increases its value. Rent is defined as any payment above the minimum necessary supply price for a factor of production. For land the necessary supply price is zero (no one has to produce it), so all payment for land is rent. Some payment for resources is rent. Rent increases with demand for land. Since rent is an unearned surplus there are strong ethical and efficiency reasons for taxing it. A throughput tax is not the same as a rent tax but its incidence will partly fall on rent from unproduced resources extracted from the land. A throughput tax has some of the equity appeal of Henry George's rent tax on land. However, like all consumption taxes, it is regressive. This could be counteracted by retaining the income tax at the extremes - a positive income tax for high incomes, a negative income tax for very low incomes, and a negligible income tax between the extremes. The essential idea is to gradually shift much of the tax burden away from "goods" like income and labor and toward "bads" like ecological damages and consumption of nonrenewable resources. Such a shift would encourage resource-saving technologies, and should simultaneously improve both employment and ecological sustainability.

Of the three major goals of economic policy (sustainable scale, efficient allocation, and just distribution) the ecological tax reform is primarily aimed at the first; contributes positively if non-optimally toward the second; and requires some supplement from an attenuated income tax structure to serve the third. These goals are discussed more fully in the following section.

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