Shifting from labour to natural resources taxes

Getting into the idea and opening the debate

Emmanuel Macron brought the European carbon tax subject back to the table a few days ago, within a plan for an enhanced European taxation. In addition to set a carbon credit at an ambitious price (at least 25–30 euros), he called for a carbon tax at European frontiers that will affect imports from polluting industries.

Natural resources taxes at a glance

Carbon taxes are a way to prevent from a scary global warming but what about other environmental challenges we are facing ? We could succumb to the temptation to deal with one after the other, setting global warming as a priority. There is lots of work to do to limit our GHG (Greenhouse gas) emissions through taxation, it has already required a long path to set a carbon quota at France level after two failures in 2010 and 2014, and the last efforts to tax polluting trucks were in vain.

Well, there is an urge for a better use of our natural resources or to say it in a very simple way : it gets scarcer and scarcer like water and metals, our soils and our oceans are filling with waste, our lungs breath pollutants (PM, NOX, SOX) and that’s without talking about the land use.

EU green taxes (transport, energy, pollution and resources) accounted for only 6 % of global taxes in 2012 while 51 % were derived from labour. Meanwhile, tax credits, or EHS (Environmental Harmful Subsidies), are made to subsidy the fossil fuel industry and were estimated to be nothing less by € 24 billions in EU in 2014 (OECD).

Shifting to labour taxes, why not ?

There is always a fear that green taxes could decrease competitiveness and rise unemployment. Well what if we would lower labour taxes to increase natural resources taxes ?

While before production was mainly local, relocation became the norm, industry left Europe because of high labour costs and unemployment rose until today. While before nature seemed infinite and manageable, we now need a shift to a circular economy and we need lots of people for that, but labour costs are slowing it. Even if estimations change a lot between research papers, it has been showed that when one job is created for incinerating waste, at least five more are needed for recycling it and at least 10 more for remanufacturing, reusing or repairing it.

The shifting brilliant idea could in fact foster the EU competitiveness and create inspiring jobs, while pushing for a green transition. The Ex’Tax project summarized the principle in the following video.

The Cambridge Econometrics and the Ex’Tax project designed the scenario below to be revenue neutral, assuming that measures were introduced in 2016 and scaled up linearly to full value by 2020 :

• reduce natural resources use and pollution : taxes are set on carbon (in addition to quota system), fossil fuels, electricity bulks and water bulks for industrial use, and VAT is increased on polluting or natural resources intensive goods
• make firms to employ more people and make green activities viable : the revenues generated above make it possible to lower social contributions and income taxes. Additional incentives are added through payroll tax credit and zero percent VAT

Figure — Scenario for a tax shift from labour to natural resources & consumption (2020, difference from 2015 baseline)

The attractive potential impacts

2020 impacts were measured and seem tremendous as you can see below. While we could have anticipated a GDP decrease, positive effects of the reduced labour taxes and the associated employment rise offset any negative effects of the price increases.

Figure — Key modelling results (EU-27, 2015–2020, % difference from baseline)

This is witheout talking about other positive externalities that were estimated in the Ex’Tax report: reduction of air pollution and diseases associated, reduction of minerals extraction, reduction of land and water pollution, increase of people health and skills due to less unemployment.

Let’s open the debate

Obviously, these results are really sensitive as poor data was available and assumptions that had to be made are as strong as such a predictive analysis can be. But it underlines the potential behind such a shift and the necessity to get introduce it on the political agenda.

Taxation is a complex subject that can be debatted for hours but the following questions may come to your mind :

1. How to prevent from a decrease in the purchasing power of low-income or inactive populations ?
2. How to ensure that taxes reductions are really going to create jobs ?
3. How to prevent from slowing down renewable energies as nothing is set to differenciate them from other behind the “electricity tax” ?
4. Should we include specific taxes for scarce metals extraction and air pollutants (NOX, SOX, PM) decrease ?

I will try in my next article to convince you that solutions can be found and to get deeper in the ways to set the idea on the political agenda. In the meantime, I really advice you to check that ambitious study produced by the Ex’Tax and its partners.

N E X T → Shifting from labour to natural resources taxes (Pt2)

The real reasons why we should focus on resources ← P R E C E D E N T