How to UnTax

 

A radical change in taxation yields radical emissions reductions

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In a nutshell, except for recessions, we haven’t managed to reduce emissions, and it is highly unlikely that we will, unless we radically change something.

Despite much fanfare, no change in carbon emissions

When the first UN Climate Conference took place in 1995, atmospheric carbon dioxide levels were roughly at 360 ppm. Two years later, nations signed the Kyoto Protocol, the first global agreement on climate change. In 2021, COP 26 is taking place, and we will likely see levels above 420 ppm, relentlessly growing year after year, despite agreements, certificate trades and renewable energy subsidies.

From Problem to Solution

Natural resources come (almost) for free

Over hundreds of millions of years, our planet has amassed geological riches, ranging from fossil fuels to high-density mineral deposits to underground water aquifers. These finite resources are essentially free to us, except for the cost of unearthing, transporting, and processing them.

Their actual “creation” isn’t paid for, and, in most cases, neither do we pay for the consequences of their use. With few exceptions, for example retail fuels in some countries, natural resource use is not taxed, encouraging large scale use and waste.

This encourages wasting nonrenewable treasures of our planet, while almost all governments worldwide levy taxes on human labor and profits. This forces even more resource use because human labor is heavily burdened, while the machines and computers replacing people are not.

We tax what is renewable – human labor – yet we don’t tax what is finite, defining incentives exactly the wrong way round.

Taxation wasn’t always going the wrong way

Before the industrial revolution during the 18th century, taxation occurred primarily on resources; farmers paid their “tithe”, a share of their harvests, owners paid tax on land or other property, and other aspects of resource use. For centuries, even a tax on windows existed, which led to owners bricking up windows to save money.

 

Most importantly: at that time, human effort and resource use were closely related, as the human share in sourcing inputs and producing outputs was high, given the fact that the world wasn’t mechanized, and engines were not yet available. Today, resource use and human labor are largely disconnected.

Yet paradoxically, when the world moved to nonrenewable resources, taxation was shifted to the only renewable resource: human labor, today providing the lion share of tax revenue.

Throughout human history, taxes were mostly levied on natural resource use, not labor. This was completely reversed during the past two centuries.

The fix: Tax nonrenewable resources, not humans

To protect future generations’ access to scarce inputs stored underground, to protect the environment from meaningless waste, and to reduce carbon emissions, we should do everything we can to curtail nonrenewable resource use without restraining the economy. The easiest and best way to do so would be by making users pay for the value they receive from those inputs, instead of merely the cost of extraction and processing.

This would significantly increase the price for fossil fuels, minerals, and scarce and often non-renewable freshwater.

If we use the proceeds from this new tax on resources to eliminate taxes on labor and profits, we would end up with a situation that benefits everyone: the environment, future generations, and people, because payroll tax and social security cost would disappear, providing more jobs and allowing for higher minimum wages.

Switching taxation from labor to non-renewable resources creates a win-win for humans and the environment.

How shifting taxes to resources can work

When moving to resource taxation, we eliminate all taxes on labor and profits, including social security and healthcare burdens on human labor, and sales tax. The same amount is then taxed from non-renewable resource use, in a way that their cost is higher than the total cost of comparable renewable (or recycled) inputs. Additionally, if waste recovery is not done by the supplier, its cost gets further added to the price. To use a few simple examples: If water is pumped from a non-renewable fossil aquifer, its cost gets raised to at least the lowest cost of other renewable water sources in the area (e.g. from purification or desalination). If we burn coal to produce electricity, the cost of renewable electricity – including storage to match demand – is taken as the reference. The price of mined copper is set to match the total cost of recycled copper of the same quality.

We expect many benefits from this changed economic paradigm. For natural resources and fossil fuels, we would expect a reduction of use by 50% or more, leading to significantly lower emissions and waste very quickly. The shift will also lead to much higher incentives to build products so they can be repaired or recycled easily, ensuring the longest-possible use of inputs that have been extracted. The fact that labor would now suddenly be much cheaper has two effects: more employment, and room for setting a higher minimum wage that enables people to live a decent life. On top of that, the fact that renewable pathways serve as a price reference encourages the improvement of those processes, leading to even better and more efficient resource use.

A few things to keep in mind

Defining a radically changed tax system can have many unintended consequences if not prepared and legislated properly. Some aspects that need to be looked at are the effects of a new tax regime on inequality, dynamics resulting from changes in resource or renewable prices, and the proper handling of cross-border transactions. Possible dynamics need to be thoroughly evaluated before making policy proposals. Here are the steps we are taking:

Defining the landscape

We are carefully evaluating other  alternative taxation proposals with a similar direction

Building a coalition

We are involving more people and institutions, bringing the best minds to the table

Developing concepts

We have already defined the basic principles, now a lot of thinking needs to go into the details

Modeling outcomes

To fully understand the dynamics and consequences, detailed models are required

Proposing legislation

We plan legislation proposals for the United States and at least one EU country

Creating momentum

Once details are ready, we hope to create a strong bipartisan movement

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