Saving resources with a tax on their total use [News]

December 9, 2011 by Eugene Tay
Filed under News

By Joergen Oerstroem Moeller, The Business Times, 9 Dec 2011.

The gloom about a potential global recession has opened the door for a cascade of recommendations to stimulate private consumption. An almost unanimous chorus advocates transfer of the Western mass consumption model to Asia – overlooking the fact that if their advice is heeded, the global economy will implode under the weight of resource demand.

We are running out of resources (commodities, raw materials, food and water), making the longer-term economic outlook uncertain at best. Physical shortages are obvious for several resources – as we saw with rare earths, indispensable in the making of, inter alia, cell phones. Economic shortages push prices up, opening the door to supply-side inflation even under a low-growth scenario.

A higher gross domestic product is synonymous with higher production and a wealthier society because there are more goods and services. But this is a short-term view, not taking into account, even neglecting, the fundamental observation that a higher GDP signifies more use of limited resources. Societies become poorer in the longer term by depleting limited resources.

A society’s wealth depends on the ability to save resources while maintaining or even increasing production. The more output a society can squeeze out of one unit of resource, the wealthier it becomes in the longer run.

Higher commodity prices must be allowed to change relative factor prices, making labour less expensive and resources more expensive. There are too many examples of countries resisting this by subsidising commodity prices. In fact, we need exactly the opposite.

The change in relative factor prices needs help to get underway. The way to do it would be to revamp the tax system, replacing income tax with a tax on total use of resources. Arguments and protests will mushroom, but this was also the case when the income tax and the sales tax were introduced.

Politically, a tax on total use of resources can be made progressive with a rising scale depending on resource use. It can be geared to influence the production processes applying different tax rates on various resources.

Economically, it would not be too difficult to measure total use of resources for a product. Economics already has a tool in the input-output tables disclosing where the input to make a product comes from. It may need some fine-tuning, but could be adapted to serve as basis for such a tax.

In a global context, the tax would facilitate negotiations about climate change and make burden sharing easier as it would end nations negotiating with other nations on this issue. Instead, the burden would be passed to the consumer who ultimately is responsible for emissions of carbon dioxide. Assuming that the tax takes the form of a levy, working more or less like a general sales tax, it would
introduce the ‘polluter pays’ principle on a global scale.

Now it is impossible to cut through the heated political arguments because the issue very soon boils down to which countries are going to pay more and which countries to pay less. A shift in location of production (outsourcing) from the United States to China means that China is being penalised even if global emission of carbon dioxide is the same.

Such a system is doomed to fail. Efforts to reduce global emissions of carbon dioxide should be neutral vis-a-vis localisation of production and consumption. A tax on total use of resources would meet that requirement.

If production is moved from the US to China, total use of resources might change a bit because production processes in the two counters differ somewhat, but not fundamentally. Consumption and, consequently, total use of resources will not change though.

Efforts to push consumers to use fewer resources might not stop with a tax, but it surely is the most effective way of getting there. Mandatory labelling might be envisaged to disclose resources used in the total production process, supplementing existing labelling about ingredients.

Producers would undoubtedly argue that it might not be possible or difficult to do this, but there seems very little evidence for repudiating the idea on such grounds.

If we know how the end product is made, we also know the inputs and it should be possible to turn that into some kind of common measurement for use of total resources.

We might go one step further. As at now, many consumer products are produced deliberately to last a limited amount of time. Technological obsolescence is often given as a reason, but that does not sound convincing.

It is much more likely that the business sector wants to boost revenue by forcing the consumer to buy a new product even if the one we have is still useful.

A tax system as proposed could reward products with a longer life span and punish products with a shorter one. It could be done by stipulating that a product with a guaranteed lifetime would be taxed less than a product with a shorter life span.

Just look at the market for many electronic products (cell phones, for example) or washing machines, dryers, fridges etc. It seems evident that most of these machines could easily last longer than they actually do.

The argument is sometimes put forward that the new model saves energy, but just keep in mind how many resources were used to produce the new model – it far outweighs the savings on the energy bill.

The writer is visiting senior research fellow, Institute of Southeast Asian Studies, Singapore, and adjunct professor, Singapore Management University & Copenhagen Business School

Source: The Business Times

Tags: resource consumption, resources tax