Economics and environmental degradation

Economists and environmentalists alike have touted neoliberalism and environmentalism as mutually exclusive. Since the turn towards neoliberalism that started in the 1980s, global carbon dioxide emissions have increased by over 50%, from 22.7 to 36.4 billion metric tons. This has led many economists and experts alike to associate environmental problems with cost-cutting procedures, taken by firms who either move these costs downstream or are unwilling to maintain non-profitable, public goods – such as wildlife preservation. Such claims are plausible, with corporations traditionally resorting to such measures, justifying the need for governments to have economic incentives for firms to pursue environment-friendly policies. Whilst government subsidies and a multitude of environmentally related taxes have succeeded as economic incentives for reducing environmental degradation, carbon taxes have been proven as the most effective form of government intervention, as such a levy slows environmental degradation without hindering economic growth.

Renewable energy subsidies by governments have effectively promoted the growth of clean energy sources, thereby slowing environmental degradation. Implementing renewable energy subsidies was initially to combat market failures, such as the price disparities that were apparent between coal and wind. In 2016, subsidies provided by governments for the development of renewable energy technologies were $140 billion. Whilst this sum appears excessive, the International Energy Agency estimated fossil fuel subsidies to be about $260 billion in the same year, with these going towards energy sources that contribute to climate change. If governments globally intend to halt environmental degradation, removing subsidies for harmful energy sources would be a good start.

Subsidies for clean energy sources have led to innovation and lower costs, thus reducing fossil fuel dependency. In the UK, Britain’s electricity generated from coal decreased from 137 to 4.4 terawatts per hour between 2012 and 2020. During the same period, electricity produced by wind has almost quadrupled, from 17.6 to 71 terawatts per hour. This is because of increased wind-turbine efficiency, developed due to government subsidies making it cheaper for engineers to experiment with such technologies, leading to offshore wind costs falling below market value for the first time in 2019, below £40/TWh. Government subsidies have caused this reduction in clean energy technologies, reducing the cost of renewable energy to the point where they are no longer needed, thus rendering subsidies an effective tool in slowing the extent of environmental degradation.

The extent of environmentally related taxes has increased since the 1980s, designed by governments to discourage firms from engaging in activities that cause environmental degradation. Such taxes generally fit into three subcategories: energy, transport and pollution taxes. Energy taxes cover both energy fuels for transportation, such as gasoline, diesel and natural gas. Transportation taxes cover congestion charges, as well as flight levies. Lastly, pollution taxes account for various gas emissions (nitrous and sulphur oxides, carbon) alongside substances that damage the ozone layer.

Energy taxes have been effective in reducing environmental degradation. A notable example of an energy tax in the UK would be the climate change levy, charging mainly electricity and natural gas usage. The Labour government introduced this in April 2001, with government revenues from this tax averaging at just over £2 billion over the past three years; levies on natural gas usage comprised just over £250 million of the £2.2 billion collected in 2019/20. The climate change levy has proved an economic incentive for firms to reduce their natural gas usage by making it more expensive to use fossil fuels, with gas consumption falling from 102 to 72.5 billion cubic metres between 2004 and 2020. As a result, electricity demand has declined in the UK, falling from 310 to 218 terawatts per hour between 2006 and 2020. Reduced electricity demand has led to a reduced supply of electricity, leading to a decline in the number of nuclear and natural gas facilities in use, resulting in fewer pollutants released into the atmosphere. Thus, energy taxes are an effective economic incentive for reducing environmental degradation.

Conversely, transportation taxes have a damaging effect on economic growth, thus hindering the development of technologies that could effectively combat environmental degradation whilst simultaneously reducing tax revenues for clean energy subsidies. Introduced in November 1994, Air Passenger Duty in the UK is one such transportation levy. Initially, it charged passengers £5 to fly to nations within the EEA (European Economic Area) and £10 for all other destinations. The rates have increased since then, with revenue growth from APD on average outstripping average GDP growth between 1994 and 2018. Therefore, Air Passenger Duty represents an average increase of 16% in ticket prices for short-haul flights, increasing to up to 27% during off-peak periods. These higher prices lead to a decrease in aggregate demand for airline flights, negatively affecting businesses and economic growth. In Ireland, following the reduction in comparable aviation tax levies, aggregate demand for flights increased by approximately 12.5%. A report on the Economic Impact of Air Passenger Duty found that abolishing APD would create up to 61,000 jobs, in effect paying for itself through increased revenues from other taxes. Thus, the abolition of various transportation tax levies, such as the Air Passenger Duty would aid in reducing future environmental degradation, as this would increase tax revenues, leaving the government with more funds for clean energy subsidies which promote the use of renewable energy sources.

As with energy taxes, pollution tax levies have reduced emissions, thus slowing environmental degradation. In 1992, the Swedish government introduced a tax on nitrous oxide. To combat soil acidification, which threatens agricultural and pasture output, the government imposed this tax on energy used for space heating, electricity generation, and industrial activities. This pollution tax contributed towards a 30-40% decline in nitrous oxide emissions – a pollutant linked to various respiratory problems. Annual revenue from this nitrous oxide tax levy reached €1 billion in 2016, used to subsidise plants that are more environmentally friendly, by subsidising firms that emit small amounts of nitrous oxide into the atmosphere. Therefore, pollution taxes slow environmental degradation by reducing emissions whilst simultaneously producing tax revenue, leaving money for governments to spend on renewable energy subsidies.

However, carbon taxes have undoubtedly been the most efficient and effective form of a pollution tax, combating environmental degradation whilst contributing to economic growth. In Canada, the province of British Columbia instituted a carbon tax in 2008, initially at $10 CAD per tonne. Since then, carbon emissions per capita have declined by 14%. Gas prices increased by $0.19 per gallon in the first year alone, thus disincentivizing gas usage. Further investment in renewable technologies followed, resulting in only 32% of British Columbia citizens opposing the carbon tax in 2015. Increased revenue from the carbon tax allowed for the provincial legislature to reduce personal income taxes, increasing spending and increasing economic growth in the process. Thus, the carbon tax in the province of British Columbia has proved successful by disincentivizing the use of fossil fuels, thus reducing carbon emissions. The tax has effectively promoted economic growth by allowing the reduction of other taxes, such as income tax, due to the additional revenue generated by the carbon tax.

On a national level, a carbon tax has produced similarly successful results, as has been the case in the UK. In April 2013, the coalition government introduced the Carbon Price Floor as part of the climate change tax levy. This first stood at £9 per tonne and was increased to £18 per tonne in 2015. The carbon tax levy has been effective, with total carbon emissions in the UK falling to levels last seen in 1890, having fallen by 29% over the past decade. It has also had a negligible effect on businesses, accounting for less than 1% of the increase in energy costs experienced by firms in 2014. The Carbon Price Floor has reduced carbon dioxide emissions, by reducing the amount of coal used to generate electricity. As burning coal emits the most carbon dioxide out of all fossil fuels, the CPF has made this process expensive. The amount of coal used in energy generation remained consistent between 1996 and 2012, at around 33 million tonnes. However, this figure declined drastically following the introduction of the CPF in 2013, falling to just over 5 million tonnes in 2016. Therefore, the effectiveness of the Carbon Price Floor as a carbon tax is clear, as it has reduced carbon emissions by reducing fossil fuel burning, making such a process more costly for firms. As such a tax has had a minimal impact on businesses, it is safe to say that a carbon tax slows environmental degradation without negatively impacting economic growth.

To conclude, government fiscal policy can effectively combat environmental degradation. By removing the fossil fuel subsidies that actively exacerbate climate change alongside transportation taxes that negatively impact economic growth to the point of reducing revenues for other environmentally friendly actions, governments can take an important step towards halting environmental degradation. Subsidies, alongside energy and pollution taxes, have proved effective economic incentives in combating climate change, however, carbon tax levies have been the most effective in slowing environmental degradation.