How Green is my Freedom?

Fred Foldvary

April 11, 2007

Civil Society Institute lecture, SCU

Good evening!

Welcome to the Civil Society Institute lecture.

The issue I want to talk about today is,

can we have a big reduction in pollution

without reducing economic output and incomes

and without restricting economic freedom?

Economic freedom is the legal ability

to produce, exchange, and consume goods

as we wish,

so long as we are peaceful and honest.

The conventional or mainstream view in economics

seems to be that there is a necessary tradeoff

between a cleaner environment

and a higher level or income or standard of living in material goods.

For example, one of the leading economics textbooks is

Principles of Microeconomics

by N. Gregory Mankiw,

a professor of economics at Harvard University

and from 2003 to 2005,

Mankiw was the chairman of the

President’s Council of Economic Advisors.

This is the textbook which I use in teaching microeconomics.

Here is what Mankiw write on the tradeoff

between the economy and the environment.

Mankiw says that there is a

“tradeoff between a clean environment

and a high level of income.


Laws that require firms to reduce pollution

raise the cost of producing goods and services.

Because of the higher costs,

these firms end up earning smaller profits,

paying lower wages,

charging higher prices,

or some combination of these three.

Thus, while pollution regulations

give us the benefit of a cleaner environment

and the improved health that comes with it,

they have the cost of reducing

the incomes of the firms’ owners,

workers, and customers.”

The are three basic types of laws to reduce pollution.

The first type is regulation, namely,

governmental commands that dictate what we do.

For example, do reduce emissions from cars,

California forces us

to do a smog test every couple of years.

I had to do one recently,

and besides paying for the test,

I suffered an opportunity cost,

the time spent to go and have the test done,

when I could have been doing important things

like grading papers.

That time I spent have my car smog tested

are precious hours of my life, wasted, gone forever.

Multiply that by the millions of car owners doing that every year.

By the way, my car passed the test,

as do most cars.

In fact, most newer cars run quite clean,

so the smog test is a waste of time and money

for most car owners.

Most of the pollution from cars comes from a small percentage of the cars.

So a smog test constitutes collective punishment.

But that is only one of many regulations to reduce car emissions.

The federal government regulates car engines and gasoline.

Regulations require special gasoline additives for California,

which is one reason why gasoline is more expensive in California

than in most of the United States.

Mankiw is correct about laws that regulate pollution.

Emission standards and restrictions and requirements do

impose an extra cost on production,

making goods more expensive,

reducing production and income.

The second way to reduce pollution is called cap and trade.

Suppose we want to reduce pollution from electricity generating plants.

In Europe and some states, governments have put a cap on emissions,

meaning that these operations

are not allowed to pollute more in total than some set amount.

Each firm is then allocated permits to pollute in proportion to their current emissions.

If a firm seeks to expand output, to generate more electricity,

which then increases its pollution,

it must buy a permit from one of the permit holders.

As production expands, the price of the permits rises,

and it becomes more costly to pollute.

Firms that can reduce their costs more easily

sell permits to those which would have a higher cost.

Firms get rewarded for reducing pollution,

and penalized for increasing pollution.

So instead of imposing rules and restrictions,

this policy reduces pollution

through the price system

and this allows firms to respond

according to their individual costs and benefits.

They can either reduce pollution or buy permits.


cap and trade still increases the costs of doing business.

and if the government lowers to cap to reach long-term environmental goals,

it has to buy back the permits.

Moreover, pollution permit trading

is not feasible for emissions from vehicles and houses.

The third method of reducing pollution is to tax it.

This would be a charge or levy or fine in proportion to the damage it causes.

This would reduce pollution through the price system like permit trading,

but unlike permits and unlike regulations

a tax on pollution brings in revenue to the government.

Several countries levy charges on emissions.

For example, Germany levies a charge on emissions that go into its waterways.

Western Germany, along the Rhine River,

has a lot of chemical factories,

and yet, the rivers are quite clean,

because of the stiff charge on emissions.

Now, when a pollution charge makes goods more costly,

this is a socially good thing,

because it makes the consumer, the buyer,

pay the full social cost of the product.

It is not an arbitrary expense like a general tax,

but specifically, compensation for the pollution damage.

General taxes, like income and sales taxes,

impose what economists call

a deadweight loss or excess burden

on society.

This is the misallocation and waste of resources

caused by arbitrarily raising the cost of goods

reducing the quantities produced,

and reducing investment,

and so reducing growth and future wealth.

A pollution charge does not have this deadweight loss

because the pollution itself is a social cost.

So if there is no pollution charge,

in effect

the polluter gets subsidized.

The polluter does not pay the full cost of his production.

The excess burden of taxation in the United States

has been calculated by economists

as at least a trillion dollars a year.

Economists have regarded this deadweight loss

as a bad thing, which of course it is.

But, we are living in a unique time in human history,

when the excess burden of taxation

can be a great social benefit.

The deadweight loss of present-day taxation,

can save humanity from a possible catastrophe

from increasing and escalating global warming.

How can the huge deadweight loss of taxation be a good thing?

Because it gives us a historic opportunity do make

a great leap of fate.

It enables us to implement

the green tax shift.

If governments at all levels

levied swiftly escalating charges on pollution

while simultaneously reducing

taxes on income, sales, and buildings,

this revenue neutral shift

would efficiently reduce pollution

while also reducing the deadweight loss

of taxes on labor and enterprise.

Since the overall level of taxation would not increase,

enterprise would not be hampered overall.

There would just be a shift from industry that pollutes a lot

to industry that pollutes much less.

Now, pollution charges would not be able to replace

all the taxes on income, sales, and buildings.

So a complete green tax shift,

to totally eliminate taxes on income, sales, and buildings,

would also require an additional shift,

namely a tax or levy on land value or land rent.

Since land has a fixed supply,

a tax on land value does not reduce the supply of land,

and so there is no deadweight loss.

Landlords cannot pass on the land tax to tenants,

because if they try, they fewer tenants, and vacancies.

Moreover, land cannot hide from the tax collector,

and land cannot run away to Brazil.

There is no way to evade a tax on land if all land is treated the same,

taxed in proportion to its potential market value

in its highest and best use, regardless of actual use.

A land tax is also simpler to implement,

because the owner does not have to keep complicated records.

The title holder gets a bill and pays it, like a utility bill.

So a complete green tax shift would

eliminate taxes on income, sales, and property improvements like buildings,

and instead tax pollution and land value.

There would also be user fees

when a government service has specific beneficiaries.

This green tax shift would eliminate

the deadweight loss of taxation.

The green tax shift

would increase productivity

while greatly reducing pollution,

and also substantially increase economic freedom,

since the shackles of paying taxes and keeping records and getting audited

would be lifted

from the worker,

from the entrepreneur,

from savings accounts,

from merchants selling goods,

from consumers,

indeed from all beneficial economic activity.

We would be taxing something bad - pollution

instead of something goods, like labor and enterprise and goods.

Even the landowner would not have any tax burden

after the transition to land-value taxation.

Why? Because a tax on land value,

reduces the price of land.

The owner keeps less of the rent

so he bids less for the land.

After the transition,

what a new owner pays in land tax,

he saves in not having to pay for land,

and not having to pay in mortgage interest.

And a pollution tax is not really a net burden to the polluter,

because for that tax, he gets the benefit

of being able to dump garbage into our environment.

The optimal amount of pollution is not zero,

because it takes resources to reduce pollution,

and the extra benefit of reducing pollution decreases

as we eliminate more of it,

while the extra cost of reducing pollution

rises as we eliminate more of it.

I don’t have data to back this up,

but my intuitive sense tells me that

the optimal amount of global pollution

is far less than the current amount of pollution,

judging from what I have read

and programs I have viewed

on the harmful effects of pollution

on wildlife and human well being

as well as possibly on the earth’s climate.

Even if current pollution is not contributing much

to climate change,

the green tax shift would be good for today’s economies

and today’s bad effects from pollution.

Taxing pollution is the morally right thing to do

and it is efficient,

and it does not restrict liberty.

How green is my freedom?

Freedom is as green as we can possibly get.

Efficiency is green, because wasting resources makes us less green.

A fundamental principle of liberty is,

that those who do harm should pay restitution,

and those who do no harm should not be imposed on.

The green tax shift

is really the only effective way to swiftly reduce pollution

in a big way.

It’s good for developed countries,

and for developing countries such as India and China.

The green tax shift would help all economies.

So, the good news is

that we can have it all.

We can take advantage of today’s big deadweight loss

to do a green tax shift.

If we don’t do a green tax shift,

if we try regulating and permit trading instead,

we will not eliminate the excess burden,

but rather increase the costs of enterprise,

and this will create political resistance,

and pollution will get worse,

and ruin our planet.

So, don’t just sit there.

Go forth and tell the world,

We need a green tax shift!

Spread the word:

Freedom is green!