A simple illustration

At the heart of the proposal made in this entry lies Buchanan’s notion of choice-influencing costs and, specifically, choice-influencing taxes. The pro­posal is driven by the need to define a choice-influencing tax, since the point

of introducing ecological taxes is to influence decision makers in their eco­logically relevant behaviour.

If taxes are to influence choices, it is important to define or identify those decision points where choices can actually be made. The difficulty with identifying such decision points is that a tax administration cannot by itself accomplish this task. Only a general rule broadly describing the decisions and their consequences will allow the identification of a particular decision point, a point in time which is subject to decisions by the taxpayer. This is in itself not an anomaly. In the presence of capital gains taxes, for instance, taxpayers will make their decision so as to minimize the liability, and they will therefore choose the point of a transaction that leads to a capital gain with a view to minimizing the tax liability. In the case of ecological taxes, we want to stimulate neither capital accumulation nor tax avoidance but a posi­tive ecological decision, which means that an incentive needs to be defined so as to induce parties to change their behaviour in an ecologically positive way.

An important issue to be raised with respect to any proposal for an ecologi­cal tax concerns the informational requirements to be demanded from the different parties involved. In general, it cannot be assumed that a tax auth­ority can develop expertise in complicated environmental issues. In our stylized example, no such information is required of the tax authority. The informa­tion rests exclusively with the parties involved, and it needs to be presented in a form that is amenable to control and certification by a specialized public authority typically dealing with environmental issues. The burden of docu­mentation and proof lies entirely on the party or parties claiming the tax credit. Hence the informational requirements with respect to the administra­tive feasibility of the ecological tax proposed are minimal.

An important issue in this case is technology choice. The stylized example involves two different types of technology choice. On the one hand, inside the ecological system as defined above, the relevant technology choice refers to the cooling system, which in our example must be flexible enough to provide for either warm water directly emitted into the river, or water being retained within the cooling system long enough to prevent the formation of mist at crucial moments. However, another technology choice is relevant with respect to the ecological system itself and interests outside this system. This is the choice of fuel to be used for the generation of electrical power, such as carbon or nuclear energy.

An important concern among economists always revolves around the prac­ticability of the solution proposed and the possibility of strategic behaviour and bargaining. With respect to Pigouvian taxes, it has often been pointed out that they create an incentive to increase the externality prior to imposition of the tax. The tax credit, which is the form the ecological tax takes in our example, creates no such incentive. The tax credit is granted to the extent that an improvement can be demonstrated. The tax credit can only be claimed against income actually generated after and due to the improvement. There is no possibility for the parties to increase the externalities in question before entering into the repartitioning agreement, since that would harm the interests of at least two of our three parties assumed.

Related to the bargaining issue is the problem of whether the tax credit granted can be too high or too low. In this context, it is important to establish upper and lower limits. The lower limit obviously is zero, which means that no incentive is present. The upper limit depends on the income claimed to be generated as a result of the ecological improvement. Here the tax authority relies on data provided by the taxpayers, who have no incentive to overesti­mate their projected income, as this will eventually be subject to taxation. Error on the part of the tax authority can be readily contained by being conservative with respect to the number of years over which the tax credit is granted. On the other hand, being too conservative means standing in the way of stimulating ecological improvements. Obviously, there are error possibili­ties of the first and of the second kind which lie within the scope of discretion of the tax authority, as in any other case of taxation.

Finally, we should point out that this particular proposal is also generalizable to the problem left outside the discussion so far: the choice of fuel for electric power generation. The important aspect here is that the ecological unit needs to be defined differently, and consequently also in all likelihood a different ecological tax unit with a different set of tax and environmental authorities involved will have to make the respective decisions. In principle, however, incompatible resource use can also in this case be resolved by attempting a repartitioning of property rights. Whether the transactions costs involved in repartitioning these property rights are outweighed by the possible benefits will only become apparent once the ecological tax credit is in place.