Making Small Cool: A Case For Progressive Green Taxes

by | April 26, 2021

I’m sorry Tesla fans, but your slick 2-ton cars are not the way to save the planet. 

For that we are going to have to find more ways of curbing our profligate use of resources. A smart start would be to introduce progressive green taxes.

Led by the US, governments around the world are aiming for a post-pandemic recovery that is both green and fair. And forthcoming policy summits – building on the one last week hosted by President Biden – will spotlight the fact that going green is not just about decarbonizing the economy to combat global warming. The need to reduce biodiversity loss, pollution, and waste means addressing the fundamentals of how we use resources and the changes in daily life that will be necessary to begin regenerating the natural world.  

But to do this while also reducing inequality  — to ‘Build Back Better’ – will require governments to find new sources of revenue that are fair as well as efficient. . This will be politically tricky. .  

This is where progressive consumption taxes, which bear more heavily on the rich, come in. Surprisingly, this idea, which is hardly new, has so far been largely overlooked.  By levying taxes on consumers, governments would avoid jeopardizing the competitiveness of their domestic producers, which is the challenge raised by producer focused alternatives such as carbon emissions taxes. And by levying them on general resource usage, consumption taxes could address not just climate change, but broader environmental harms.  

Consumer, as opposed to producer taxes, would also more directly curb and redirect demand. Curbing demand would cut the scale of the required greening of the capital stock (just think of all the batteries that we are going to need) and reduce our reliance on refining sometimes unproven new technologies. Successful technical progress will also reduce the cost of products, which means that consumer taxes might be less visible to consumers because they would cream off only part of the benefits that would otherwise feed through to lower prices.  

Nevertheless, bringing in new green taxes would face opposition. Higher taxes on energy and resource-intensive goods would run straight into the problem that such goods account for a relatively high proportion of the budgets of poorer households.  

So, it makes sense to structure the taxes in a progressive fashion. The most obvious way would be to link the green taxes to the size, weight and value of the goods. This would hit the richer households harder because they consume not just more goods overall, but also the higher-end versions of stuff they buy. So people buying and using bigger cars or living in fancier homes would pay disproportionately more.  

Done well, progressive consumption taxes, by making smaller products relatively cheap, could help amplify a change in social norms to make small cool. They would also incentivize the sharing of larger aspirational products, a shift to towards saving and more spending on services. This new post-pandemic mix of behaviors might foster lives which are not just more sustainable, but happier too.  

Surveys suggest that consumers are increasingly receptive to buying greener products, although they remain reluctant to pay up to do so. But the precedent of charges on plastic carrier bags, which in the UK reduced demand by 95% in five years, illustrates how government action can leverage price signals to good effect.  

Cars provide another good example of the potential. Consider Japan, where the best selling cars are micro ‘kei’ cars, which are half the size and weight of the best-selling ‘cars’ in the US, which are actually huge pick-up trucks like the Ford F Series. This contrast is not simply cultural. It is easily forgotten that a catalyst for the US – and increasingly global – mania for pick-ups and SUVs was successful auto industry lobbying for laxer emissions standards on light trucks back in the 1970s. Meanwhile, in Japan tax and regulatory relief have actively promoted micro cars. 

Given the current expansive mode of fiscal policy, governments have a golden opportunity to get started on greening the tax system. They could offer a ‘Build Back Better’ bargain to sweeten prospective tax hikes on resource-intensive goods with immediate tax cuts for the lower paid, as well as for services and green products. 

And, they might even tempt Tesla to help make small cool by launching a micro car.  

About the Author

Mark Cliffe is a board advisor and thought leader on the impact of disruptive change. He is an Advisory Board member at Project Syndicate and Nimbus Ninety and an Associate Fellow at the Centre for Economic Policy Research. He was previously Chief Economist and Global Head of Research for ING Group, having earlier led similar teams at HSBC and Nomura Research Institute. Beyond his long experience of economic and market forecasting, Mark is a strong advocate of multi-disciplinary and open-source approaches to analyzing rapid political, environmental, technological, social, and behavioral shifts. Over 30 years he has advised a diverse range of clients, built an extensive expert network and developed a global media profile as an incisive commentator.

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