Ecological Fiscal Reform – A strategy that redirects a government’s taxation and expenditure programs to create an integrated set of incentives to support the shift to sustainable development. Ecological fiscal reform (EFR) includes the use of such policy tools as taxation, tax exemptions, permit trading, tax rebates, direct expenditure, program expenditure and tax credits.
Ecological Tax Reform/Environmental Tax Shift – Ecological tax reform (ETR), or environmental tax shifting, can involve adjusting existing taxes to make them sensitive to environmental impacts. An example of this kind of policy is exempting ethanol from fuel taxes based on the environmental merits of the use of ethanol as a motor fuel. ETR might also involve levying new ecological taxes to offer incentives to reduce environmental impacts and “recycling” the revenue from the new taxes. The revenue can be recycled in numerous ways, including funding reductions in existing taxes, new credit or subsidy programs, or refunds to taxpayers. An example of this kind of ETR policy is the introduction of carbon taxes, combined with reductions in payroll taxes.
Double Dividend – The use of ecological tax reform (ETR) policies has often been praised for resulting in a double dividend of benefits. The first dividend results from the environmental improvement that ensues as a result of the incentive effects associated with ecological taxes. The second dividend results from a reduction in the cost of the tax system when existing distortionary taxes are reduced. For example, to the extent that payroll taxes distort the cost of labour and thus discourage employers from hiring additional employees, the second dividend would be the increased employment that results when payroll taxes are reduced. Not all ETR policies will result in a double dividend.
Deadweight Loss – A result of the impact of a tax that distorts economic signals. For example, to the extent that a tax on labour distorts the true cost of labour and thus discourages employers from hiring employees, a tax placed on labour will result in deadweight loss equal to the amount of employment that is discouraged by the tax.
Pigouvian Taxes – Taxes levied on the quantity of a good/service consumed – e.g., a tax on the carbon content of fossil fuels. This tax does not vary by price and is the kind of tax that could incorporate the value of a negative externality into the price of a good or service.
Ad Valorem Taxes – Taxes levied on the price of a good/service that are equal to a certain percentage of the price – i.e., a sales tax.
Environmental Externality – Environmental damage that results from the consumption and/or production of a good or service that is not directly reflected in the price charged for the good or service or compensated for in some other, non-price way. Environmental externalities usually exist because relatively open access to the environment (air, water, land) means that it can be treated as a free receptacle for the wastes of production and consumption. Reduction in air quality due to vehicle emissions is an example of an environmental externality.
Market Failure – The result when the price of goods and services do not reflect the true costs of producing and consuming those goods and services. In the context of environmental externalities, a market failure occurs when the price of goods and services does not reflect full societal costs, which are conventional financial costs plus environmental externalities. The result is that market prices are too low and more of the good or service is likely to be consumed than would be the case if all costs were taken into account. Many argue, therefore, that environmental externalities need to be included in the cost of producing and consuming goods and services in order for society to make better decisions about how much of the good or service to produce and/or consume.
Feebate System – A system that places a charge on the purchase of a good that is associated with high environmental impacts (e.g., inefficient automobiles) and provides a rebate or credit towards the purchase of a good that is associated with relatively lower impacts (e.g., efficient automobiles).
Property Tax Shift – A process that involves shifting some of or the entire property tax base from buildings to land, removing or reducing a disincentive to improve or renovate older, rundown buildings.
Revenue Recycling – Recycling revenue that is generated from a particular tax back to society in the form of refunds, subsidies, credits or reductions in existing taxes. This process implies a substantial degree of transparency with respect to the amount of revenue that is raised and the amount that is recycled.
Revenue-Neutral Revenue Recycling – Occurs when all of the revenue associated with a new tax is recycled so that the introduction of the tax does not result in an increase in total government revenues.
Regressivity – Occurs when high-income taxpayers pay a smaller fraction of their total income towards a tax than low-income taxpayers. Carbon taxes are considered regressive because they take a greater portion of income from low-income earners than from high-income earners. Regressivity can be mitigated through tax exemptions.
Polluter Pay Principle – The principle used to allocate the cost of pollution prevention and control measures in order to encourage the rational use of scarce environmental resources. The polluter pay principle requires that those who cause environmental damage and destruction be responsible for the costs associated with prevention, mitigation or control of that impact.
Own Price Demand Elasticity – A measure of the response of demand to a change in price. It is calculated as the percentage change in demand per percentage change in price. The own price demand elasticity reflects current preferences, technology and the availability of substitute goods. Demand is considered elastic when a percentage change in price results in an equal or greater percentage change in demand. This would be the case, for example, if the price of wind power declined by 5% and the demand for wind power increased by more than 5%. Demand is considered inelastic when a percentage change in price results in a proportionately smaller change in demand. This would be the case if the price of wind power declined by 5% and the demand for wind power increased by less than 5%.
Cross Price Demand Elasticity – A measure of the response of the demand for one good to a change in the price of another good – for example, the increase in the demand for wind power that results from an increase in the price of coal.
Border Tax Adjustment – Used to limit impacts of environmental taxation on export markets, while maintaining the effect of the tax locally. Border tax adjustments (BTAs) involve imposing equivalent taxes on imported goods and eliminating the environmentally related tax on exported goods.