Letters From The Earth

Tax Shifting

July 14, 2010

It is mid-June as I reflect on the oil spill in the Gulf of Mexico. The oil rig, Deepwater Horizon, exploded on April 22, killing 11 people. Notwithstanding the loss of life, about two million barrels of oil have contaminated the environment. As I write this column, the spill continues and who knows for how much longer. BP has skimmed, burned, and collected about 25 percent of the leaking oil. We know that part of the remaining 75 percent has arrived at the shorelines of Louisiana, Mississippi, Texas, and Florida. Scientists are still not sure where the rest is going. They are trying to track the flow patterns but it is underneath the surface of the water and difficult to confirm movement. We have been told by the media that there are clouds of oil that form and break up and reform. How this affects our natural balance remains to be seen. The most worrisome part is that we are now in the hurricane season. Storms will undoubtedly move the oil randomly and make BP's containment effort much more difficult.

Deepwater oil exploration and drilling has been and is a disaster waiting to happen. This will probably not be an isolated incident. Other disasters will occur. BP is certainly responsible. However, I really can't fault its sincere effort to try to stabilize the situation. The spill could have been caused by Shell, ExxonMobil or any other producer. If we want to look at fault, I believe we should focus on the system that allows these companies and other raw material manufacturers to operate almost carte blanche in a quasi-regulated environment. Maybe that's a bit strong. However, we continue to learn that inspections were lax and/or incomplete. The demand for jobs, capital spending, satisfaction of material goods, low taxes – this is where the fault lies. Until we get our priorities right and change our culture, we will continue to have disasters like this one.

What's the solution? What are the changes we need to make, and how does this affect us and our supply chain?

My mentor, Lester Brown, has been preaching a change to building an economy as a subset of the environment, not the other way around, for many, many years. I've been reading him for at least 20 years and trying to determine if anyone is listening to him. I guess not, otherwise we wouldn't have had this mess with the BP spill. Lester says we need to take "decisive action," not just in America but globally. We need to refocus and change our habits. He gives several good examples of what change can accomplish.

Prime Minister Helen Clarke of New Zealand announced that New Zealand will increase the renewable share of its electricity from 70 percent to 90 percent by 2025; most of this change comes from hydro and geothermal sources. In the US and Europe, because of high population centers, it could be waste-to-energy. Regardless of source, the focus should be on what is readily available. Based on the population of New Zealand, these sources make the most sense. Clarke has also legislated that carbon emissions from transport be cut in half by 2040. Both of these measures have been legislated. It is law. It will happen. New Zealand will also expand its forests by 250,000 hectares (965 square miles) by 2020. This will sequester about 1 million tons of carbon per year. New Zealand will also make other changes during the next several years which will reduce its carbon footprint. Clarke says, "The challenge is to dare to aspire to be carbon neutral."

Several examples of the effects of "tax shifting" demonstrate that change can have a beneficial effect on our environment. Remember Lester's "eco-economy." Germany adopted a plan in 1999 to shift taxes from labor to energy. By 2003 this plan had reduced annual CO2 emissions by 20 million tons and helped to create additional jobs. It also accelerated growth in renewable energy.

Between 2001 and 2006, Sweden shifted about $2 billion in taxes from income to environmentally destructive activities. (What about shifting income taxes to deep sea oil drilling? What about shifting income taxes here in America to any and all manufacturing that affects our environment in a negative way? Why not tax coal? Are you beginning to get my message?) Environmentally destructive activities could include transportation, electricity generated by fossil fuel, even smoking.

The whole concept of tax shifting is to calculate all indirect costs. I don't think anyone has calculated the indirect costs of deep sea oil drilling but I would hazard a guess that if all indirect costs were considered, the actual cost for a gallon of gasoline in the US would be nothing less than $10 per gallon. The best example of calculating indirect costs was a study done by the Centers for Disease Control and Prevention (CDC) on the true cost of smoking. In 2006, the CDC calculated the cost to society of smoking cigarettes. If you include treatment for smoking related illnesses and lost worker productivity, the true cost is $10.50 per pack.

In both cases – higher cost per gallon of gasoline and higher cost per pack of cigarettes – the higher cost will cause a shift. Alternatives will develop more quickly reducing dependence on gasoline driven automobiles and smoking cigarettes. (How about chewing gum on a bike!)

Lester Brown believes we need to restructure taxes in order to tell the "ecological truth." (Could someone get this message to Washington!) The continued use of fossil fuels, particularly in China, now the world's largest economic engine, will "accelerate the deterioration of the economy's ecological balance." The western economic model doesn't work anymore. The "fossil-fuel based, automobile centered, throwaway economy" will not last much longer. We need to build a new economy, one that will be powered by renewable sources of energy, that will have a more transparent and creative transport system, and that will reuse and recycle everything.

British Petroleum and the others should be paying a tax that is calculated from the indirect costs associated with oil that is made into gasoline. I may sound like a heretic, but anything that is fossil based should receive the same tax. This means films that are increasingly used in our industry and in packaging. Anything downstream that uses fossil based materials should receive a tax for indirect costs. In the case of oil manufacturing, I believe it should be mandatory that oil companies maintain an environmental escrow account that would fund the clean up from a spill or other potential disaster caused by the manufacturing process.

I believe our industry has a fundamental flaw. The flaw is waste. That's the bad news. The good news is that solutions are available. It is not too late to begin to participate in one or more of these solutions. Unfortunately, these solutions may not be cost neutral. However, again my view, I don't think any of us has a choice. Either your customer will demand improvement and a goal toward zero waste, or legislation will be implemented. Make the change now. Be proactive, not reactive. Don't wait for your "oil spill."

Another Letter from the Earth.

Reference: Plan B 3.0, Lester Brown

Calvin Frost is chairman of Channeled Resources Group, headquartered in Chicago, the parent company of Maratech International and GMC Coating. His email address is cfrost@channeledresources.com.