Making Prices Work for the Environment

Annual Conference of the European Environmental Bureau, Brussels, 10 October 2002
Keynote Speech by Ernst von Weizsäcker, M. P.

Let me at the outset distinguish two different tasks of environmental policy.

  • One is pollution control which is predominantly a local and a national activity. The first twenty years of environmental policy in European countries were almost exclusively devoted to pollution control, and the role of the European Community – later Union – was chiefly to set standards that aimed at harmonising national pollution control legislation, and that more of environmental professionals both in the public and private sectors deal with pollution control.
  • The other task of environmental policy relates to global and long-term challenges such as climate change, biodiversity losses and unsustainable lifestyles. This is rather a new field of concern and is still in its conceptual phase regarding policy making.

Prices can work for the environment in both arenas. But if one pricing instrument is successful in one of the two, it does not necessarily follow that it is applicable for the other as well.

For pollution control, pricing instruments abound and have greatly helped cleaning up the environment. A typical case has been the waste water charge the revenues of which were used to finance water purification installations. This system of charges most widely used in the Netherlands but also in all other EU countries was highly successful environmentally. It never was very controversial. It fully conformed with the polluter pays principle and it had the attraction that he who applied prevention measures in his factory was freed from the charge.

In a wider sense the same applies to user fees, refund systems, violation penalties and tradable emission permits for classical pollutants such as SO2 or NOx They too met with rather little public resistance when introduced.

Let me not lose more time on this subject because we would all agree very soon that prices work well to reduce classical pollution. Nevertheless, if the EEB wants to document the findings of this conference, I suggest to add an expert paper by an environmental economist on many successes and a few failures.

Let me instead turn the attraction to the other subject, of long term and global environmental problems, notably the greenhouse effect and life style changes.

Let me at this juncture mention one major difference between the two fields of concern. For classical pollution control you could say it is good to be rich so that one can afford costly pollution control. Or, with a slightly modified meaning you can quote Indira Gandhi that “poverty is the biggest polluter”. This famous statement goes down extremely well with developing countries, but equally well with traditional business people and other people in the North because it justifies them to go on with traditional growth strategies and claim that this is good for the environment.

The opposite, or nearly, can be observed when we address the greenhouse effect, biodiversity and sustainable life styles. Here clearly prosperity is the biggest polluter.

This is so embarrassing a phenomenon that economists and politicians prefer not to recognise its truth. They hastily invoke the sustainable development triangle which says that economic and social well-being are equally important as a healthy environment. And very soon they return to the comfortable and familiar paradigm of pollution control where economic prosperity was not at all suspicious. You will discover that in their argumentation the environmental corner of the triangle is always classical pollution control. I am afraid, for the time being I have to invite you to be extremely cautious, if you are an environmentalist, when that triangle of sustainability is put forward.

But now comes the shock for us advocates of pricing instruments: In a domain where prosperity is the biggest polluter, all of a sudden, you have to admit that prices are meant to reduce “prosperity”, – at least the kind of prosperity that is causing so much CO2 emissions, land use, traffic and avalanches of materials. If you want to reduce urban sprawl, you have to say that people shouldn’t live in one family homes and commute to work with their cars. You want them to cut their energy and water consumption. You want them to stop buying lots of unnecessary trash goods and having weekend trips to Malaga and Christmas trips to the Seychelles. Don’t expect anybody, let alone democratic majorities to agree with these objectives.

And yet, having said all this, I remain a staunch defender of pricing instruments also for the second set of problems. How can that be?

Well, it is because I am confident that, fortunately for the environment, different modes of prosperity are available. The core of that “sustainable prosperity” is a new universe of eco-efficient technologies. At the Wuppertal Institute for Climate, Environment and Energy we have sketched out the landscape of that new universe. In a book which I wrote together with Amory Lovins, I gave it the simple title “Factor Four”, with the subtitle “Doubling Wealth, Halving Resource Use”.

The book features fifty examples, from automobiles to household appliances, from buildings to logistics, from industrial processes to farming methods, all demonstrating that a factor of four is available in energy or material efficiency.

The factor four universe can be seen as the Promised Land to those who deal with climate change, urban sprawl and biodiversity losses.

But there is a difference again with classical pollution technologies. Waste water treatment technology can be introduced in a matter of five or ten years, depending on the life cycle of the economy’s capital stock. In buildings, it may take fifty years to refurbish the entire stock of houses. The complete renewal of the car fleet may take thirty years. And a reasonable and comfortable reduction of urban sprawl may take a hundred or two hundred years.

“Factor Four” can be seen as the solid rock of technological insights which we need when talking about pricing instruments that work on the second category of problems. If we want to avoid attacking prosperity we should be patient with the existing capital stock.

The long time frame can also be expressed in terms of price elasticity. You would not expect the car fleet to react to an abrupt price signal, unless it is a brutal signal. However, if society knows that energy and other resource prices will go up for a long time with no hope of their coming down again, companies will strategically invest in resource efficient technologies. Consumer education will make resource efficient behaviour a prime objective. Academic engineers and scientists will target the basics of resource productivity. And public planning will shift priorities towards convenient mass transport, agreeable high-density urban planning and high resource efficiency in public buildings, transport systems and disposal concepts. As a result, the factor of four becomes a realistic perspective for all sectors.

Long term price elasticity means that price signals should be mild but predictable. The best of all worlds would be a political all-party agreement over thirty or fifty years to raise prices for scarce resources in very small and predictable steps, preferably in steps so small that technological progress can keep pace.

Please note that I am talking about a price corridor, not a taxation corridor. Taxes or other instruments would be used to reach the price corridor. In this ideal case, the monthly bills for petrol, electric power, water, space, virgin raw materials remain stable and on average the population is not suffering any losses in their lifestyles.

If the fiscal revenues from this operation go into reducing indirect labour cost, you would expect positive effects on the labour markets. And compared to business as usual scenarios, you would see human labour services becoming gradually cheaper, i. e. more affordable for the beneficiaries of that labour.

So much for the ideal world. I felt it was necessary to talk about the ideal world in order to provide orientation in this conflictual theme of price signals on the basic commodities of modern life.

Let me at the end very briefly address some of the practical problems.

First, with reference to the EEB’s campaign motives and targets, let me clearly say that I support them. It will be, however, extremely difficult with regard to reducing internal farm subsidies; it may be possible, however, to reduce export subsidies of farm products. It is reasonable to demand ten percent of all taxes to be environmental and to make the operation fiscally neutral, ie not to increase the overall tax burden.

Regarding the time frame, it is EEB’s right to ask for rapid results, but as a politician I can tell you that our machinery works rather a bit slower. Perverse subsidies too are difficult to remove. They are consistently targeted at politically influential parts of the electorate. Transport subsidies in particular enjoy extremely strong support not only from the immediate beneficiaries but also from the automobile and aircraft lobbies. Moreover, they tend to increase economic turnover which politicians call growth even if it does not contribute to any quality of life. But it is turnover, not quality of life that creates jobs.

Let me say a practical or political word about the price corridor that I am asking for. It is, let me admit it, highly unrealistic in our days. It requires two unusual things at once: a fiscal policy that flexibly responds to world market signals, and an all-party consensus in one area, which is perhaps the favourite battlefield for political parties. Also, it should be said that the price corridor it not easily attained with emission trading and other pure market instruments. An adjustment mechanism may have to be introduced to avoid brutal jumps that can occur in the course of free market fluctuations.

On the other hand, if the public is convinced that this gentle price corridor is a fair deal and the best guide rail to the Promised Land, it becomes increasingly more plausible for political parties to go for it.

This then brings me to my concluding remark. It is essential that we create a strong vision of what is necessary to avoid disasters from fossil and nuclear energy use, from rapid biodiversity losses and from resources. If that vision also contains a realistic and agreeable strategy of how to get from here to there, you will have the people behind you.


  • In the discussion, Dr. Iannis Paleocrassas mentioned that as Greek Minister of Finance he had introduced a fuel tax flexibly responding to world market fluctuations.
  • A few days after the conference, the coalition agreement was adopted between SPD and Greens in Germany. It reaffirms the exciting energy tax escalator and foresees a general review by 2004 of the green fiscal reform, with a view to potentially develop it further and more comprehensively.

Further information about the Conference and the EEB can be found on the EEB’s website.