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Natural capital depletion tax

Sustainability requires maintaining so-called natural capital intact, or at least, slowing down its loss while waiting for positive technological changes and peak human population. In order to achieve this, an economic instrument to encourage the conservation of natural resources would be useful. One possibility is a ‘natural capital depletion tax’. Developed by ecological economists Robert Costanza and Herman Daly, executive and author Paul Hawken, and ecologist John Woodwell (Bernow et al., 1998), their ‘ecological tax reform’ proposal calls for a revenue neutral tax shift. In other words, it would not add to the total tax burden, and would even be compatible with tax reduction, but it would radically shift the target of taxation and replace much current income tax (and also taxes on labour in the form of social security contributions) with a ‘natural capital depletion tax’. The aim of the proposed tax reform is to provide incentives to use natural resources and ecosystems in a sustainable way. Consumption of natural capital would be taxed to the extent that materials are not recycled, encouraging ‘closed loop’ use to the possible extent. For example, fossil energy (which of course cannot be recycled) would be taxed but might be offset with credits for investment in renewable alternatives. This provision would encourage the development of energy efficient technology and renewable sources of energy.

Shifting the tax burden from income (and labour) to pollution and depletion would benefit both the economy and the environment by encouraging employment and income, reducing the need for government regulation and promoting the sustainable use of natural resources and ecosystems. The revenue-neutral aspect of the tax shift would not raise costs for business, rather offering businesses appropriate incentives to develop new technologies, improving production efficiency and environmental performance. Moreover, since the natural capital depletion tax would be applied mainly at the input side of the economy, the tax would pass through the whole system, influencing the prices of all goods and services that consumed natural capital, either directly or indirectly. This would encourage the development of products that do not consume natural capital, which would then have a competitive advantage in the marketplace and tend to displace their non-sustainable alternatives.

As often with tax reform proposals, there would be both winners and losers. Taxes on cheap sources of energy such as coal might cause ‘energy poverty’ among low-income consumers. In general, natural capital depletion taxes would favour the raw materials exporting countries or regions. However, most governments are reluctant to impose such taxes. Instead, many countries in Latin America and Africa are forced to export cheap raw materials by the burden of payments of external debts.

The concept of natural capital depletion tax is problematic in that it is hard to see how the tax level could be rationally set when the total volume and accessibility or recoverability of a resource is unknown. As an example, the penalty level and urgency level of conservation is very different if the depletion rate appears to be 10, 0.1 or 0.001 percent of the total resource per year. We are approaching peak oil and eventually, peak gas. Proven reserves have been depleted to a few decades-worth of production. Extraction should be taxed, but then the rate of prospecting for other sources such as coal will increase until companies feel secure again. The limits of exploiting living resources of the sea are perhaps more apparent, but procedures such as aquaculture may radically change equations and assumptions. Similarly, for taxes on wood exports, that might encourage tree plantations at the cost of ecosystem conservation. There is the also the matter of implementation: a system of natural capital depletion taxes would require an international agreement under the UN or cartels (such as OPEC) to prevent advantages to countries with no natural capital depletion taxes.


Bernow, S., Costanza, R., Daly, H., DeGennaro R., Erlandson, D., Ferris, D., Hawken, P., Horner, J. A., Lancelot, J., Marx, T., Norland, D., Peters, I., Roodman, D., Schneider, C., Shyamsundar, P., and Woodwell J. (1998) Ecological tax reform, BioScience 48 193-196.

For further reading:

Costanza, R., Daly H., Hawken P. and Woodwell, J. (1995) Non-partisan ecological tax reform: a win-win proposal that is economically efficient, socially equitable, and ecologically sustainable. International Society for Ecological Economics Newsletter, 6 (3) 3 and 8.

This glossary entry is based on a contribution by Tom Bauler

EJOLT glossary editors: Hali Healy, Sylvia Lorek and Beatriz Rodríguez-Labajos

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