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Judging from economic statistics, the latter half of the 20th century has been a period of remarkable success for the world. Between 1950 and 1990, the global economy expanded fivefold, per-capita income more than doubled, and material consumption soared to new heights.

But this unparalleled prosperity has come at great environmental expense. Health-threatening air pollution, contaminated drinking water, a thinning ozone shield, and the buildup of climate-disrupting greenhouse gases are among the uncounted costs of economic expansion.

These problems arise largely from the failure of economies to incorporate environmental damages into public and private decisions -- whether to generate electricity from coal or sunlight, for instance, or to commute by car or public transportation. As a result, society has ended up bearing these costs, often in unanticipated ways. U.S. citizens annually incur an estimated $40 billion in damages from unhealthy levels of air pollution, but car drivers pay nothing at the gas pump for their part in this assault.

At the same time, government decision makers, preoccupied with economic growth, are often blind to the ecological price of their pursuits. Rapid clearing of forests for timber export may increase gross national product but eventually will cause untallied costs in soil erosion, water supply disruption, reduced biological diversity, and hastened climatic change.

If the world economy currently wreaks such environmental havoc, then how can we design a vibrant, ecologically sound alternative? The answer may be found in the tortuous maze of government fiscal policy, where many environmental problems now begin. By curtailing subsidies that foster the misuse or destruction of resources, creating incentives for ecologically beneficial activities, and imposing taxes on environmentally damaging practices, we can steer ourselves toward a more promising future.

Government-Financed Destruction

A surprising number of public policies are stacked squarely against the environment. Hidden subsidies for automobile use, utility regulations biased against conservation, underpriced irrigation water, and below-cost timber sales are but a few of the numerous public programs that result in serious environmental damage. Collectively, governments spend tens of billions of dollars a year supporting environmentally unsound economic practices.

In the Third World, tax exemptions and discounted prices for pesticides provide one example of these misguided incentives. In examining policies among nine developing countries in Asia, Africa, and Latin America, economist Robert Repetto of the World Resources Institute in Washington, D.C., found pesticide subsidies in the early 1980s ranging from 19 percent of the unsubsidized retail cost (in China) to 89 percent (in Senegal). The Egyptian government spent more per capita on pesticide subsidies in 1982 than it currently spends on health.

By keeping pesticide costs low, governments aim to help farmers reduce pest damage and thereby increase crop yields. But they also encourage farmers to use pesticides excessively, increasing the number of chemical-related deaths and illnesses and releasing more pollutants into the environment. Moreover, subsidies inhibit the development and use of integrated pest management (IPM), a package of measures designed to control pests in a safer, more ecologically sound way.

IPM makes use of natural predators of pests, different planting patterns, pest-resistant crop varieties, and other non-chemical controls to stabilize and even increase harvests while minimizing hazards to health and the environment. Under this integrated approach, farmers use chemicals selectively and only when necessary. IPM has proved effective with soybeans in Brazil, with cotton in China, Nicaragua, and Texas, and with cassava in equatorial Africa [see "To Kill a Mealybug" on page 37]. A far-reaching program for Indonesian rice growers slashed the use of insecticides by nearly 60 percent within a year. Average rice yields among farmers trained in IPM rose from 2.7 tons per acre to 3.3 tons.

Similarly, forests have suffered in rich and poor countries alike from government efforts to promote economic growth. Laden with debt and looking for quick revenues, many tropical-country governments -- often aided by international donors -- have offered fiscal incentives to encourage the conversion of forests to pasture, cash crops, and other land uses that may earn immediate profits bur rarely prove sustainable on poor tropical soils. Harvesting contracts overly favorable to loggers have fueled "timber booms" that not only deplete and degrade forests but open larger areas to the further depredations of unsustainable farming and ranching.

Brazil, Indonesia, and the Philippines are among the countries draining their treasuries of $500 million to more than $1 billion annually because of such policies. Much of the deforestation of the Brazilian Amazon can be linked to government road-building, resettlement schemes, and income tax credits for the conversion of forest to pasture or other land uses.

Recent deforestation trends in Brazil suggest how rapidly change can occur once government inducements are removed. In 1988, most tax credits that encouraged large-scale forest clearing were suspended. Satellite images show that annual deforestation rates in the Amazon peaked in 1987 at 20 million acres, dropped to 12 million in 1988 and continued sliding to 7.4 million in 1989 (the most recent year for which figures are available). An unusually rainy dry season, when most of the jungle burning takes place, coupled with stepped-up enforcement against illegal burning, helped stem the loss in 1989, but the government's shift in fiscal policy undoubtedly played a role.

In addition to environmental benefits, reducing such subsidies often eases social inequities and frees funds for programs that benefit the poor. Most incentives currently enrich the politically powerful, who can successfully lobby for economic favors. Pesticide subsidies and underpriced irrigation water, for instance, do nothing for the cash-poor, dryland farmer who has no access to these inputs. Likewise, subsidies for cattle ranching and logging typically bypass those on the lower economic rungs.

Rewarding Do-Gooders

Moving the economy toward sustainability will require more than just eliminating government incentives for environmentally destructive activities. It also involves creating rewards for ecologically sound practices. Such an approach demands a systematic look at how current rules, regulations, and incentives shape behavior, and how they can be changed to encourage sound decisions.

Positive incentives can do much, for example, to reinvigorate Third World family planning efforts, which have been badly neglected over the last decade. Setting up education savings accounts for the children of couples who limit their family size, allowing higher income tax deductions for couples with no more than two children, and providing free family planning services are but a few of the ways to encourage smaller families.

Well-designed incentive programs are cost-effective, since expenditures to reduce fertility levels avoid larger social service costs later on. In Mexico, for example, every peso spent on family planning by the urban social security system between 1972 and 1984 saved nine pesos that would have been spent on maternal and infant health care. By providing nearly 800,000 women with contraceptives, the program averted 3.6 million unwanted births and resulted in a net savings of some 318 billion pesos ($2 billion).

In the energy area, reforming the way utilities are regulated could unleash the vast money-saving potential of energy efficiency, while at the same time slowing global warming, reducing acid rain, and curbing urban air pollution. Under most current regulations, utility profits rise in tandem with electricity sales. Even though utilities could save energy more cheaply than supplying more -- by encouraging the installation of efficient lighting, low-flow showerheads that reduce the use of hot water, and insulation in homes and offices -- they have little incentive to do so.

In the United States, new programs in California, New York, Oregon, and five New England states are "de-coupling" profits from power sales and giving utilities a financial reason to invest in conservation. Under a new California program, three regulated utilities will be allowed to profit more from investing in conservation than from selling additional electricity. Together, these efficiency programs will cost an estimated $500 million over the next two years but are expected to save more than twice that in reduced power bills.

Efficiency improvements have an enormous untapped potential in developing countries as well, even though their per-capita energy use is tar lower than that in industrial countries. For example, Brazil could cut its growth in electricity use in half over the next two decades by promoting efficient technologies, according to energy analyst Howard Geller at the American Council for an Energy-Efficient Economy. Indeed, by encouraging conservation and efficiency investments -- instead of subsidizing energy use -- developing countries could avoid more than $1.4 trillion in energy production costs over the next 20 years, saving scarce capital and improving the environment.

Making Polluters Pay

Equally important as redirecting government incentives is taking steps to correct the market's failure to capture the full costs of pollution, waste, and resource depletion.

Most governments have dealt with this shortcoming by setting regulations, such as requiring that power plants install equipment to capture air pollutants or that factories treat their wastewater in a specified manner before releasing it into nearby rivers and streams. This approach has measurably improved the environment in many cases and is especially important where high-risk activities are concerned, such as disposing of radioactive waste or safeguarding an endangered species from extinction. But it is often a costly and cumbersome way of attaining broad societal aims.

A powerful instrument for fostering environmentally sound economic activity lies in the realm of taxation. While new taxes are unpopular politically, opinion polls show that a good share of the public thinks more should be spent on protecting the environment. By shifting the tax base away from income and toward environmentally damaging activities, governments can reflect new priorities without necessarily increasing the total tax burden. And because taxes adjust prices and let the market do the rest, they can help meet many environmental goals efficiently.

Restructuring the tax base in this way has many advantages. Governments typically raise the bulk of their revenues by taxing income, profits, and the value added to goods and services. This has the unintended effect of discouraging work, savings, and investment --things that are generally good for an economy. If governments substituted taxes on pollution, waste, and resource depletion for a large portion of current levies, both the environment and the economy could benefit.

Many nations have already established so-called green taxes. A survey by the Organization for Economic Cooperation and Development -- a governmental organization of industrial, free-market countries -- found more than 50 separate green taxes among 14 of its 23 members, including levies on air and water pollution, waste, noise, and potentially harmful products such as fertilizers and batteries. In most cases, however, these fees have been set too low to motivate major changes in behavior. Norway's charge on fertilizers and pesticides, for instance, raises funds for programs in sustainable agriculture -- certainly a worthy cause -- but is too low to encourage farmers to cut their chemical use.

A comprehensive environmental tax code would alter economic activity in many areas. It would place fees on carbon emissions from the burning of coal, oil, and natural gas, and thereby slow global warming; it would penalize the use of virgin materials, and thus encourage recycling and reuse; it would charge for the generation of toxic waste, and so foster waste reduction and the development of safer products; it would tax emissions of sulfur and nitrogen oxides, and therefore curb acid rain; and it would impose levies on the overpumping of groundwater, thus encouraging efficient water use.

An analysis of eight possible green taxes for the United States -- on carbon emissions, hazardous waste, paper produced from virgin pulp, pesticide sales, sulfur and nitrogen oxides emissions, chlorofluorocarbon (CFC) sales, and groundwater depletion -- suggests that they can raise substantial revenues while working to protect the environment (see box). Determining tax levels that reduce harm to human health and the environment without damaging the economy is a complicated task; the ones shown here are simply for illustration. Because some taxes have multiple effects (a carbon tax, for example, would lower both carbon and sulfur dioxide emissions by discouraging fossil fuel consumption) and because the taxed activities will decline even before taxes are fully in place, revenues shown in the box cannot be neatly totaled. But it seems likely that the eight levies listed here could raise $100 billion to $150 billion, or 25 to 35 percent of the current government revenue from personal income taxes.

On the Political Agenda

In late September 1990, the 12 environment ministers from the European Community (EC) gathered in Rome to discuss the possibility of community-wide green taxes. Though they failed to reach agreement, the idea seems likely to stay alive. The European Commission, the policymaking arm of the European Community, supports a common EC tax on carbon emissions, as do Belgium, Denmark, France, and Germany. However, the less wealthy EC members fear that a harmonized tax would be too high, jeopardizing their growth; the Netherlands worries that it might be too low.

Both Finland and the Netherlands instituted taxes on carbon emissions from fossil fuels in early 1990; Norway and Sweden were scheduled to begin collecting carbon taxes in January. Unfortunately, none of these levies is high enough to spur major changes in energy use. Now that more than a dozen industrial nations are committed to slowing the pace of global warming, higher charges will almost certainly be needed to reduce carbon dioxide emissions.

In the United States, several energy taxes were proposed in 1990. With little support for energy efficiency coming from the Bush administration, all that Congress approved was a meager 5 cents per-gallon increase in the federal gasoline tax, which will not reduce energy use or carbon emissions substantially.

Adjustments for the Poor

Completely shifting the tax base away from income taxes and toward green taxes would be undesirable, since income taxes are usually designed to make the wealthy pay proportionately more; green taxes, in contrast, may hit the poor the hardest. Hefty carbon charges, for instance, would cause hearing oil prices to rise, imposing a heavy burden on low-income households. To offset this undesirable impact, income tax rates would need to be lowered even more for poorer people. Government payments could compensate the very poor, who may not pay any income taxes at all now but who might experience higher living costs under an environmental tax code.

Another reason a blend of income and environmental taxes is best is that green-tax revenues would diminish as production and consumption patterns shift away from taxed activities. Therefore, environmental taxes would not be as constant a source of revenue over time as income taxes are. Once businesses and consumers have adjusted to the new tax scheme, revenues from green taxes and income taxes would strike a more stable balance.

Beyond National Borders

Besides their help in reshaping national economies, green taxes can play an important role in international initiatives to deal with global environmental threats. In 1989, for example, the United States started taxing sales of CFCs to help meet its commitment to phase out production of these ozone-depicting substances by the year 2000.

Green taxes can also raise funds for global initiatives that require transfers from rich countries to poorer ones, including slowing global warming, preserving tropical forests and biological diversity, and protecting the ozone shield. Such transfers would serve as partial payment for the ecological debt industrial countries have incurred by causing most of the damage to the global environment thus far. The creation of a new financing mechanism of this kind will be high on the agenda of the U.N. Conference on Environment and Development to be held in Brazil in 1992.

A step in this direction was taken in September 1989, when the international community agreed to set up an environmental fund to be managed by the World Bank in cooperation with the U.N. Development Program and the U.N. Environment Program. The aim is to raise more than $1 billion for the first three years. While this is a start, much more will be required to aid Third World countries with the energy, forestry, family planning, and other investments needed to move the global economy onto a sustainable track. An extra tax of $10 per ton of carbon emitted in industrial nations (excluding economically strapped Eastern Europe and the Soviet Union) would initially generate $25 billion per year for an expanded global fund.

Reshaping fiscal policy to be an instrument of environmental restoration may be difficult at a time when policymakers are concerned with the economic slowdown in much of the world and with revitalizing the flagging economies of the former Soviet bloc. Yet nothing lasting will be gained by the continued pursuit of growth at the environment's expense. Capitalism may stand victorious over socialism as the better way of organizing a modern industrial economy, but the challenge of building an environmentally sustainable economy has just begun.

The Not-For-Everglades?

Looking down on the heart of south Florida's Everglades, the watery wilderness seems anything but threatened. Huge flocks of snow-white ibis, wings glistening in the afternoon sun, take flight against a backdrop of gentle sawgrass prairie spreading as far as the eye can see. The Everglades, known as "grassy water" to the region's native Americans, remains one of the world's largest freshwater wetlands.

Unfortunately, scientists say time is running out for this unique wilderness. The Everglades ecosystem, now a shadow of its former self, is buckling under pressure from pollution and the siphoning of its water to meet the demands of agriculture and a growing state population. According to Robert Arnsberger, assistant superintendent of Everglades National Park, the stressed-out system "could ecologically fail within the next 20 years."

Historically, the Everglades watershed began north of Lake Okeechobee in the Kissimmee River basin. Heavy summer rains flooded the lake and surrounding marshes, causing a broad sheet of water a few feet deep and up to 40 miles wide to flow slowly south to the Gulf of Mexico through the sawgrass, cypress swamps, and other vegetation that make up the diverse Everglades. A dry winter period followed, when water supplies contracted to scattered shallow pools.

Many plants and animals have come to depend on this seasonal water cycle for their existence, including the wood stork -- one of 14 endangered wildlife species surviving in Everglades National Park.

This natural pattern began to unravel during this century, as vast areas of south Florida's swamps were drained for farmland and urban development.

Only about half of the original 4 million acres of wetland remains, 500,000 of it in the 1.5 million acres that make up the park.

A vast system of canals, dikes, levees and pump stations -- 80 percent of it federally funded and built by the U.S. Army Corps of Engineers -- now controls flooding and diverts water for agriculture, coastal residents, and tourists. This has greatly altered the natural water flow. As a result, populations of nesting wading birds -- including herons, egrets, ibis, and wood storks -- have plummeted 90 percent, from some 300,000 in the 1930s to no more than 30,000 today.

Pollution raises concerns for the Everglades' future as well. Some 700,000 acres of agricultural land just south of Lake Okeechobee -- nearly two-thirds of it in sugar cane -- not only claim the lion's share of south Florida's water but also release runoff contaminated with nitrogen and phosphorus into adjacent wetlands. Elevated levels of these nutrients foster the growth of cattails, which have clogged waterways and caused shifts in the natural vegetation on as many as 30,000 acres over the last three decades. Wetlands filter out most of the excess nutrients before they reach the park, but continued heavy loads could cause a pollution front to move south, tipping the park's ecological balance.

In an unusual twist, the federal government has filed a lawsuit against the South Florida Water Management District, the agency operating the regional water system, and other state officials, claiming that their lack of enforcement of state water quality standards has put at risk both Everglades National Park and the federally owned Loxahatchee National Wildlife Refuge, also located in the Everglades watershed. At the heart of the matter, which was still unresolved as of January, are the phosphorus loads from sugar cane fields and vegetable farms entering wetlands 70 miles north of the park.

Last September, the management district adopted a blueprint to protect the Everglades. Now steeped in controversy, the Surface Water Improvement and Management (SWIM) Plan attempts to address the water quantity and quality problems threatening Everglades National Park. It calls for a 75-percent reduction in phosphorus loadings from the agricultural area into adjacent marshes, from an average of 222 tons a year to 56 tons. Toward this end, 18,000 acres of sugar cane and sod farms would be converted into wetlands to help absorb excess nutrients.

Studies by Curtis J. Richardson and colleagues at the Duke University Wetland Center suggest, however, that some 560 acres of marsh are needed to reclaim one ton of phosphorus on a sustained basis. Meeting the SWIM plan target would therefore require about 93,000 acres of restored wetlands -- five times the area provided for in the plan. The management district, however, contests the applicability of these findings.

Even if pollution is adequately abated, the timing and amount of water entering the park pose immediate threats to its integrity. At least partial restoration of the natural water cycle is crucial to halting the habitat degradation and wildlife declines scientists have documented. In 1990, Congress appropriated $15 million for a 107,000 acre expansion of the park's eastern boundary and asked the Army Corps of Engineers to develop a plan for re-creating original water patterns there. Additional help may come from a $500,000 federal study that will evaluate ways to improve the park's water supply.

With so many overlapping interests, federal and state agencies need to work toward a partnership. Yet the federal government's decision to slap a lawsuit on state officials seems a costly distraction from the need to remedy the harm done by projects it built. At the state level, conservation measures are essential. Florida residents use an average of 200 gallons of water per person per day, twice the national average. Farmers are charged nothing for their water use, and so have no incentive to conserve.

Saving the Everglades represents a crucial test of whether a region's people and economy can adapt to the ecological needs of an irreplaceable natural area. Decisions made now will determine whether this treasured wilderness gets a fighting chance.