Group Project on Chapter 6:
Dear Students:
a) Read sections 1, 2, 3 ( do not focus on emission trading) and 6 of Fullerton D., Leicester A. and S. Smith (2008), « Environmental taxes », NBER Working Paper 14197.
b) Present section 6 (pages 27-37) « Road transport externalities and the tax system », pp 27-37 in Fullerton D., Leicester A. and S. Smith (2008), « Environmental taxes », NBER Working Paper 14197. Present only pages 27-37.
c) Based on the indicated reading of this article and section 6 in particular, choose, present and analyze the control of road transport congestion and pollution in another country/city (other than UK).
Working as a group project ( no more than 4 students per group) provide a written report
(item a/ and b/), no more than 15 pages ( police 1,5) and a ppt for the last day of class. The last day of class, each group will present its project orally ( no more than 10 minutes per group). Each group should also submit its written report through blackboard “safe assignment”. Please inform me about your city / country. Each group should choose its own city / country. There should not be redundancy.
NBER WORKING PAPER SERIES
ENVIRONMENTAL TAXES
Don Fullerton
Andrew Leicester
Stephen Smith
Working Paper 14197
http://www.nber.org/papers/w14197
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
July 2008
This paper has been prepared for the Mirrlees Review – Reforming the Tax System for the 21st Century,
http://www.ifs.org.uk/mirrleesreview/. The authors are grateful for helpful suggestions from the editors
of this volume, from Paul Johnson and Nick Stern, and from all participants at the conferences where
this work was presented and discussed. We are particularly grateful to Agnar Sandmo, the discussant
at the 2007 conference. Any views expressed here are solely those of the authors, however, and we
are responsible for any remaining errors.
NBER working papers are circulated for discussion and comment purposes. They have not been peer-
reviewed or been subject to the review by the NBER Board of Directors that accompanies official
NBER publications.
© 2008 by Don Fullerton, Andrew Leicester, and Stephen Smith. All rights reserved. Short sections
of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full
credit, including © notice, is given to the source.
Environmental Taxes
Don Fullerton, Andrew Leicester, and Stephen Smith
NBER Working Paper No. 14197
July 2008
JEL No. H23,Q28
ABSTRACT
This chapter provides an overview of key economic issues in the use of taxation as an instrument of
environmental policy in the UK. It first reviews economic arguments for using taxes and other market
mechanisms in environmental policy, discusses the choice of tax base, and considers the value of the
revenue from environmental taxes. It is argued that environmental tax revenues do not significantly
alter economic constraints on tax policy, and that environmental taxes need to be justified primarily
by the cost-effective achievement of environmental goals. The chapter then assesses key areas where
environmental taxes appear to have significant potential – including taxes on energy used by industry
and households, road transport, aviation, and waste. In some of these areas, efficient environmental
tax design needs to make use of a number of taxes in combination – a “multi-part instrument”.
Don Fullerton
Department of Finance
University of Illinois
340 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
and NBER
[email protected]
Andrew Leicester
Institute for Fiscal Studies
7 Ridgmount Steet
London WC1E 7AE, UK
[email protected]
Stephen Smith
Department of Economics
University College London
Gower Street
London WC1E 6BT, UK
[email protected]
1. Introduction
Growing concern about climate change has brought environmental issues to the forefront of the policy
agenda in many European countries. In addition to the substantial scientific literature assembled under
the auspices of the Intergovernmental Panel on Climate Change, the October 2006
Stern Review of
the Economics of Climate Change
argued strongly for immediate and urgent action to mitigate the
potential costs of global climate change. Taxes, charges, tradable permits and other economic
instruments can play an important role in ac
hieving cost-effective control of greenhouse gas
emissions, but their potential scale and revenue c
ontribution raise many wider economic and fiscal
policy implications. A number of European countries introduced carbon taxes during the 1990s, though
a proposal for an EU-wide carbon-energy tax was ultimately unsuccessful. More recently, attention
has shifted to emissions trading, and the EU Emissions Trading Scheme, introduced in 2005, is the
most substantial application to date of this approach.
In the UK, a number of tax measures have been impl
emented primarily with environmental objectives
in mind. They have included three new national environm
ental taxes, on landfill, industrial energy use
(the climate change levy) and the extraction of aggregates (quarry products). Taxes on motor fuels
and the annual vehicle excise duty have both been restructured, with differential rates reflecting the
different environmental attributes of fuels and vehicles. In London, the transport authority has
introduced a congestion charge for vehicle use in the
central area. In addition to these explicitly
environmental tax measures, a wider range of areas of tax policy-making routinely include some
discussion of environmental issues.
The increasing use of environmental taxes, emi
ssions trading and other economic instruments has
been partly driven by a recognition of the limitations
of conventional environmental regulation. To
make any serious impact on some of the major
environmental problems now facing policy-makers –
acid rain, global warming, traffic congestion – environmental policy cannot be approached purely as a
technical issue, to be resolved merely by requiring the use of specified abatement technologies and
setting emissions limits on large firms. Extensiv
e and far-reaching changes to existing patterns of
production and consumption will be needed, and these changes will inevitably entail substantial
economic costs. The search for instruments capable
of minimising these costs, and of achieving
behavioural changes across all sectors, has led policy-makers to pay much closer attention to the
potential for incentive-based environmental regulati
on, that is, through economic instruments.
This approach to environmental policy has the potent
ial to generate additional government revenues –
in the form of environmental tax receipts, or t
he proceeds of auctioned emissions trading allowances.
This calls for a much closer interaction between environmental policy and tax policy than in the past.
At one level, the new government revenues that
could be generated may provide an opportunity for
tax reform. At a deeper level is an issue about how far the availability of environmental taxes alters the
constraints and costs of current tax policy, in terms of the distortionary impact of existing taxes on
labour and capital markets. Here, the issues are mo
re complex. ‘Packaging’ environmental tax reform
with offsetting reductions in taxes on labour income
or the payroll taxes paid by employersmay have
political attractions, but the fiscal benefits of this type of tax substitution are much more contentious.
This paper provides an overview of key economic i
ssues in the use of taxation as environmental
policy. Following this introduction, the paper has two main parts. Part A discusses economic principles
of environmental taxation, reviewing the arguments for using taxes and other market mechanisms in
environmental policy, the efficient design of environmental taxes, and the fiscal value of the revenue
contribution from environmental taxes. In what sens
e – if at all – would an environmental tax reform
provide a ‘double dividend’, in the form of a less distortionary fiscal system as well as a cleaner
environment? Part B of this paper then applies these basic principles to four specific environmental tax
areas – energy, road transport, aviation and household waste. The first two of these – general taxes on
energy and taxes on road transport – perhaps have the greatest revenue potential, but in all four areas
taxes or other similar instruments could make a signi
ficant contribution to efficiency in environmental
policy.
2
Before embarking on the main analysis of the paper, we have some preliminary observations of a
general nature about this field of tax policy, and about the approach we have adopted:
Firstly, the focus of the paper is primarily on the economic aspects of environmental taxes. In addition
to economic considerations, however, both politics
and public opinion will play a crucial role in
determining the scale of action needed, and the range of acceptable measures. This is a fast-
changing landscape, and we have tried, as far as possible, to avoid constraining the analysis by our
own personal speculations about what measures woul
d be publicly or politically acceptable in current
circumstances.
Secondly, technology is developing rapidly, and is a key issue in determining the types of
environmental taxes that are practicable. For example, technological advances that make it easier and
cheaper to measure emissions directly may open up new possibilities for direct, targeted emissions
taxes, based on measured emissions. Also, as viable technologies are developed for large-scale
carbon capture and storage, it may be necessary to replace straightforward taxes on energy use with
more complex and targeted taxes that provide appropriate incentives for the use of carbon capture.
Thirdly, environmental policy choices depend on some key value judgements as well as objective
data. For example, a central issue in deciding whether the costs of action to curb greenhouse gas
emissions are justified by the environmental benefits is
the weight to be given to the interests of future
generations. The
Stern Review’s
conclusions on the scale of the damages from global warming, which
are much higher than many earlier economic estimate
s, reflect not only the accumulating scientific
evidence about the severity of climate change, but also a judgement that the interests of future
generations should be weighted more heavily than in much of the literature.
Finally, while the primary focus of the paper is on nat
ional tax policy, a key international dimension to
some major areas of environmental policy-making cannot be neglected. For energy and carbon, in
particular, the relevant externalities are global in
their impact – all greenhouse gases emitted in any
country have similar global effects. This means that
effective policy cannot be implemented by a single
country, and that national policies have to be formulated in the context of wider international policy
developments.
Part A: Principles
2. Environmental regulation: instrument choice
From the perspective of environmental policy, th
e case for using environmental taxes, emissions
trading and other economic instruments is primarily a matter of efficiency.
1
In comparison with
‘conventional’ regulatory policies based on technology mandates or emissions standards, economic
instruments may be able to reduce the costs of achiev
ing a given level of environmental protection (or,
alternatively, can achieve a greater environment
al impact for a given economic cost). Not all
environmental problems, however,
are best tackled in this way, and other approaches, including
various forms of command-and-control (CAC) regulation, may be preferable in some cases.
2
Likewise,
different economic instruments have vari
ous advantages and disadvantages, and the balance
between these will vary from case to case.
2.1 Advantages of environmental taxes and other economic instruments
1
The potential use of environm
ental taxes is assessed by, among others, Sm
ith (1992), OECD (1993, 1996), Bovenberg and
Cnossen (1995), Fullerton (2001), Bovenberg and Goulder (200
2), Stavins (2003), and Newell and Stavins (2003). The
seminal work is Pigou (1920).
2
Bohm and Russell (1985) and Fullerton (2001) also review
the goals and objectives of environmental policy, and they
discuss how the tradeoffs among these goals might imply when to
use incentives, direct regul
ation, or other policies.
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