„ A p
  
 can be used to correct for the presence of externalities.

„ ëf gauged correctly, it raises the marginal private cost (MPC) to equal the marginal social cost
(MSC) of production (see standard externality diagram).

This would prevent overproduction/consumption of the pollutant.

„ owever, it can also play a dual role:

§Pollution taxes have a negative excess burden (deadweight loss) which can
account for the excess burden of other taxes, such as labour taxes.

Therefore, an environmental tax confers a ÀÀ  ÀÀ: it reduces environmental

degradation and corrects for other economic distortions.

§This means that the optimal environmental tax is not where MAC=MEC, rather,
they must also account for the excess burden reductions.

„ Yistinguish between a WEAK and STRONG double dividend.

u redistributing env. Tax revenue through reducing other distortions improves welfare
relative to lump-sum redistribution.

| 
 redistributing tax revenue through reducing other distortions improves the absolute
level of welfare.
 
   

„ A simple model of tax reform:

 

„ Assume a w  
 level above
market equilibrium (minimum wage).

 - ‰
„  

No Env. Tax.


‰
Non-negative Labour tax, labour supply ͚L͛.
-£
Government raises enough to pay for
public goods ͚G͛. §nly revenue is from
taxes.

„  p
  

Non-negative Env. Tax, energy usage E͛.
Î
Non-negative Labour tax (not necessarily
the same level as before), Labour supply L͛
 Î 
Government raises the same level of
revenue ͚G͛ (Revenue neutrality rule).
„
 Î Î
„
Î Î -£
 
   

        

  - „
 Î  Î
„
Î Î
 Î

 Î -


Î
Î Î

"

 Î "

Î
Two effects leading to a lower ex-post labour tax:
å|   :
First term of the LS of highlighted equation. Úhe tax base has increased (L͛ >
L) as labour demand rises due to a change in the relative prices of Energy and
Labour. Energy is now relatively more expensive. Therefore tax per worker
falls.
åw  
Second term. The revenue from the environmental tax is being returned to the
firm by further reducing the labour tax rate.
 
   

Wage Graphical Effect:

Y L͛
YL SL Yiagram shows the labour market in
the presence of a reservation wage
͚R͛ (which acts as a price floor).
R
After the tax reform, the demand for
labour rises to YL͛ due tot he
W* substitution and revenue effects.
  The size of the shift is R ʹ W͛ = the
reduction in the labour tax borne by
W͛ the firm.

ëf there is an economy with no

labour taxes, the double dividend
still occurs, except it is in the form of
L L* L͛ Employment an explicit subsidy to the firm,
where   
 
   

„ Extensions to the theoretical model:

„ *
À  

ëntroduces the effect of taxation on the consumption of ͚dirty͛ and ͚clean͛

consumption goods.

Finds that under 0 labour taxes (no need to use distortionary taxes to fund G), the
optimal tax on ͚dirty͛ goods is Pigouvian (no subsidy as in the simple model).

Under positive labour taxes, find that     
À  ! 
 !" 
 À(that there is a negative ͚tax-base͛ effect).

The negative tax base effect is due to an environmental tax changing the
consumption basket away from dirty to clean goods. owever, in doing so, the tax
base for the environmental tax diminishes and the reduction in the labour tax
cannot be large. This means that the real after tax wage falls as the fall in labour
tax can͛t fully compensate for the higher cost of dirty goods.

ëf labour taxes are 0, then there is no welfare change (LS) by marginally reducing
env. Taxes below their Pigouvian level. owever, there is a welfare gain by doing
so if labour taxes > 0. ence, the §p#$%p§&#$§
#%'(|§$%)%%"
*w§p§&#$§


ën this second best there is still a double-dividend from lowering labour taxes.
 
   

     
* ) - 
   





 - ' !
(
#!6  6    

6 ' - ' !

Welfare Effect on Effect on environmental
Change Lab. Market distortion
6 & - 
&
6%# distortion
$ - $!
 "! # due to tL
 - 
6  !  6
›
›

- 
  6  6   -

d -  6   

6   
 - 
 6    

 6 -   
  6  6
 
 › ›
 
  
 
   

„ *
)  

Later study, broadly supports the conclusion of the previous paper.

ëf no previous tax, or a very small tax is introduced there is no impact on employment,

but environmental quality is improved; hence likely to be a welfare gain.

A tax rise/larger tax on the POLLUTëNG COMMOYëTY draws the same conclusion as
the previous paper; due to !  À 
  !! 
 À
  
(lower real post-tax wage reduces incentive to supply labour $
lower employment).
; %!
! w|)    (but also improves quality more), !
!  
!!
 .

A similar tax on the POLLUTëNG ëNPUT harms employment if the initial tax was > 0.
; The tax reduces the demand for the polluting input, !
!

+ À  ,
  , and due to the tax-base erosion effect, the Gov can͛t reduce the labour tax
to fully compensate.

There is a fundamental conflict between $

+  
 
- ,and
 
 
!   
+ +À 
.

ÀÀ  ÀÀ  
À    À!   

 
    À !     #!
 !
"+À 
!   À
 .!!
! !! À    ,
 À
+     .
 
   

„ §

„ Warns that if the revenue from environmental taxes are directly distributed to the victims of
pollution , they will invest in too little ͚defensive action͛/͛preventative goods͛.
* %

% wÀÀ „ Contrary to Bovenberg + Ye Mooij, Oates states the +
 
 
, À
!p
  in order to reduce the excess burden of distortionary taxes by raising
  À 
 more revenue than the MAC=MEC scenario.
!  .
Y=excess burden, R
is revenue, E is
 Î „
 Î „
Î „ D Î „
environmental „ )+À!   ,%
quality
ëf Elasticity > 1, a fall in tax raises revenue, Env. Tax rate falls.

ëf Elasticity < 1, a fall in tax loses revenue, Env. Tax rate rises.

ëf Elasticity = 1, the Pigouvian and optimal taxes are the same.

„ owever, Oates  
 

  
 À, or using environmental taxes for purely
raising revenues; they are primarily for attaining an environmental target.

Such earmarking has occurred in ͚Environmental Trust Funds͛.

„ Ú

 




 










 

 


 
   

„ p 

„ Notes carbon taxes are likely to differ for coal, gas and oil, they will be consumption-based
and would rise over time due to rising energy demand.

„ Advantages of a carbon tax:

͚Youble dividend͛
; An international carbon tax would imply a grand double dividend, with revenues being allocated to
developing countries hit hardest.

; iwÀ 

/      À!  !
 , 
+

 
,      

Carbon Taxes will minimise the marginal cost of abatement for firms if set correctly.

 
À,
  ,,!À+    !
,.

   ! À  

À0  
 

„ Yisadvantages:

)      + + ,     ,+  ,

 

Proops et al. (1990) show that for a 20% reduction in CO2, the indirect tax burden for the
lowest decile rises by ~300%, but only for 80% for the richest   w"w||$1.
 
   

„ * À2

„ OECY has been moving towards carbon taxes (number of ͚economic instruments͛ ʹ
largely taxes ʹ increased by 50% in some §ECD states between 1987 ʹ 1993).

Yue to limited performance of command and control.

Need for greater revenues and integration between environmental + economic

policy.

„ Úwo ways to introduce an environmental tax:

Adjust an existing tax: alter the relative prices of polluting goods (done in 16
countries to stimulate the purchase of ͚cleaner͛ cars). |À!
 
3
, À À§+ +  

ëntroduce new ecotaxes for specific pollutants (CO2, landfills etc.)

„ Any such taxes need to:

ave  À À
with clear links to a pollutant.

# !   , + 
 (if there are none,
tax is purely for raising revenue $ Oates says this is bad).

#! 

À  ÀÀÀ!    .
 
   

„ * À À:

„ Earmarking is more politically attractive and guarantees a stable flow of funds, BUT:

)   4++ À

+  as their consumption is simply being
offset.
  
 À  ,!+
ʹ they will be aimed at
maximising revenue.

Earmarking not consistent with revenue neutrality

„ Pearson and Smith (1991): * À
,  !

+  !+ 
 
than the very richest, hence reforms must consider the distributional effect of the taxes.

„ Double dividend problems:

A high ecotax will be needed to substantially lower the income tax rate.

%   À
 !   
ÀÀ  ÀÀ
,
 

„ Empirically, no detection that ecotaxes have lead to poor trade or flight to ecotax havens.

„ 
+  !À
+  !
 due to cleaner, more efficient tech being
implemented.

„ Carbon taxes are currently in a transition phase: #!!  , there is
+    ,and there may need to be  ,  
À
 
   

„ 
+    results (1.1%).

„ 6umerical estimates of the double owever,  "

À À  !
dividend hypothesis have been mixed: ÀÀ   § 
 
 ! 
+,
    

+   aside from in the Proost +van
„ 
+ "     
" Regemorter (1996) case w/ no equity
À provide estimates of welfare concerns..
changes due to a tax.
„  
À do not provide welfare
"À 5 p  À  change estimates, but look at a group of
w

  6 both find welfare countries:
losses due to a carbon tax of US$10 -
$25/ton of carbon, coupled with a
payroll tax cut/income tax cut in the 
 7 and -   both
US. The former only finds a small provide estimates for an EU-wide
effect, but the latter find a substantial carbon/energy tax with payroll tax
loss ëN TE CASE WëT NO EQUëTY cuts. They find positive effects on both
CONCERNS (5.4%) employment and GYP, suggesting
efficiency gains. They also find falls in
the CO2 level.
p  À  w

  6
find a 1.6% increase in welfare under
the scenario where EQUIÚ C§6CER6
The *|"
À 5 is used,
ARE PRE
E6Ú, however, as the tax and finds a high G7-wide carbon tax
redistributes from richer to poorer ($275/ton) + payroll tax cut leads to
households.      finds an substantially reduced emissions and
ëtalian tax on total energy expenditure higher employment, but at the cost of
combined with an effective labour tax GYP ʹ a fall in the range of 0.5-1.8%.
cut to also yield positive welfare
 
   

„   À*  study environmental tax reform in Europe:

Green tax reform packages tend to reduce the cost of employing labour via reducing
social security contributions.

„  0|

 also study tax reform in Europe (Table 8):

They find 1.9% of total tax revenue has been shifted from Personal ëncome tax $
Environmental taxes in Sweden.

2.5% in Yenmark, including social security contributions.

hifts from

Cs can be seen in the &8(Climate Change Levy), $,, "
,, * ,
* À ʹ over a range of taxes (CO2, SO2, Landfills, general pollution). owever, the
shifts here are lower than those found in Sweden + Yenmark.

„ §)6 report (see next slide) shows that the U
performs poorly relative to the
rest of the §ECD in terms of env. Tax revenue as a % of both GYP and total tax
revenue.

„ The best performers are # ,À (this seems odd; it could be due to low
overall taxes revenues and GDP), " , |À and )
  are the otherwise
best performers, although Greece has seen a worsening of its performance since 1995
ʹ this could be due to tax base erosion?