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The Distributional Effects of Environmental Tax Reform

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  • Johnstone, Nick
  • Alavalapati, Janaki R.R.

Abstract

In recent years there has been increased debate about the potential for shifting the incidence of the tax system away from a variety of economic goods (i.e. employment, investment, etc...) and towards environmental bads (i.e. pollution emissions, resource extraction, etc ...). However, in spite of their apparent efficiency, economic instruments have been adopted relatively less frequently than direct regulation to mitigate environmental damages. One reason may be that some of the distributional implications of environmental tax reform have not been adequately recognized and addressed. How the costs and benefits of environmental policies are distributed in society is critical for their application since this will play a significant role in determining whether or not a particular measure is likely to be politically feasible. Moreover, for a given level of aggregate economic wealth, a redistribution of resources from richer households toward poorer households will tend to increase overall social welfare, and vice versa. While environmental measures should not be the instrument through which distributional objectives are realized, their growing importance means that distributional implications can no longer be ignored, particularly in the face of increasing economic inequality in many countries. This report reviews some of the distributional implications of environmental tax reform in the residential energy, road transport and agriculture sectors. While some of the most important distributional issues are related to the direct financial burden of the tax, this study also reviews some of the other distributional implications. In particular, it looks at the indirect effects on goods and services through input-output linkages, the potentially mitigating effects through different forms of revenue recycling, the distribution of indirect economic effects such as employment opportunities, as well as the distribution of social and environmental effects such as personal health and exposure to pollutants. The paper argues that in many cases the distributional consequences of environmental tax reform may be distinctly regressive, at least in terms of relative tax burdens. The distribution of environmental and social consequences are much less readily quantifiable, but in many cases their effects may be progressive. However, this depends very much on the sector affected and the precise form of the reform introduced. In addition, the revenue raised by environmental taxes (unlike most other environmental policy measures) provide the means whereby some of these adverse distributional consequences can be mitigated and even reversed. Finally, by addressing market failures and barriers which impact particularly upon lower-income households some measures which mitigate the adverse distributional effects of environmental tax reform can also improve the economic efficiency of the reform. Thus, if designed appropriately, environmental tax reform can meet both distributional and environmental objectives in an efficient manner. On the basis of the evidence reviewed it is concluded that distributional concerns, while important in many cases, should not prevent or delay the introduction of environmental taxes. Rather, they should serve as guiding principles in the design of environmental tax reform not only for their own sake, but also because efficiency objectives and equity objectives can be complementary in a well-designed package of environmental tax reform.

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Bibliographic Info

Paper provided by International Institute for Environment and Development, Environmental Economics Programme in its series Discussion Papers with number 24140.

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Date of creation: 1998
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Handle: RePEc:ags:iieddp:24140

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Keywords: Environmental Economics and Policy;

References

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  1. Kuo S. Huang, 1996. "Nutrient Elasticities in a Complete Food Demand System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, Agricultural and Applied Economics Association, vol. 78(1), pages 21-29.
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  7. Walls, Margaret & Hanson, Jean, 1996. "Distributional Impacts of an Environmental Tax Shift: The Case of Motor Vehicle Emissions Taxes," Discussion Papers, Resources For the Future dp-96-11, Resources For the Future.
  8. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  9. Mabey, Nick & Nixon, James, 1997. "Are environmental taxes a free lunch? Issues in modelling the macroeconomic effects of carbon taxes," Energy Economics, Elsevier, Elsevier, vol. 19(1), pages 29-56, March.
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Cited by:
  1. Scarborough, Helen & Burton, Michael P. & Bennett, Jeffrey W., 2009. "Decision-Making in a Social Welfare Context," 2009 Conference (53rd), February 11-13, 2009, Cairns, Australia, Australian Agricultural and Resource Economics Society 47622, Australian Agricultural and Resource Economics Society.
  2. Katri Kosonen, 2012. "Regressivity of environmental taxation: myth or reality?," Taxation Papers 32, Directorate General Taxation and Customs Union, European Commission.
  3. Amitrajeet Batabyal & Hamid Beladi, 2012. "A simple auction mechanism for locating noxious facilities," Letters in Spatial and Resource Sciences, Springer, Springer, vol. 5(1), pages 1-6, March.

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