The Distributional Effects of Environmental Tax Reform
AbstractIn 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by International Institute for Environment and Development, Environmental Economics Programme in its series Discussion Papers with number 24140.
Date of creation: 1998
Date of revision:
Contact details of provider:
Postal: 3 Endsleigh Street, London WC1H 0DD
Phone: (+44) 20 7388-2117
Fax: (+44) 020 7388-2826
Web page: http://www.iied.org/SM/eep/index.html
More information through EDIRC
Environmental Economics and Policy;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Brooks, Nancy & Sethi, Rajiv, 1997. "The Distribution of Pollution: Community Characteristics and Exposure to Air Toxics," Journal of Environmental Economics and Management, Elsevier, vol. 32(2), pages 233-250, February.
- Rendleman, C. Matthew, 1991. "Agrichemical Reduction Policy: Its Effect on Income and Income Distribution," Journal of Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, United States Department of Agriculture, Economic Research Service, issue 4.
- Vanessa Brechling & Stephen Smith, 1994. "Household energy efficiency in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 15(2), pages 44-56, May.
- Casler, Stephen D. & Rafiqui, Aisha, 1993. "Evaluating Fuel Tax Equity: Direct and Indirect Distributional Effects," National Tax Journal, National Tax Association, vol. 46(2), pages 197-205, June.
- Lawrence H. Goulder, 1994. "Environmental Taxation and the "Double Dividend:" A Reader's Guide," NBER Working Papers 4896, National Bureau of Economic Research, Inc.
- 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.
- Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
- 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.
- Tobey, James A. & Reinert, Kenneth A., 1991. "The Effects of Domestic Agricultural Policy Reform on Environmental Quality," Journal of Agricultural Economics Research, United States Department of Agriculture, Economic Research Service, United States Department of Agriculture, Economic Research Service, issue 2.
- Barker, Terry & Baylis, Susan & Madsen, Peter, 1993. "A UK carbon/energy tax : The macroeconomics effects," Energy Policy, Elsevier, vol. 21(3), pages 296-308, March.
- Bengt Kristrom & Pere Riera, 1996. "Is the income elasticity of environmental improvements less than one?," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 7(1), pages 45-55, January.
- Liapis, Peter S., 1994. "Environmental And Economic Implications Of Alternative Ec Policies," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, Southern Agricultural Economics Association, vol. 26(01), July.
- 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.
- Katri Kosonen, 2012. "Regressivity of environmental taxation: myth or reality?," Taxation Papers 32, Directorate General Taxation and Customs Union, European Commission.
- 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.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.