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A Tax on Output of the Polluting Industry is Not a Tax on Pollution: The Importance of Hitting the Target

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  • Don Fullerton
  • Inkee Hong
  • Gilbert E. Metcalf

Abstract

We explore the effects of environmental taxes that imprecisely target pollution. A review of actual policies indicates few (if any) examples of a true tax on pollution. More typically, environmental taxes target an input or output that is correlated with pollution. We construct a simple analytical general equilibrium model to calculate the optimum tax rate on the input of the polluting industry, in terms of key behavioral parameters, and we compare this imprecisely-targeted tax to an ideal tax on pollution. Finally, we consider incremental tax reforms such as a change in either tax from some pre-existing level. Using a utility-based money-metric measure of welfare, we examine the losses that arise from not taxing pollution directly. With no existing tax, under our plausible parameters, the welfare gain from an output tax is less that half the gain from an emissions tax.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7259.

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Date of creation: Jul 1999
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Publication status: published as Distributional and Behavioral Effects of Environmental Policy, Carraro, C.and G. Metcalf, eds., Chicago: University of Chicago Press, 2000,forthcoming.
Handle: RePEc:nbr:nberwo:7259

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  1. Hahn, Robert W, 1989. "Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor's Orders," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 3(2), pages 95-114, Spring.
  2. Schmutzler, Armin & Goulder, Lawrence H., 1997. "The Choice between Emission Taxes and Output Taxes under Imperfect Monitoring," Journal of Environmental Economics and Management, Elsevier, vol. 32(1), pages 51-64, January.
  3. Agnar Sandmo & David Wildasin, 1999. "Taxation, Migration, and Pollution," International Tax and Public Finance, Springer, Springer, vol. 6(1), pages 39-59, February.
  4. Don Fullerton, 1996. "Why Have Separate Environmental Taxes?," NBER Chapters, in: Tax Policy and the Economy, Volume 10, pages 33-70 National Bureau of Economic Research, Inc.
  5. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages S64-S77, November.
  6. Don Fullerton & Gilbert E. Metcalf, 1997. "Environmental Taxes and the Double Dividends Hypothesis: Did You Really Expect Something for Nothing?," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 9706, Department of Economics, Tufts University.
  7. Lawrence H. Goulder & Roberton C. Williams III, 1999. "The Usual Excess-Burden Approximation Usually Doesn't Come Close," NBER Working Papers 7034, National Bureau of Economic Research, Inc.
  8. Don Fullerton & Gilbert Metcalf, 1997. "Environmental Controls, Scarcity Rents, and Pre-Existing Distortions," NBER Working Papers 6091, National Bureau of Economic Research, Inc.
  9. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer, Springer, vol. 2(2), pages 157-183, August.
  10. de Bovenberg, A Lans & Mooij, Ruud A, 1994. "Environmental Levies and Distortionary Taxation," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 1085-89, September.
  11. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes: General equilibrium analyses," Open Access publications from Tilburg University urn:nbn:nl:ui:12-73560, Tilburg University.
  12. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 30(2), pages 675-740, June.
  13. Bovenberg, A. Lans & van der Ploeg, Frederick, 1996. "Optimal taxation, public goods and environmental policy with involuntary unemployment," Journal of Public Economics, Elsevier, Elsevier, vol. 62(1-2), pages 59-83, October.
  14. Lawrence H. Goulder & Ian W. H. Parry & Dallas Burtraw, 1996. "Revenue-Raising vs. Other Approaches to Environmental Protection: The Critical Significance of Pre-Existing Tax Distortions," NBER Working Papers 5641, National Bureau of Economic Research, Inc.
  15. Metcalf, Gilbert E. & Dudek, Daniel J. & Willis, Cleve E., 1984. "Cross-Media Transfers Of Hazardous Wastes," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, Northeastern Agricultural and Resource Economics Association, vol. 13(2), October.
  16. Devlin, R.A. & Grafton, R.Q., 1993. "Tradeable Permits, Missing Markets, and Technology," Working Papers, University of Ottawa, Department of Economics 9301e, University of Ottawa, Department of Economics.
  17. Lawrence H. Goulder & Ian W.H. Parry & Dallas Burtraw, 1997. "Revenue-Raising versus Other Approaches to Environmental Protection: The Critical Significance of Preexisting Tax Distortions," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 708-731, Winter.
  18. Bovenberg, A Lans & de Mooij, Ruud A, 1997. "Environmental Levies and Distortionary Taxation: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 252-53, March.
  19. Don Fullerton & Andrew Leicester & Stephen Smith, 2008. "Environmental Taxes," NBER Working Papers 14197, National Bureau of Economic Research, Inc.
  20. Thomas A. Barthold, 1994. "Issues in the Design of Environmental Excise Taxes," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 8(1), pages 133-151, Winter.
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Cited by:
  1. Herman Vollebergh, 2004. "Lessons from the Polder: Is Dutch CO2-Taxation Optimal?," Working Papers, Fondazione Eni Enrico Mattei 2004.6, Fondazione Eni Enrico Mattei.
  2. Gilbert E. Metcalf, 2000. "Environmental Levies and Distortionary Taxation: Pigou, Taxation, and Pollution," NBER Working Papers 7917, National Bureau of Economic Research, Inc.
  3. Oladosu, Gbadebo & Rose, Adam, 2007. "Income distribution impacts of climate change mitigation policy in the Susquehanna River Basin Economy," Energy Economics, Elsevier, Elsevier, vol. 29(3), pages 520-544, May.
  4. Sjak Smulders & Herman R. J. Vollebergh, 2001. "Green Taxes and Administrative Costs: The Case of Carbon Taxation," NBER Chapters, in: Behavioral and Distributional Effects of Environmental Policy, pages 91-130 National Bureau of Economic Research, Inc.
  5. Jeffrey Milyo, 1999. "A Problem with Euclidean Preferences in Spatial Models of Politics," Discussion Papers Series, Department of Economics, Tufts University, Department of Economics, Tufts University 9920, Department of Economics, Tufts University.
  6. Cremer, Helmuth & Gahvari, Firouz, 2002. "Imperfect observability of emissions and second-best emission and output taxes," Journal of Public Economics, Elsevier, Elsevier, vol. 85(3), pages 385-407, September.
  7. Navajas, Fernando H. & Panadeiros, Monica & Natale, Oscar, 2011. "Environmentally Related Energy Taxes in Argentina, Bolivia and Uruguay," MPRA Paper 37829, University Library of Munich, Germany.

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