IDEAS home Printed from
   My bibliography  Save this paper

The Distributional Effects of Environmental Tax Reform


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


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.

Suggested Citation

  • Johnstone, Nick & Alavalapati, Janaki R.R., 1998. "The Distributional Effects of Environmental Tax Reform," Discussion Papers 24140, International Institute for Environment and Development, Environmental Economics Programme.
  • Handle: RePEc:ags:iieddp:24140

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Vanessa Brechling & Stephen Smith, 1994. "Household energy efficiency in the UK," Fiscal Studies, Institute for Fiscal Studies, vol. 15(2), pages 44-56, May.
    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.
    3. Walls, Margaret & Hanson, Jean, 1996. "Distributional Impacts of an Environmental Tax Shift: The Case of Motor Vehicle Emissions Taxes," Discussion Papers dp-96-11, Resources For the Future.
    4. Lawrence H. Goulder, 1994. "Environmental Taxation and the "Double Dividend:" A Reader's Guide," NBER Working Papers 4896, National Bureau of Economic Research, Inc.
    5. Liapis, Peter S., 1994. "Environmental And Economic Implications Of Alternative Ec Policies," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 26(01), July.
    6. 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, issue 2.
    7. 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.
    8. 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.
    9. Mabey, Nick & Nixon, James, 1997. "Are environmental taxes a free lunch? Issues in modelling the macroeconomic effects of carbon taxes," Energy Economics, Elsevier, vol. 19(1), pages 29-56, March.
    10. Leonard P. Gianessi & Henry M. Peskin & Edward Wolff, 1979. "The Distributional Effects of Uniform Air Pollution Policy in the United States," The Quarterly Journal of Economics, Oxford University Press, vol. 93(2), pages 281-301.
    11. Baumol,William J. & Oates,Wallace E., 1988. "The Theory of Environmental Policy," Cambridge Books, Cambridge University Press, number 9780521322249, March.
    12. 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, issue 4.
    13. Parry Ian W. H., 1995. "Pollution Taxes and Revenue Recycling," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 64-77, November.
    14. 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.
    15. Bengt Kristrom & Pere Riera, 1996. "Is the income elasticity of environmental improvements less than one?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 7(1), pages 45-55, January.
    16. Liapis, Peter S., 1994. "Environmental and Economic Implications of Alternative EC Policies," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 26(01), pages 241-251, July.
    17. Kuo S. Huang, 1996. "Nutrient Elasticities in a Complete Food Demand System," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(1), pages 21-29.
    18. Lawrence H. Goulder, 1994. "Environmental Taxation and the "Double Dividend": A Reader's Guide," CESifo Working Paper Series 74, CESifo Group Munich.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    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 47622, Australian Agricultural and Resource Economics Society.
    2. Amitrajeet Batabyal & Hamid Beladi, 2012. "A simple auction mechanism for locating noxious facilities," Letters in Spatial and Resource Sciences, Springer, vol. 5(1), pages 1-6, March.
    3. Katri Kosonen, 2012. "Regressivity of environmental taxation: myth or reality?," Taxation Papers 32, Directorate General Taxation and Customs Union, European Commission.

    More about this item


    Environmental Economics and Policy;


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:iieddp:24140. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search). General contact details of provider: .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.