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Tax Policy and the Environment; Theory and Practice


  • David C Nellor
  • Ronald T. McMorran


This paper provides a framework for examining environment taxes. It reviews the theoretical efficiency of three types of environment taxes: taxes on emissions or Pigouvian taxes; taxes on productive inputs or consumer goods whose use is related to environmental damage; and environment-related provisions in other taxes. A survey of environment taxes in 42 countries--drawn from developing countries, economies in transition, and industrial countries--illustrates that the use of environment taxes differs dramatically from the recommendations of environment tax theory. This divergence between the theory and practice of environment taxes can be attributed to several factors; environment taxes are difficult to implement, there are many factors that impede their effectiveness, and their introduction may be discouraged by their implications for other policy objectives.

Suggested Citation

  • David C Nellor & Ronald T. McMorran, 1994. "Tax Policy and the Environment; Theory and Practice," IMF Working Papers 94/106, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:94/106

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    References listed on IDEAS

    1. Ching-huei Chang & Peter W. H. Cheng, 1992. "Tax Policy and Foreign Direct Investment in Taiwan," NBER Chapters,in: The Political Economy of Tax Reform, NBER-EASE Volume 1, pages 315-338 National Bureau of Economic Research, Inc.
    2. Agarwal, Jamuna Prasad, 1986. "Home country incentives and FDI in ASEAN countries," Kiel Working Papers 258, Kiel Institute for the World Economy (IfW).
    3. Chen, Jo-Hui, 1998. "The Effects of International Competition of Fiscal Incentives on Foreign Direct Investment," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 51(4), pages 497-516.
    4. Peter K. Clark, 1993. "Tax Incentives and Equipment Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 317-347.
    5. Michael J. Boskin, 1987. "Tax Policy and the International Location of Investment," NBER Chapters,in: Taxes and Capital Formation, pages 73-82 National Bureau of Economic Research, Inc.
    6. Shah, Anwar & Slemrod, Joel, 1991. "Do Taxes Matter for Foreign Direct Investment?," World Bank Economic Review, World Bank Group, vol. 5(3), pages 473-491, September.
    7. Itagaki, Takao, 1979. "Theory of the Multinational Firm: An Analysis of Effects of Government Policies," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 437-448, June.
    8. Aldaba, Rafaelita M., 1994. "Foreign Direct Investment in the Philippines: A Reassessment," Research Paper Series RPS 1994-10, Philippine Institute for Development Studies.
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    Cited by:

    1. Stavins, Robert N., 2003. "Experience with market-based environmental policy instruments," Handbook of Environmental Economics,in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 9, pages 355-435 Elsevier.
    2. Morgenstern, Richard, 1995. "Environmental Taxes: Dead or Alive?," Discussion Papers dp-96-03, Resources For the Future.
    3. Evy Crals & Lode Vereeck, 2005. "Taxes, Tradable Rights and Transaction Costs," European Journal of Law and Economics, Springer, vol. 20(2), pages 199-223, September.


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