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Environmental Taxation and Regulation

  • A. Lans Bovenberg
  • Lawrence H. Goulder

This chapter examines government policy alternatives for protecting the environment. We compare environmentally motivated taxes and various non-tax environmental policy instruments in terms of their efficiency and distributional impacts. Much of the analysis is performed in a second-best setting where the government relies on distortionary taxes to finance some of its budget. The chapter indicates that in this setting, general equilibrium considerations have first-order importance in the evaluation of environmental policies. Indeed, some of the most important impacts of environmental policies take place outside of the market that is targeted for regulation. Section 2 examines the optimal (efficiency-maximizing) level of environmental taxes. Section 3 analyzes the impacts of environmental tax reforms, concentrating on revenue-neutral policies in which revenues from environmental taxes are used to finance cuts in ordinary, distortionary taxes. We explore in particular the circumstances under which the 'recycling' of revenues from environmental taxes through cuts in distortionary taxes can eliminate the non-environmental costs of such reforms. Section 4 compares environmental taxes with other policy instruments including emissions quotas, performance standards, and subsidies to abatement in economies with pre-existing distortionary taxes. We first compare these instruments assuming that regulators face no uncertainties as to firms' abatement costs or the benefits of environmental improvement, and then consider how uncertainty and associated monitoring and enforcement costs affect the choice among alternative policy instruments. Section 5 concentrates on the trade-offs between efficiency and distribution in a second-best setting. Section 6 offers conclusions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8458.

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Date of creation: Sep 2001
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Publication status: published as Bovenberg, A. Lans & Goulder, Lawrence H., 2002. "Environmental taxation and regulation," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 23, pages 1471-1545 Elsevier.
Handle: RePEc:nbr:nberwo:8458
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