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The Design Features of Environmental Taxes

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The Design Features of Environmental Taxes The design features of environmental taxes Claudia Alexandra Dias Soares London School of Economics (Law Department) Doctoral thesis Supervisor: Damian Chalmers 13 September 2011 ABSTRACT This dissertation aimed at assessing what environmental taxes are. It was argued clear policy guidelines for their design follow from understanding them as regulatory instruments aimed at environmental policy goals. Empirical evidence drawn from institutional practices in Denmark (waste tax), Portugal (energy tax) and Sweden (energy tax, CO 2 tax, sulphur tax and the NO x charge) showed that compliance with such guidelines, which allow the distinction between environmental taxes and environmentally-related taxes, are paramount to the environmental effectiveness of these instruments. Both environmental taxes and pollution taxes or environmentally-related taxes are raised on polluting tax bases and highlight inefficiencies in abatement and opportunities for technological progress by putting a positive price on pollution, hence raising awareness and sharing responsibility. However, they are substantially different. Their underlying normative tax design is different following the different objectives they pursue. The more environmentally targeted tax design of environmental taxes makes them perform better than pollution taxes as instruments of environmental policy, producing stronger and quicker environmental effects than environmentally-related taxes raised on the same tax bases. Environmental taxes aim only or primarily at fulfilling precise environmental objectives via behavioural change and technological progress and must be ruled by environmental criteria. Their design induces behavioural change by promoting tax awareness and tax avoidance, as well as by adopting a ‘forward looking’ approach provided by its reference to the opportunity for improvement rather than mere pollution amounts. Therefore, they must be raised on specific polluting emissions or a proxy for them. Their tax rate needs to be referred to pollution abatement costs or relative polluting impacts taking into account a specific pollutant, and be set at the level required to induce the behavioural change necessary to attain the environmental objective pursued. And they must be charged to polluters who control the cause sine qua non of pollution and still did not explore all their opportunities for environmental improvement. 1 CONTENTS Abstract .............................................................................................................................................................................................. 1 Contents ............................................................................................................................................................................................. 2 List of Tables...................................................................................................................................................................................... 4 Abbreviations ..................................................................................................................................................................................... 5 Introduction ........................................................................................................................................................................................ 7 1. Overview of the argument of the dissertation ............................................................................................................................ 7 2. Preliminary conceptual analysis of environmental taxes ........................................................................................................... 9 2.1 Environmental taxes are regulatory instruments aimed at environmental policy goals ..................................................... 9 2.2 Environmental tax effectiveness must be assessed against precise environmental goals ............................................. 13 2.3 Environmental tax effectiveness is limited by the price system but not by cost-benefit analysis .................................... 14 2.4 Competitive markets enhance environmental tax effectiveness ..................................................................................... 15 3. The Design Features of Environmental Taxes ........................................................................................................................ 16 3.1 Environmental taxation should be ruled by environmental criteria and aimed at precise environmental objectives ....... 16 3.2 The environmental tax design must be referred to improvement potentials rather than pollution amounts .................... 17 3.3 Environmental tax powers should be allocated according to environmental expertise and diverted away from non- environmental concerns ......................................................................................................................................................... 27 4. Institutional practice usually does not include the design features of environmental taxes: The Energy Taxation Directive . 28 5. The thesis structure ................................................................................................................................................................. 29 6. The Case Selection ................................................................................................................................................................. 30 7. Methodology ............................................................................................................................................................................ 31 Conclusions ................................................................................................................................................................................. 32 Chapter I - The theoretical framework underpinning pollution taxes and institutional practice leading to environmentally- related taxes ..................................................................................................................................................................................... 34 1. Main theoretical approaches available .................................................................................................................................... 34 1.1 The Theory of Internalisation of External Costs .............................................................................................................. 35 1.2 The Polluter Pays Principle .............................................................................................................................................. 36 1.3 The Least Abatement Cost Argument ............................................................................................................................. 39 1.4 The Double Dividend Argument....................................................................................................................................... 40 2. Insufficient policy guidance towards environmentally effective tax design .............................................................................. 42 2.1 The Amount of Tax Payment ........................................................................................................................................... 43 2.2 Who should pay ............................................................................................................................................................... 45 2.3 Especially favourable regimes to polluters ...................................................................................................................... 45 2.4 The application of tax revenues ....................................................................................................................................... 46 3. Theoretical vagueness led to misapplication of ‘Good Theory’ ............................................................................................... 47 4. Explaining the conceptual evolution ........................................................................................................................................ 49 4.1 The idea of green taxation ............................................................................................................................................... 49 4.2 Main driving forces shaping the concept ......................................................................................................................... 51 Conclusions ................................................................................................................................................................................. 55 Chapter II - The Danish Waste Tax................................................................................................................................................. 57 1. Brief overview on waste intensities: notion, causes and regulation ........................................................................................ 58 2. Brief overview of the Danish waste management policy ......................................................................................................... 59 3. The Danish waste tax .............................................................................................................................................................. 61 3.1 The waste tax was mainly aimed
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