The environment as a policy issue has increased dramatically in importance in recent decades. The issues extend from global challenges, such as climate change, access to water and soils, ozone emissions, and biodiversity loss, to issues with a smaller geographical scope, such as water quality and congestion, to the impact of the environment on health. Environmental policy measures, including environmental regulations, taxes, and emission trading schemes, have been proposed to reduce pollution. This chapter focuses on environmental taxes, as they are most amenable to simulation using a microsimulation model, requiring both the behavioural response to the policy to be measured and the distributional impact. In particular, the focus is on the modelling and design of Pigouvian taxes that aim to reduce environmental pollution such as a carbon tax. The chapter presents methodological issues in terms of modelling pollution. It also describes how to use an input-output model to simulate the direct and indirect impact of environmental taxation. The chapter then undertakes an example analysis assessing the welfare impact of a carbon tax.
