Environmental Taxation

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.

Taxation for a Circular Economy: New Instruments, Reforms, and Architectural Changes in the Fiscal System

This article addresses fiscal policy as a key instrument for promoting the transition to a circular economy. It is based on the hypotheses that (1) the current tax system penalizes circular activities, which are generally labour intensive, as opposed to new product manufacturing activities, which are generally intensive in materials and energy, highly automated and robotized, and (2) that the environmental taxation implemented in recent decades is unable to introduce significant changes to stop climate change or keep the economy within planetary ecological limits. This article examines the basis of an alternative tax system and tax instruments for correcting the current linear economy bias and driving the transition to a circular economy. Proposals are developed for both structural and partial reforms of the fiscal system, focusing on tax measures that can be implemented in the medium or short term to boost a circular economy. More specifically, we suggest a complete redesign of the currently opaque and significant amount of tax expenditure to transform environmentally harmful tax benefits into environmentally friendly tax measures that are suitable for the circular economy.

Emission taxes, firm relocation, and product differentiation

This paper studies the effect of an emission tax on the relocation decision in a duopoly with vertical product differentiation. We establish the relationship between an exogenous product quality markup, relocation cost, and emission taxation in a two-country-setting for three cases: (a) an environmental tax set only by one country, (b) non-cooperative environmental taxation in both countries, and (c) coordinated environmental taxation. We show that a larger product quality markup and, thus, weaker competition can serve as a substitute for environmental policy as both reduce emissions. However, weaker competition makes firm relocation more likely, which results in emission shifting instead of emission reduction. The higher the product quality markup, the more likely it is that at least one firm relocates to the foreign country. Emission taxation in the foreign country changes location decisions: If also the foreign country applies an emission tax, at least one firm stays in the home country. If both governments set taxes non-cooperatively, the low-quality firm always stays in the home country. If both countries set taxes cooperatively, both firms are more likely to stay in the home country. However, relocation of the low-quality firm is a possible outcome under cooperative taxation.