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Although the need for environmentally related taxes, charges, and tradable permits is widely recognized, in practice command-and-control types of regulations still dominate the environmental landscape. Moreover, green taxes and other environmentally related levies on motor fuel, electricity, packaging, and landfill waste still exhibit a large number of shortcomings. In most cases, the externality-tax linkage is weak, the rates are low, the bases are riddled with exemptions (for example, for coal, which is often subsidized, and electricity), taxes overlap with regulations, and international coordination, required to contain border-crossing externalities, is not forthcoming. Two main fears seem to stall further progress — the perceived regressivity of environmental levies and their negative impact on sectoral competitiveness. However, the regressivity issue can be tackled by ex-post compensation measures and the loss of competitiveness by ex-ante exemptions and reduced rates. Green tax reform is unlikely to make much progress unless some minimum level playing field is agreed upon between OECD countries.

Design of environmental taxes are picked up as an argument of whether or not environmental taxes should be practically introduced into the Japanese tax system, since it is still immature. It is necessary to investigate the background of environmental issues and protection in the past, and possible way of designing a desirable form of environmental taxes, such as a carbon/ energy tax.

This chapter assesses the macroeconomic effects of carbon‐energy taxation introduced under unilateral environmental tax reform (ETR) in the 1990s undertaken in six member states of the European Union: Denmark, Finland, Germany, the Netherlands, Sweden, and the UK. The effects are estimated using the large‐scale Energy–Environment–Economy (E3) model for Europe, E3ME, which covers the countries involved, as well as the complete single market, so that the effects on other economies can be considered, along with any effects on competitiveness. The method is to identify the key characteristics of the green tax reform packages and include these in the modelling of the price and non‐price effects of the ETR on energy use and international trade in E3ME. The effects are then compared with a ‘reference case’ (i.e. a counterfactual case) generated by E3ME over the period 1995–2012 including current and expected developments in the EU economy, e.g. the impact of the EU Emission Trading Scheme, but without the ETR. The ETRs caused a modest reduction in fuel use and greenhouse gas emissions in all six of countries and a very small increase in employment and GDP. All the ETRs were assumed to be revenue‐neutral. The revenue recycling meant that the cost of ETR to the economy was significantly reduced and in several cases resulted in an increase in GDP. The method for revenue recycling strongly affects the results, as does the scale of exemptions offered to certain fuel user groups.

This chapter reviews the theoretical debate on the properties of environmental tax reforms and implications for competitiveness. Starting from the Porter hypothesis, a claim was made for improvements in competitiveness from shifting taxation from good to bad – from labour to pollution. The chapter argues with reference to Leibenstein (1966) that the benefits of tax‐shifting need to be appreciated not only from the perspective of allocative efficiency, but also from associated improvements in incentive efficiency. The review is followed by a closer inspection of the concept of competitiveness, whereby both its broader connotations as well as some official definitions are considered. The purpose is to present a clarification of the conceptual and methodological basis for the assessment of competitiveness impacts for energy‐intensive industries and European economies undertaken in this book. In the final section, the chapter presents the research methodology underlying the book as a whole and provides a brief introduction to individual chapters. The need for a complementary research design combining a top‐down macroeconomic with bottom‐up sectoral approaches is argued.

This chapter assesses the macroeconomic effects of carbon‐energy taxation introduced under unilateral environmental tax reform (ETR) in the 1990s undertaken in six member states of the European Union: Denmark, Finland, Germany, the Netherlands, Sweden, and the UK. The effects are estimated using the large‐scale Energy–Environment–Economy (E3) model for Europe, E3ME, which covers the countries involved as well as the complete single market, so that the effects on other economies can be considered, along with any effects on competitiveness. The method is to identify the key characteristics of the green tax reform packages and include these in the modelling of the price and non‐price effects of the ETR on energy use and international trade in E3ME. The effects are then compared with a ‘reference case’ (i.e. a counterfactual case) generated by E3ME over the period 1995–2012, including current and expected developments in the EU economy, e.g. the impact of the EU Emission Trading Scheme, but without the ETR. The revenue recycling meant that the cost of ETR to the economy was significantly reduced and in several cases resulted in an increase in GDP. The method for revenue recycling strongly affects the results, as does the scale of exemptions offered to certain fuel user groups.

This chapter pulls together the findings described in the book, draws conclusions, and makes recommendations for an ETR in Europe. It treats specifically the implications of ETR in Europe for the new member states of Central and Eastern Europe, for Europe as a whole, and for the rest of the world. The book concludes with recommendations for ETR design in Europe based on the conclusions of the PETRE project.

The objective of ETRs is to improve the environment (for example, by reducing carbon emissions) while reducing other taxes which may have a negative economic effect. Often ETRs also have the objective of increasing employment. The aim of this chapter is to estimate the effect on the demand for energy and the level of unemployment of the UK and German ETRs that have been implemented. In order to do this, we estimate a specification based on a translog cost function which allows us to model the cross-price elasticities among capital, labour, energy, material, and services.

The main purpose of environmental taxes is “to get the prices right.” Emissions taxes signal the scarcity of environmental resources to their users and thus help to internalize negative environmental externalities. The idea dates back to 1920 and was taken up by modern environmental economics in the late 1960s; since that time environmental economists have tried to persuade politicians to introduce this incentive-compatible instrument as an efficiency-enhancing substitute of the still predominant command and control approach. However, environmental taxes are still the exception rather than the rule in environmental regulation. This has led economists to search for other arguments in favor of the introduction of environmental taxes. Are there additional dividends to be gained from an environmental tax reform? This chapter looks at the link between unemployment and environmental tax reforms, focusing on an open economy endowed with fixed quantities of labor and capital. After describing a basic model of interjurisdictional competition, the chapter discusses a revenue-neutral environmental tax reform and considers its welfare and employment effects. It then looks at optimal environmental policies in first-best and second-best situations.

A tax per unit of pollution can induce all the cheapest and most efficient forms of pollution abatement. To reduce its tax liability, the firm can switch to a less-polluting fuel, add a scrubber, change disposal methods, or otherwise adjust its production process. These methods of substitution in production reduce the pollution per unit of output. In addition, the tax raises the overall cost of production, so the higher equilibrium output price chokes off demand for the output. Thus the tax has a substitution effect that reduces pollution per unit, and an output effect that reduces the number of units. Yet few actual taxes are targeted directly on pollution. This chapter examines the welfare effect of improperly targeted instruments using a simple analytical general equilibrium model with substitution in production and demand by consumers. It derives second-best optimal tax rates on emissions or on output that are based on preference parameters, technological parameters, and preexisting tax rates. It also reviews actual environmental taxes around the world and describes the extent to which they miss the target.

This chapter examines potential environmental tax policy reforms. It focuses primarily on a carbon tax but also more briefly considers a range of other possible changes and green taxes. These include revising or eliminating various energy and environmental tax credits and deductions (many of which might become unnecessary in the presence of a carbon tax), as well as changes to energy taxes that have substantial environmental implications (such as the federal gasoline tax). The chapter draws on recent theoretical and empirical research to evaluate the effects of such reforms on tax revenue, pollution emissions pricing, economic efficiency, and income distribution.

Begins with a note on the two‐way relationship between poverty and the environment and on the U‐shaped curve relating economic development and environmental quality. The next section elucidates the problem of overexploitation of natural resources that arises from an institutional failure to cope with the externalities involved. The conventional prescription is the establishment of well‐defined property rights, and so next the problems involved in its implementation through privatization or nationalization are discussed. Then, the scope for community‐level environmental management through cooperation based on incentives and penalties is analyzed, with the focus on game theoretic models of repeated Prisoners’ Dilemma and assurance games. The last section studies the relationship between trade and pollution in a model with endogenous environmental taxes.

In implementing the most efficient instruments in environmental policy, gaining electoral support is essential. One factor influencing this support is people’s trust in their governments. Quantitative analysis suggests that the lower the trust is that people have in their governments, the lower is their willingness to pay for environmental protection. Using survey data of 45,000 individuals in 32 countries, this study shows that political trust is indeed an influencing factor. In our model the predicted probability of accepting new environmental taxes is 17%, the probability to be indifferent is 21%, and the probability of not accepting environmental taxes is 62%. We show that if the average survey participant theoretically had Swiss trust levels, acceptance would increase from 17% to 23%. Considering that all other variables are held constant, the gain in acceptance of environmental taxes by an increase in trust in government is significant.

In recent years, environmental policymakers have adopted a set of instruments quite different from those usually prescribed in environmental policy textbooks. Economists have traditionally encouraged the use of incentive-based instruments in place of command and control regulation. This book explores the economic incentives provided by environmental policy, their effects on a firm's strategy, and their distribution across sectors. It discusses issues that arise in the design and implementation of environmental taxes or other market-based instruments, compliance costs, and environmental policy design when trade and development issues are considered, along with incentives, information, and research and development as they affect optimal policy design. The book looks at CO₂ abatement policies, carbon taxation, air quality regulation, the link between unemployment and environmental tax reforms, the environmental regime in developing countries, environmental policy and firm behavior, and the effects of environmental policy on the performance of environmental research joint ventures.

The chapter describes the main modelling tools, E3ME and GINFORS, which were used to provide a quantitative analysis of the effects of ETR, and sets out the models’ underlying assumptions and simplifications that play a large role in determining the magnitude and direction of the models’ results. The chapter also identifies areas in which the models’ results are likely to differ, particularly with regard to the intended impacts of ETR, and considers how the treatment of revenues from environmental taxes and charges affects the results of modelling ETRs. The detailed application of the models to ETR is then described, outlining the lines of causality between such variables as energy prices, energy demand, output of different industrial sectors, real incomes, and household expenditure, without quantifying the results, but identifying the likely direction of the different impacts and potential indirect effects.