1. Don Fullerton (Texas) Andrew Leicester (IFS) Stephen Smith (UCL & IFS)
Environmental Taxation Paper prepared for the Mirrlees Review Reforming the Tax System for the 21st Century Paper available at
Don Fullerton (Texas)
Andrew Leicester (IFS)
Stephen Smith (UCL & IFS)

2. Environmental taxes: introduction
Key part of policy agenda across OECD
New UK taxes on landfill, business energy, aggregates extraction
Other taxes (petrol, vehicles, etc) often reflect “green” objectives
How to minimise cost of meeting major environmental goals?
Can environmental tax revenues substitute for other sources of revenue?

3. Outline and key issues Environmental regulation: instrument choice
Designing environmental taxes
Revenue aspects of environmental taxes
Applications:
Carbon taxes on energy use by industry and households
Road transport externalities and the tax system
Aviation taxes
Taxes and household waste

4. Taxes and emissions trading (ET)
Policy development has recently focussed much more on ET, both in UK and EU
Good practical reasons
EU tax measures require unanimity, ET doesn’t
ET guarantees outcomes. Use where EU directives set quantity targets?
In principle, taxes and auctioned permits are very similar, and are formally identical except where there is uncertainty.
While the focus of Mirrlees Review is on taxes, much of our analysis could apply equally to ET

5. Instrument choice: Three key issues
Efficiency
achieving environmental goals at lower cost
Market mechanisms share advantages of static and dynamic efficiency compared with conventional “command-and-control” regulation
Performance under uncertainty
Taxes and ET differ sharply
Which matters more – risk of excess abatement cost, or excess pollution?
Rents and revenues
Taxes and ET can both raise revenues
But ET in practice rarely does

6. Rents and revenues
Pollution control policies (regulation, taxes, TPs) can create scarcity rents
Where environmental policy instruments have the potential to raise revenues, there is a significant cost if the revenues are foregone.
Welfare gain from using green tax revenues to reduce existing distortionary taxes.
Substantial long-run costs if we distribute emissions permits for free, rather than auctioning and raising revenues.

7. Environmental tax policy is not just a “technical” choice
Environmental tax policies develop from a political process, reflecting public concerns and pressures
These will influence what is feasible and acceptable
Note the fate of the UK’s fuel duty “escalator”
Distributional aspects may be important, even if easily compensated
Revenue earmarking may influence acceptance, even if it leads to inefficiency
Ecotaxes may themselves have effects on attitudes and perceptions