Environmental Taxes
Michael Hanemann
Department of Agricultural &
Resource Economics
UC Berkeley hanemann@are.berkeley.edu Environmental policy instruments
• Tax on emissions
• Regulatory limit on emissions
• Cap and trade
– Fixed limit on aggregate emissions
– Individual firms have their individual limits but they can buy and sell emission permits from one another for a market price
It combines features of both other approaches.
It is a limit on aggregate emissions but, for any individual firm, it functions more like a tax
(there is an opportunity cost of emitting).
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Topics
• Environmental taxes
– What they are
– Why they can be a good idea
– Who uses them
– What the experience in Europe has been

• Greenhouse gas (GHG) reduction
– AB32 and other actions in California
– Past experience with emission
– Why GHGs are different than other pollutants
– A mixed approach is needed for GHGs
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Environmental taxes

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Externality

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Environmental policy
• Starts ~1970 in US with regulation of emissions. Generally starts later (1980s) in
Europe; initial efforts there often follow US regulatory pattern.
• 1990 Clean Air Act Amendment in US introduces emission trading for SO2 and, later, NOx.
• Starting ~1990, European countries introduce environmental taxes – not only
Scandinavia and Germany, where green parties are strong, but also many Southern and Eastern European countries.
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Types of environmental tax
• Gasoline tax
• Carbon tax
– Sweden, Norway, Denmark, Finland, Italy, the
Netherlands

• Sulfur tax
– Sweden, Norway, Denmark, Poland, Italy,
France, Switzerland, Spain, Finland, Bulgaria,
Czech, Hungary, Estonia, Lithuania, Slovakia

• Nitrogen tax
– Sweden, Bulgaria, Czech, Estonia, France,
Hungary, Italy, Lithuania, Poland
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Other (local) taxes
• Water pollution discharge charge
– France, Germany, Netherlands

• Waste/Landfill charge
– Denmark, Netherlands, Finland, Estonia, Latvia,
Poland

• Garbage disposal/recycling charge
• Congestion pricing
– Singapore, Stockholm, London, Bergen, Valletta,
Milan, German & Austria (trucks)

• Taxes on chlorinated solvents (Denmark,
Norway), batteries (Sweden), non-refillable containers (Sweden, Finland), ozone-depleting substances (Denmark), VOCs (Switzerland,
France).
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Recycling green tax revenues

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Environmental tax dividends
• Leads to a reduction in pollution emissions
• Raises revenues that could be used to lower other taxes that cause distortions in the economy (revenue recycling effect)
• But, also interacts with existing taxes that create distortions in the economy and may exacerbate the effects of those distortions
– substituting a narrow-base tax for a broad-base one.
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• The magnitude of a harmful tax-interaction effect is questionable.
– Alleged pathway – pollution tax makes commodities more expensive, reduces real wage and encourages a reduction in labor supply, which generates an increased distortion – is questionable empirically.
– Analysis assumes that emissions can only be reduced by reducing production of offending good – not by changing production technology.
– Analysis assumes that pollution itself has no adverse impact on consumption or production of commodities. If this is false, the adverse taxinteraction effect can be reversed.
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Climate change policy

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California’s 2006 GHG laws
• AB 32, places a cap on all GHG emissions in California; requires that, by 2020, these be reduced to their 1990 level, a reduction of ~29%.
• SB 1368 Prohibits any load-serving entity from entering into long-term financial commitment for baseload generation unless GHG emissions are less than from new, combined-cycle natural gas. Applies to out-of-state generators, also to municipals. 19

Electricity Initiatives in California
• Emission Performance Standard for New
Procurement
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