Appendix I. Country Experiences with Environmental Taxes: The Ecotax Leaders
Appendix II. Country Experiences with Tradable Permits Systems
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Bohm, P., and C. Russell, 1985, “Comparative Analysis of Alternative Policy Instruments,” in Handbook of ‘Natural Resource and Energy Economics, ed. by A. Kneese and J. Sweeney, Vol. 1 (Amsterdam: North-Holland).
Bovenberg, A., and R. de Mooij, 1994, “Environmental Levies and Distortionary Taxation,” American Economic Review, Vol. 84, pp. 1085–89.
Brannlund, R., 1999, “Green Tax Reforms: Some Experiences from Sweden,” in Green Budget Reform in Europe: Countries at the Forefront, ed. by K. Schlegelmilch (Berlin; New York: Springer-Verlag).
Buchanan, J., 1969, “External Diseconomies, Corrective Taxes and Market Structure,” American Economic Review, Vol. 59, pp. 139–47.
Burrows, P., 1981, “Controlling the Monopolistic Producer: Nihilism or Eclecticism,” Journal of Environmental Economics and Management, Vol. 8, pp. 372–80.
Ellerman, D, P. Joskow, and R. Schmalensee, 1996, “Update on Compliance and Emissions Trading under the U.S. Acid Rain Program,” CEPR Working Paper (Cambridge, Massachusetts: Massachusetts Institute of Technology).
Endres, A., 1997, “Incentive-based Instruments in Environmental Policy: Conceptual Aspects and Recent Developments,” Konjunkturpolitik: Zeitschrift Fur Angewandte Wirtschaftsforschung, Vol. 43 (No. 4), pp. 299–343.
Goulder, L., 1995, “Environmental Taxation and the Double Dividend: A Reader’s Guide,” International Tax and Public Finance, Vol. 2, pp. 157–84.
Hahn, R., 1989, “Economic Prescriptions for Environmental Problems: How the Patient Followed the Doctor’s Orders,” Journal of Economic Perspectives, Vol. 3, pp. 95–114.
Hahn, R., and G. Hester, 1990, “Where did all the Markets Go? An Analysis of EPA’s Emissions Trading Programs,” Yale Journal of Regulation, Vol. 7, pp. 109–53.
Hahn, R., and A.M. McGartland, 1989, “The Political Economy of Instrument Choice: an Examination of the U.S. Role in Implementing the Montreal Protocol,” Northwestern University Law Review, Vol. 83 (No. 3), pp. 593–611.
Hahn, R., and R. Stavins, 1991, “Incentive-Based Environmental Regulation: A New Era from an Old Idea?” Ecology Law Quarterly, Vol. 18, pp. 1–42.
Harrison, D., 1999, “Tradable Permits for Air Pollution Control: The U.S. Experience,” in Implementing Domestic Tradable Permits for Environmental Protection, proceedings of an OECD Workshop (Paris: Organization for Economic Cooperation and Development).
Helbo Hansen, J. H., 1999, “Green Tax Reform in Denmark,” in Green Budget Reform in Europe: Countries at the Forefront, ed. by K. Schlegelmilch ((Berlin; New York: Springer-Verlag).
Howe, C., 1994, “Taxes versus Tradable Discharge Permits: A Review in Light of the U.S. and European Experience,” Environmental and Resource Economics, Vol. 4, pp. 151–69.
Joskow, P., and R. Schmalensee, 1998, “The Political Economy of Market-Based Environmental Policy: The U.S. Acid Rain Program,” Journal of Law and Economics, Vol. 41, pp. 89–135.
Klaassen, G., 1996, “Emission Trading for Air Quality Standards: Opening Pandora’s Box?” paper presented at the Seventh Annual Conference of the European Association of Environmental and Resource Economists (EAERE) Lisbon, Portugal, June 27–29.
Klaassen, G., and A. Nentjes, 1997, “Sulfur Trading Under the 1990 CAAA in the U.S.: An Assessment of First Experiences,” Journal of Institutional and Theoretical Economics, Vol. 153 (No. 2), pp. 384–410.
Koustaal, P., 1997, Economic Policy and Climate Change: Tradable Permits for Reducing Carbon Emissions (Cheltenham, U.K.: Edward Elgar).
Lyon, R., 1982, “Auctions and Alternative Procedures for Allocating Pollution Rights,” Land Economics, Vol. 58 (No. 1), pp. 16–32.
Malueg, D., 1990, “Welfare Consequences of Emission Credit Trading Program,” Journal of Environmental Economics and Management, Vol. 18, pp. 66–77.
McMorran, R., and D. Nellor, 1994, “Tax Policy and the Environment: Theory and Practice,” Working Paper No. 106 (Washington: International Monetary Fund).
Misiolek, W., and H. Elder, 1989, “Exclusionary Manipulation of Markets for Pollution Rights,” Journal of ‘Environmental Economics andManagement, Vol. 16, p. 156–66.
Moe, T., 1999, “Policies for a Better Environment and High Employment,” in Green Budget Reform in Europe: Countries at the Forefront, ed. by K. Schlegelmilch (Berlin; New York: Springer-Verlag).
Oates, W., 1992, “Pollution Charges as a Source of Public Revenues. Quality of the Environment Division,” Discussion Paper No. 5, (Washington: Resources for the Future).
Oates, W., 1995, “Green Taxes: Can We Protect the Environment and Improve the Tax System at the Same Time?” Southern Economic Journal, Vol. 61 (No. 4).
Oates, W., 1999, “Forty Years in an Emerging Field: Economics and Environmental Policy in Retrospect,” Resources, Issue 137 (Fall), pp. 8–12.
O’Connor, D., 1998, “Applying Instruments in Developing Countries: From Theory to Implementation,” Environment andDevelopment Economics, Vol. 4, pp. 91–110.
Organization for Economic Cooperation and Development, 1997a, Applying Market-based Instruments to Environmental Policies in China and OECD Countries (Paris: OECD).
Organization for Economic Cooperation and Development, 1999c, Environmental Taxes: Recent Developments in China and OECD Countries, (Paris: OECD).
Organization for Economic Cooperation and Development, 1999d, “Implementing Domestic Tradable Permits for Environmental Protection,” proceedings of an OECD Workshop, Paris.
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The authors are staff members of the IMF’s Fiscal Affairs Department. They would like to thank Liam Ebrill, Angelo Faria, and Harald Hirschhofer for useful comments.
The Protocol implicitly recognizes that developing countries may need additional time to meet the requirements of the agreement, taking into account potential technical and economic constraints.
For example, the limit agreed to by the United States implies a reduction by about one-third compared to the estimated level of CO2 emissions at the end of the next decade in the absence of such measures.
Tietenberg (1985), in a review of several studies, found that the potential magnitudes of these cost savings range from 50 to 90 percent. More recent studies by O’Ryan (1996) and Klaassen (1996) show quite similar results.
In this case, there are two sources of market failure that need to be addressed, namely, pollution externalities and market power characterized by a level of output that is less than optimal. Any instruments to correct for the environmental externality will encourage firms to reduce emissions. And to the extent that emission reductions are accompanied by reductions in output, the second type of market failure (e.g., suboptimal output levels) will be exacerbated and hence some welfare losses will occur. This risk is reduced when emissions reductions can be achieved through other means (end-of-pipe treatment, and the like).
This sum collapses to the familiar Pigouvian tax if the industry is competitive, and it will equal zero if, as Buchanan suggests, the two effects cancel each other.
In the case of an oligopoly for instance (see Ebert, 1992), the derivation of the second best fee would depend on the behavioral assumptions about the firms, but would essentially incorporate the same trade-off between the concerns of market power and excessive pollution.
This approach seems particularly warranted when inputs and/or outputs are assumed to be closely correlated with emissions.
At a conceptual level, a system of marketable permits for input is conceivable (See Helfand, 1999). However, in practice such systems have never been used since it is extremely difficult to determine the levels of aggregate inputs use necessary to achieve a specified level of total emissions. Developing a system of marketable permits in input markets, then, will not clearly achieve a specified pollution level without a great deal of information on the part of the regulator.
In most permit systems implemented to this date, permits were distributed free of charge and hence did not generate revenue for the government (this will be discussed in greater detail in the next section).
As will be discussed in the next section, one of the main obstacles to implementing new environmental taxes is the possible loss of international competitiveness, as illustrated by the EU example.
To address this problem, the OECD in cooperation with other institutions is working on a statistical framework, which in time will provide a clearer picture of the level and structure of environmental taxation in developed countries. In the same context, the OECD has also established a comprehensive database with information on environmentally related taxes in its member countries (OECD, 1999a).
In practice, the concept of a true Pigouvian tax set optimally such that it equals the marginal damages of emissions is rarely applicable, given that regulators are unlikely to have the information needed to set such a tax (see Section II).
In September 1999, for example, the Environment Committee of the European Parliament passed a draft resolution on climate change containing a harmonized ecotax plan in which the 15 EU countries can opt in or out.
The Protocol will not enter into force until ratified by countries accounting for at least 55 percent of so-called Annex 1 emissions, and by at least 55 countries. Eight countries have ratified so far, but none of the Annex 1 countries. The institutions and procedures for monitoring and reporting of noncompliance are yet to be established.
Developing countries are not subjected to binding targets under the Protocol, and only a few of these countries have voluntarily adopted emission targets similar to those of the developed countries.
The costs are also estimated to increase over time, and will reach 1½ percent of GDP in 2050 if emissions are to be maintained at the level embodied in the Protocol.
“Effective” rates of taxation could be measured as the ratio between actual green tax yield collected and the potential tax base (that is, including what is currently exempt). Data deficiencies have prevented the calculation of effective rates.
These lessons are drawn for the most part from the proceedings of an OECD workshop held in Paris in September 1998, on the theme: “Domestic Tradable Permit Systems for Environmental Protection: Issues and Challenges.”
Hot spots are very high concentrations of pollution in particular locations; tradable permits could contribute to the formation of such hot spots if they allowed more clustering of emissions in vulnerable areas.
In some instances, the combined emissions from small emitters may turn out to be more significant than those of the larger emitters.
Very few cases of such international trades have been reported to this date.
Electric currents are a standard measure of salinity and are used in calculating the number of salinity credits available for trade.
Other countries such as Canada, Iceland, the Netherlands, and the United States have experimented with such programs, but on a much smaller scale.