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Environmental Tax Reform: Principles from Theory and Practice to Date

Environmental Tax Reform: Principles from Theory and Practice to Date

Full Title: Environmental Tax Reform: Principles from Theory and Practice to Date
Author(s): Ian W.H. Parry, John Norregaard, and Dirk Heine
Publisher(s): International Monetary Fund
Publication Date: August 1, 2012
Full Text: Download Resource
Description (excerpt):

This paper has two objectives. First is to review core principles from the literature on  environmental tax design. Second (which is less common in the literature) is to take a look—albeit a very quick one—at how these principles might be applied in practice.2 We consider  (briefly) a diverse mix of countries, including Sweden (a pioneer of environmental taxes),  Germany (where earlier environmental tax reforms have lost momentum), Turkey (where  environmental tax revenues are atypically high—see Figure 1) and Vietnam (where  environmental taxes are introduced into a heavily distorted, low-income economy). For each  country, appropriate taxes to internalize CO2, local air pollution (SO2 and NOx), and broader  externalities in transportation, are considered.

While, to varying degrees, improvements have been made in these countries, and  revenues from environmental taxes appear to have been used productively, there is plenty of  scope for further tax reform. Although common in practice, taxes on vehicle ownership and  electricity consumption are redundant from an environmental perspective if more finely-tuned  instruments are employed (though they could have some rationale on fiscal grounds in countries  where broader taxes are easier to evade). Moreover, effective tax rates sometimes vary  substantially across different emissions sources, and rates can be out of line with our, admittedly,  ‘back-of-the-envelope’ calculations for externalities. To simplify and better target externalities  for all four countries, we would recommend defining separate charges for each pollutant, and  levying these charges upstream on fossil fuels, according to their emissions content (with refunds  for downstream emissions capture at industrial and generation plants). And transportation taxes  should be progressively re-structured as capability is developed for charging by the mile (to  better target congestion). Refining these recommendations in the future will require a lot more  work on the quantification of local externalities, however.

All statements and/or propositions in discussion prompts are meant exclusively to stimulate discussion and do not represent the views of OurEnergyPolicy.org, its Partners, Topic Directors or Experts, nor of any individual or organization. Comments by and opinions of Expert participants are their own.

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