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
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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.