We began class concluding the e-mail discussion on the disadvantages of emission
fees. Issues raised included:
Compared to command and control, emission fees provide more
certainty on costs, but less certainty on the final level of emissions.
Market-based policies guarantee an overall goal, but they don't
guarantee which firms will reduce and which firms won't. If firms
near an urban center choose to pay the fee rather than reduce
emissions, damages may remain high.
Varying the fee based on potential damages can help address
Concerns about equity might make some environmental taxes
politically unpopular. For example, lower income families spend more
of their income on gasoline, making a gas tax a regressive.
While all policies raise the possibility of costs being passed on to
consumers, there are more costs to be passed on here, as firms pay
both for abatement and the fee for the remaining units of pollution.
To charge a fee per unit of pollution, all pollution must be monitored
Compared to regulations that mandate a specific abatement
technique, fees are more flexible
In addition, if economic conditions change, fees allow responses to
adjust to new conditions.
I. Implementation Issues
We began class by discussing practical issues for implementing an environmental tax.
Note that most U.S. taxes that affect the environment were not implemented
primarily for environmental reasons. Other concerns, such as raising revenue,
tend to be more important.
Questions for designing an environmental excise tax:
What is to be taxed?
That is, what is the tax base.
May be direct (e.g. CFCs, emissions), or indirect (e.g. gasoline)
Who is to be taxed?
Here we’re focusing on administration, not ultimate incidence.
Recall that economic incidence is independent of legal incidence.
Ideally, we would like to tax users directly. However, it can be difficult to
know the users.
For example, to prevent non-point pollution, we may tax fertilizer,
since we can’t tax each farmer for his or her individual