Theory and Impact
Critical Issues in Environmental Taxation series
Edited by Larry Kreiser, Soocheol Lee, Kazuhiro Ueta, Janet E. Milne and Hope Ashiabor
Chapter 1: Environmental taxes and fees: wrestling with theory
Since the publication of Pigou’s Economics of Welfare almost one hundred years ago, policymakers, scholars and environmental advocates have explored using economic instruments to internalize environmental externalities, particularly since the 1960s. Yet Pigou’s call for internalization set a high standard that may be difficult to meet in actual implementation. This chapter poses questions that probe the gap between the underlying economic theory of environmental taxes and their actual execution. In light of a possible gap, it offers a preliminary inquiry into whether governments should consider an enhanced role for environmental fees in the continued evolution of the theory of environmental economic instruments. A complete analysis of environmental pricing instruments inevitably must draw upon multiple disciplines often beyond the reach of any one author, and it should consider the unique legal, environmental and political circumstances of each country, which are known best to those who work within each country. Hence, this chapter provides an analytical framework and identifies questions for research and debate. This inquiry into fees is not meant to suggest that fees should displace environmental taxes, but rather that an expanded concept of fees might offer an alternative.