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Edited by Janet E. Milne and Mikael S. Andersen
Chapter 8: Externality research
Environmental taxes are introduced to raise revenue while at the same time help reduce significantly the damages associated with pressures and emissions from polluting activities. Economists are, however, searching for environmental taxes that are ‘optimal’ in the sense that they reflect accurately the damages at play, not more and not less. If taxes are too low they will be insufficient to internalize environmental damages in market transactions. If taxes are too high they will penalize too extensively the market transactions and cause a loss of economic welfare. From a theoretical point of view environmental taxes need to be ‘just right.’ Such a tax is known as a Pigovian tax. In the debate over competitiveness effects (see Chapter 21 of this Handbook) and the double dividend (see Chapter 12), it makes an important difference whether the environmental taxes introduced are optimal or not. For this reason economists have long grappled with how to place monetary values on environmental damages. There are examples of a spillover from this preoccupation with optimality to certain legal principles codified for environmental taxation. Environmental engineers have made an important contribution by developing the ‘impact pathway’ approach, which is an analytical method that links the sequences leading from an emission to an impact. Models over the transport and dissemination of pollutants are required to account for the end effects and to attach a relevant price tag.
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