Edited by Janet E. Milne and Mikael S. Andersen
Chapter 9: Regressivity of environmental taxation: myth or reality?
Environmental taxes are key instruments for achieving sustainability in the economy. By increasing the prices of environmentally harmful goods in relation to other goods, they encourage consumers to shift their consumption patterns in a more sustainable direction. Environmental taxes may also increase the prices of production inputs and thus induce the producers to adopt more environmentally friendly technologies. The most common forms of environmental taxes, and the ones that are the most fiscally important, are those on energy and transport. These taxes affect the costs of heating, electricity and transport, which can all be considered as necessities of modern life. It is often believed—and supported by empirical evidence—that imposing taxes on such goods would impose a heavier burden on low-income households than on high-income households, since the former spend a larger share of their income on these goods. This regressive impact of environmental taxes is often found politically unacceptable and makes it difficult to carry out environmental tax reforms. However, there is also empirical evidence indicating that several factors could mitigate, or even eliminate, the regressivity of environmental tax reforms, and this should be taken into account in judging the distributional effect of the a tax reform package. These factors include, in particular, the income concept used in the analysis, the use of tax revenues and the lesser regressivity of transport taxes compared with those on other energy products.
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