Edited by Janet E. Milne and Mikael S. Andersen
Chapter 22: The role of environmental taxation: economics and the law
Environmental taxation is different from other forms of taxation. It is not designed primarily for revenue-raising or as an instrument directed to marginally influence behavior, but rather strives for fundamental and structural changes in the behavior of economic actors (Backhaus 1999). Since altering behavior is not easily achieved, it is not surprising that incentive mechanisms have to be designed within a particular socio-political context where actors will seek to influence policymaking. Environmental pollution associated with economic activity also gives rise to benefits. The optimal level of pollution is therefore normally not zero, but positive. A crucial question that environmental law and economics scholars have is thus how to usefully determine the desired level of environmental protection. In a related question, these scholars are also interested in the optimal design of institutions and instruments to ensure efficient and effective environmental protection. The economic literature suggests the use of incentive-based (or economic) instruments that specify a particular environmental goal but subsequently leave it (via financial incentives) to market participants to decide how to reach these environmental goals. Examples of such instruments are environmental taxes and emissions trading systems. Since legal policy instruments such as liability rules are also ‘incentive based’ through their use of sanctions, the division between economic instruments and command-and control instruments is not clear-cut.
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