Edited by Janet E. Milne and Mikael S. Andersen
Chapter 3: Economic principles of environmental fiscal reform
The adoption of the polluter-pays principle by OECD (Organization for Economic Cooperation and Development) member countries in 1972 occurred at the crossroads of economic, trade and environmental concerns. The principle inspired interest in economic instruments as a means of promoting a full integration of environmental and economic issues, particularly after the 1987 Brundtland report successfully advocated for the concept of sustainable development worldwide. In this context, economic instruments would be the key policy means of joining economic and environmental sustainability. Reaching a macroeconomic level of significance, environmentally related taxes could become the nexus of fiscal reform, partially switching the burden of social security from labor and capital to sources of environmental externalities. At that time the so-called ‘double dividend’ strategy came to the forefront of proposals for supporting an integrated approach of economic, fiscal and environmental issues. Nevertheless, despite a few success stories, in particular in Nordic European countries, implementing consistent environmental tax reforms is often fraught with difficulties and obstacles. Environmental taxes have a long-standing intellectual history, rooted in welfare economics (for instance Pigou 1920; Baumol and Oates 1988) as well as in institutional economics (Andersen 1994). Yet despite early analyses and experiences of water charges (Kneese 1964), it took a long time before the academic literature began to influence the political sphere. Signs of a consistent use of tax instruments started to emerge during the early 1990s in a few pilot countries such as Sweden, Norway and Denmark (OECD 2002 and 2006).
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