Agnar Sandmo

Abstract: This paper considers the possible role of environmental taxes for economic development. This role is quite complex and has so far not been widely discussed in the literature. It is therefore useful to start with a review of the basic economic insights in the field of environmental taxation in order to prepare the ground for the application of the theory to problems of economic development and the global environment. Section 1 below starts with a review of the welfare economics of environmental taxation in a single closed economy; analytical details are provided in Appendix A. Section 2 discusses alternatives to taxes as instruments of environmental policy, considering both fixed and transferable quotas. Section 3 is a review of the double dividend issue, which has received much attention in the recent literature, while Section 4 considers the extent to which distributional concerns should be reflected in the design of environmental policy. Since much of the literature in this area relates to the economies of industrialized countries, Section 5 takes up some special problems in its application to developing economies. Section 6 extends the analysis from the single country to the case of global externalities where each individual country is affected by the environmental pollution of all other countries; a formal analysis in the context of a two-country model is in Appendix B. The political economy of global environmental taxes is considered in Section 7, which also compares alternative tax designs with regard to the equity-efficiency trade-off. After a brief discussion of some practical problems of tax collection in Section 8, Section 9 evaluates the revenue potential of such taxes with special reference to the carbon tax. Some concluding remarks are collected in the final section of the paper.