The Role of Environmental Taxation: Economics and the Law

Abstract

This contribution to the Handbook of Research on Environmental Taxation discusses the law and economics of environmental taxation. The chapter provides an overview of taxation and other incentive-based regulations from an environmental law and economics perspective by addressing their strengths and weaknesses. Issues such as flexibility and cost-effectiveness, and also their susceptibility to lobbying at the legislative level and to regulate capture, are examined. The chapter shows that it is not surprising that there differing approaches since none of the policy instruments (taxes, contracts, liability rules, regulation or market-based instruments) may alone be optimal to provide adequate incentives for pollution control. A combination may be necessary, ideally making optimal use of the advantages of each particular policy instrument. To some extent, this can be observed in practice as well. The chapter also discusses the necessity to search for optimal instrument mixes and shows how those mixes of instruments are also applied in practice, especially in the European Union. However, using a behavioural approach, the chapter also shows some of the limits of instrument mixes.

Keywords: environmental taxation, market-based instruments, economic instruments, incentives, emission trading, Coase Theorem, liability rules, negligence, strict liability, tort law, regulation, enforcement instrument mixes

JEL Classification: K32, K13