Taxing or talking: Addressing environmental externalities in the extractive industries

Abstract

Proposals have emerged in recent years to use taxation as a means to internalise the environmental costs of mineral extraction. An example is the proposal to introduce a tax on mineral aggregates in the United Kingdom in 2002. It is argued here that the economic tools used to put a price on environmental externalities in this sector are fundamentally flawed, taking insufficient account of the trade‐offs normally implicit in the price‐setting process. Moreover, flat‐rate taxes across an industry fail to take account of the wide range of differences in local impacts and will only influence producer behaviour in so far as the demand for the mineral product is elastic (which often it is not). A more effective approach to the internalisation of environmental costs, and one which addresses the specifics of environmental disturbance at a local level, is through the better use of formal regulatory processes and through constructive dialogue between those engaged in mineral extraction and those directly impacted by it.