How do governments actually use environmental taxes?

ABSTRACT

This paper empirically examines how governments actually use environmental taxes, by looking to what extent their resort to this type of taxation is consistent with three alternative interpretations of environmental taxes proposed by the welfare economics theoretical literature: the strict and the broad Pigouvian and the double dividend hypotheses. We also extend our analysis to an alternative vision of politics, the Leviathan model, to verify how governments that are imperfectly accountable use environmental taxes. Each theory leads to alternative testable hypotheses, which we verify on a sample that minimizes the analysts’ discretionary evaluations, the EU-28 countries that committed themselves to reducing the greenhouse gas emissions by 2020. The estimates lend support to the strict Pigouvian hypothesis and, to a lesser extent, to a version of the double dividend hypothesis, where personal income taxes are ‘recycled’ by environmental ones. The other interpretations do not appear consistent with the data.

KEYWORDS:

• Environmental taxes
• environmental policy goals
• pigouvian taxation
• double dividend hypothesis
• leviathan government

JEL CLASSIFICATION:

• codes: Q28
• H54
• H87
• D72
• D73
• D78

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Paper presented at the EPCS 2016 conference in Freiburg (Germany), the 2017 conference in Budapest, the 2016 EALE conference in Bologna, the TEPP Conference at La Réunion, the 2019 SIEP conference in Turin and the 2019 conference of the AISRE in L’Aquila. We thank the participants to the conferences mentioned above, Nicolas Gavoille, Benoit Le-Maux and Yvon Rocaboy as well as an anonymous referee for helpful comments on previous versions of this paper. The usual caveat applies. Corresponding author: Isabelle Cadoret. email: [email protected]. I thank Sapienza University of Rome for inviting me as a visiting professor in 2015.

² Article 2.1 of decision 406/2009 defines the GHG emissions as ‘ … the emission of carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF₆), […] expressed in terms of tons of carbon dioxide equivalent’. The same decision commits the EU member countries collectively to reduce GHG to 70% of their 1990 levels by the year 2020. In addition to this EU wide target, the Decision sets also country-specific targets, to account for the economic and environmental starting point situations of each country, especially those of the former Eastern European nations. (Annexe II to Decision 4006/2009). Furthermore, the EU member states’ targets are given by the EU Effort Sharing Decision where ‘Member States’ reduction efforts should be based on the principle of solidarity between Member States […] taking into account the relative per capita GDP of Member States’. Furthermore, the national 2020 targets apply to non-Exchange Trade System emissions, a crucial fact, since it allows analysing the impact of ET in reducing a type of emissions and in sectors where an important policy instrument, such as ETS, do not operate (preliminary n. 6 of decision 406/2009).

³ Demania et al. (2005), Fredriksson (1997) and Conconi (2003) are among the various papers that specify lobbying power in this way. Other lobbying variables considered are MAN_VA, the share of value added from the manufacturing industry on total GDP, as well as AGR_VA, the diffusion of lobbies from the agricultural sector. They prove collinear with VA_IND.