Are environmental taxes truly solving environmental problems?

Among different approaches to solving environmental issues, one of the most common is a command and control regulatory mechanism. Many systems of environmental protection through command and control regulation emphasize environmental taxes as one of their major tools. According to theoretical concepts of environmental economics, a Pigovian fee or tax may be as efficient as other regulatory tools. In addition, environmental taxes are expected to guarantee equimarginality even as they address the incentives of individual economic actors.

The data yields a different picture. This paper investigates the member-states of the European Union, on a country by country basis and at the territorial level, using NUTS 2 regions within the EU. (The acronym NUTS refers to nomenclature d'unités territoriales statistiques, French for Nomenclature of Territorial Units for Statistics.) We seek to establish whether environmental taxes actually accomplish their intended goal of reducing pollution or, by contrast, whether environmental taxes merely constitute another tool for raising budgetary revenue. If environmental taxes are truly solving environmental problems, revenues attributable to such taxes should decrease over time, ceteris paribus, as private actors subject to environmental taxes modify their behavior and internalize the costs of pollution. Under this account of environmental taxation, governments that are genuinely interested in protecting the environment should be willing to accept a lower stream of revenue in exchange for the accomplishment of those taxes’ true regulatory purpose, which after all is to protect the environment. What we find, however, is that revenues from environmental taxes are actually rising in many EU member states. This suggests that environmental taxation might be missing its target. Instead, European governments may be imposing environmental taxes simply for the purpose of raising additional revenue.