The Law and Economics of Environmental Taxation: When
Should the Ecotax Kick In?
J¨
URGEN
G. B
ACKHAUS
Universiteit Maastricht, The Netherlands E-mail: f.schijlenalgec.unimaas.nl
Ecological taxes are categorically different from the classical taxes that seek to extract a certain revenue at a minimum excess burden. Classical taxes are levied so as to
interfere with the market-based allocation of resources as little as possible. Ecological taxes, on the other hand, are designed to achieve a well-defined ecological effect again
at a minimum of excess burdens. The revenue of an ecological tax, however, is coin- cidental and nil when the tax is ecologically optimal. Most ecological taxes currently
proposed are not ecologically optimal as they are defined here. In generating revenues, they partly miss the ecological objective. The tax revenue is an indication that the
ecologically relevant decisions of some agents in the jurisdiction have not been affected so as to achieve the desired ecological result.
This paper explores the law and economics of ecological taxation from this point of view. The question is: How can an optimal ecological tax be institutionally structured so
as to have a maximum impact on ecologically relevant decisions in the desired scope and direction? The paper systematically explores and applies the work contained in
James M. Buchanan’s Cost and Choice: An Inquiry in Economic Theory 1969 to this question and derives an innovative institutional solution. © 1999 by Elsevier Science
Inc.
I. Introduction
In this essay, it is being argued that environmental taxes are fundamentally different from traditional taxes. They are not primarily designed to be revenue-raising instru-
ments, and they are not regulatory taxes in the sense of accomplishing slight changes in individual or firm behavior. The point of environmental taxation and of designing an
environmentally sound tax system is rather to accomplish deep and structural changes in the economic and ecological behavior of individuals, households, and firms, i.e.,
Comments from two anonymous referees and the editors are gratefully acknowledged. International Review of Law and Economics 19:117–134, 1999
© 1999 by Elsevier Science Inc. 0144-818899–see front matter
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changes of patterns and not changes of degree. When these basic patterns of behavior and processes are to be influenced, it is important to identify those basic aspects that are
environmentally and ecologically important and susceptible to change as a conse- quence of a tax intervention. Consequently, one has to identify those instances where
basic choices can be taken and where decision makers face alternatives among which they can choose.
This approach is different from the standard approach to discussing environmental taxation. The law and economics approach pursued in this essay looks at structural
changes and the possibility of effecting such changes through tax instruments. The standard approach to ecological taxation is to impose regulatory taxation so as to curtail
environmentally and ecologically undesirable effects and thereby even to generate a double dividend consisting of, on the one hand, the improvement of the environment
and the ecological system and, on the other hand, a revenue that can be used for different policy ends, such as those relating to the environment and the ecological
system. Taxes that promise to generate such a double dividend are, of course, politically very attractive. It has, however, repeatedly been pointed out that the double dividend
approach is basically flawed [Backhaus 1995; Schneider and Volkert 1996]. After initial enthusiasm on the part of politicians and policy advisors, the consensus has now
vanished and it has even been suggested that the double dividend be negative [Boven- berg and de Mooij 1994].
With so much ambiguity surrounding one of the core concepts of environmental taxation, a fresh approach can be tried. This essay first looks at central features of the
double dividend approach from a law and economics point of view. It then explores a Coasian perspective to proceed then to an analysis based on a rigorous application of
Buchanan’s cost and choice concept. A fourth section contains a simple illustration. The essay concludes with a summary that emphasizes unresolved issues.
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II. The Double Dividend
