The Scale and Scope of Environmental Taxation

This paper provides a discussion of the principles of environmental taxation. It considers the empirical identification of environmental taxes and the problems associated with the choice of the right tax base from the point of view of the correction of market incentives. It then presents a model of optimal second best environmental taxation when taxes must fulfil the double role of modifying market incentives and generating tax revenue. It also considers the issues of the double dividend, the interaction between intrinsic and extrinsic incentives and the problem of designing a tax policy for the alleviation of global environmental problems. JEL classification: D62, H23, Q50 * This paper was prepared for the conference Tax Systems: Whence and Whither. Recent Evolution, Current Problems and Future Challenges, Malaga, 9-12 September 2009. I am indebted to Xavier Labandeira for his comments on a previous version of the paper.