One incentive approach to pollution control relies on taxes. If a tax is imposed on each unit of emissions, polluters will reduce their emissions until the marginal benefit of emissions equals the tax, and a least-cost reduction in emissions is achieved.
Emissions taxes are widely used in Europe. France, for example, has enacted taxes on the sulfur dioxide and nitrous oxide emissions of power plants and other industrial firms. Spain has imposed taxes on the dumping of pollutants into the country’s waterways. Emissions taxes have long been imposed on firms that dump pollutants into some river systems in Europe.
Emissions taxes are also being used in economies making the transition from socialism to a market system. In China, taxes are used to limit the emission by firms of water pollutants. By law, 80% of the money collected from these taxes goes back to the firms themselves for emissions control projects. The tax in China is a rudimentary one. The level of a firm’s emissions is determined by visual inspection of the water just downstream from the point at which the firm emits pollutants. Taxes are imposed based on a guess as to how much the firm has emitted. A similar approach is used in China to limit emissions of particulate matter, an important air pollutant. While the method appears primitive, it is nevertheless successful. During the 1990s, China had the fastest growing economy in the world. Total economic activity increased in China at an annual rate of about 10% per year. Despite this phenomenal increase in economic activity, international estimates of China’s emissions of particulates suggest that they were down 50% during the decade. China’s emissions of effluents were unchanged during this period of phenomenal growth.
Taxes are also used to limit pollution in the countries of the former Soviet Union. Rather than basing taxes on an estimate of marginal cost, taxes are set according to complicated engineering formulae. In Lithuania, for example, the tax on sulfide emissions in the water has been set at several million dollars per ton. Needless to say, that tax is not even collected.
The important role for pollution taxes in improving environmental quality is often misunderstood. For example, an intriguing battle in the courts followed Argentina’s attempt to use taxes to control air pollution. Environmental groups went to federal court, charging that the taxes constituted a “license to pollute.” The unfortunate result was that the Argentine government withdrew its effort to control pollution through taxation without finding an adequate substitute policy.The observations on pollution taxes in China, Argentina, and Lithuania are from Randall A. Bluffstone, “Environmental Taxes in Developing and Transition Economies,” Public Finance & Management 3(1) (Spring, 2003): 143–75.
An emissions tax requires, of course, that a polluter’s emissions be monitored. The polluter is then charged a tax equal to the tax per unit times the quantity of emissions. The tax clearly gives the polluter an incentive to reduce emissions. It also ensures that reductions will be accomplished by those polluters that can achieve them at the lowest cost. Polluters for whom reductions are most costly will generally find it cheaper to pay the emissions tax.
In cases where it is difficult to monitor emissions, a tax could be imposed indirectly. Consider, for example, farmers’ use of fertilizers and pesticides. Rain may wash some of these materials into local rivers, polluting the water. Clearly, it would be virtually impossible to monitor this runoff and assess responsible farmers a charge for their emissions. But it would be possible to levy a tax on these materials when they are sold, confronting farmers with a rough measure of the cost of the pollution their use of these materials imposes.
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