Public Policy: Using Market-Based Approaches - Department for ...

Due to the negative externality, these taxes can provide a source of public
revenue that is likely to be less distortionary than existing taxes. 52 In fact, Terkla
estimates that revenues from an effluent fee charged on particulates and sulphur
oxide emissions would provide substantial efficiency gains of up to $3.05 billion
(in 1982 US dollars) if substituted for either federal individual income tax or
corporation income tax. 53
APPLICATIONS
Unit taxes in the form of effluent fees have been employed to regulate water quality
and noise pollution in Europe. However, their goal has largely been to raise money
to finance projects for water quality management rather than to regulate optimal
effluent discharge. Evidence from the Netherlands, however, suggests that fees
have had a measurable effect on reducing emissions. For example, Bressers (1983)
and Brown and Bressers (1986) use econometric techniques to find that firms have
responded to fees by cutting back significantly on discharges of water borne
pollutants. 54 Although a command and control situation would also have reduced
pollution, the benefit of the taxes and subsidy system is that the cost of the
pollution is internalised and the market adjusts to find the optimum level of output.
WHEN ARE TAXES PREFERABLE TO MARKETABLE PERMITS?
Section 7 – Market-Based Mechanisms
In a world of perfect information and certainty, tradable permits and taxes would
have identical effects on emissions abatement and costs. 55 In the real world,
however, uncertainties about costs and benefits can influence which approach is
preferred. For instance, in cases where a small increase in the level of emissions
could result in a large decrease in benefit a tradable permit approach may be
preferred. In cases where the cost of achieving a given emissions level is
uncertain the charge approach may be preferred. 56
52 Lee, D. and Misiolek, W. (1986) ‘Substituting Pollution Taxation for General Taxation: Some Implications for
Efficiency in Pollution Taxation’, Journal of Environmental Economic Management 13(4).
53 Terkla, D. (1984) ‘The Efficiency Value of Effluent Tax Revenues’, Journal of Environmental Economic
Management 11(2).
54 Bressers, H. (1983) ‘The Effectiveness of Dutch Water Quality Policy,’ Mimeo, The Netherlands: Twente University
of Technology.
Brown, G. and H. Bressers (1986) ‘Evidence Supporting Effluent Charges’, Mimeo. The Netherlands: Twente
University of Technology.
55 Using taxes to address environmental externalities leads to an efficient level of pollution abatement, which can
occurred at the lowest marginal cost. Baumol,W.J.(1972) ‘On taxation and the Control of Externalities’, American
Economic Review 62 (3).
56 See for instance Stavins, R. (2001) ‘Lessons from the American Experiment with Market-based Environmental
Policies’ RFF discussion paper 01-53: and Chairman of the Council of Economic Advisors (2000), Making Market
Work for the Environment, Economic Report of the President, Chapter 7. USA 2000
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