On the costs and benefits of environmental taxes

Environmental taxes are a useful economic tool that reduces pollution and resources use. This is something widely recognized amongst economists. The concept is simple and intuitive, if you increase the price of a good or service by imposing a tax, its demand gets reduced. Moreover, if the supply of a specific good or service implies some kind of environmental damage, it may be desirable to reduce it from a societal point of view. On the other side, some economists argue that, in general, taxes provoke costs and distortions. The economy is less efficient in allocating resources, so imposing a new tax is costly. All these arguments are backed by theory and empirical evidence.

Thousands rally for climate action and a carbon price

However, some questions can be arisen in this discussion: what is the cost of environmental damages produced by some economic activities? It might worth paying today the cost and avoiding the future consequences of for instance, climate change, that is likely to provoke future tremendous costs, as scientists are alerting. Moreover, what if revenues from environmental taxes are used to reduce other pre-existing taxes? Can be the cost compensated or even exceeded by benefits in this case? What if the reduction is on taxes on primary inputs, like labor or capital taxes? These and other questions of an environmental taxation reform are being studied in METRES project.