Introduction
This entry serves to emphasize the difference between three distinct types of taxation: classical or traditional taxes serve to generate revenues with a minimum excess burden or welfare loss; regulatory taxes, on the other hand, can be of two kinds.
Pigouvian taxes are regulatory taxes in the sense of accomplishing slight changes in individual or firm behaviour; the production or consumption functions are assumed as given. The point of environmental taxation and of designing an environmentally sound tax system, on the other hand, is to accomplish deep and structural changes in the economic and ecological behaviour of individuals, households and firms, that is, changes of patterns and not changes of degree. When these basic patterns of behaviour 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 consequence 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.Generally speaking, environmental taxes of this kind belong to a type of regulatory taxes that is designed to affect not only choices within structures and constraints, but also choices about such structures and constraints. Since Pigouvian taxes, the first type of regulatory taxes, are well documented in the literature, the emphasis here is on the other type of regulatory taxes which aim at structural change. Throughout, this is done with reference to environmental regulatory taxes.
This approach is different from the standard approach to discussing environmental taxation. The law and economics approach pursued below looks at structural changes and the possibility of effecting such changes through tax instruments. The standard approach to ecological taxation is to impose regulatory taxations so as to curtail environmentally and ecologically undesirable effects and thereby even 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 which can be used for different policy ends, such as those relating to the environment and the ecological system. Taxes which promise to generate such a double dividend are, of course, politically very attractive. However, it has repeatedly been pointed out that the double dividend approach is basically flawed (Bovenberg and de Mooij, 1994; Backhaus, 1995; Schneider and Volkert, 1997).
With so much ambiguity surrounding environmental taxation, a fresh approach may well be tried. This entry explores a Coasean perspective in order then to proceed to an analysis based on a rigorous application of Buchanan’s ‘cost and choice’ concept. A third section contains a simple illustration. The entry concludes with a summary and an emphasis on unresolved issues.