Green taxes unpopular

Back in the 1970s, Agnar Sandmo had already found a way of designing the tax system to provide the right environmental incentives without loss of revenues for the government. 'So why don't politicians think that this is a wonderful alternative?' he asks.

18.01.2010 - Text: Sigrid Folkestad

The article was originally published in Norwegian in NHH Bulletin nr 3, 2009. This version is from a newly published English edition of NHH Bulletin.

Professor Emeritus Agnar Sandmo has been interested in environmental economics and published research in the field since the early 1970s.

In June 2009 The European Association of Environmental and Resource Economists (EAERE) conferred the European Lifetime Achievement Award in Environmental Economics on Sandmo for his significant contributions to economic analysis in general and environmental economics in particular.

'They noted that my interest in environmental economy issues and my publications in the field span a period of almost forty years,' explains the economist.

This interest is due in part to Professor Sandmo's concern for the environment and in part because he saw it as an interesting area for economists in general.

'I started by writing a number of articles in Norwegian, in which I tried to present basic issues in a relatively popular style.'

'In the mid-1970s, however, I attempted to combine my theoretical interest in fiscal matters with my concern for the environment. And that was when I wrote these articles to show how an ideal tax system could be designed that would assure the government of its tax revenues while also ensuring that taxation provides the right environmental incentives.'

Professor Sandmo's most quoted article in the area of environmental economics is 'Optimal Taxation in the Presence of Externalities' (Swedish Journal of Economics, 1975).

In this article, Sandmo presents a theoretical framework for characterising environmental taxes, their design and how they should be combined with the rest of the tax system.

Pigovian tax in Sandmo's work

A concept that often crops up in references to Sandmo's 1975 article is Pigovian tax.

'Arthur Cecil Pigou was an English economist who first described a form of environmental taxation in 1920, in a manner that was very perceptive and interesting, albeit rather vague in relation to modern economic thinking. He discussed many different examples, but did not refer to them as environmental issues since the environment was not a primary category in 1920. In fact, as a concept, it barely existed at all.'

'However, he wrote, for example, that emissions from factories led to a dirty environment in industrial towns and cities at considerable cost to their populations, who had far greater outlays on washing and cleaning than people living in a clean environment. This entailed a social cost and Pigou thought that something should be done to make the people responsible for the smoke emissions pay. A tax should be levied that reflected the cost inflicted on others. Hence the expression Pigovian tax,' explains Sandmo.

Pigou discusses environmental taxes as a separate issue from the rest of the tax system.

However, according to Professor Sandmo, the rest of the tax system will normally result in a loss of efficiency for society in the form of reduced work effort and, perhaps, lower savings.

'So the question is how we can link up the two sides of the tax system: on the one hand the generation of income for the government, with its detrimental effect on the private sector, and, on the other hand, environmental taxes. Will the whole concept of environmental taxation disappear when just about all taxes can be perceived as environmental?' he asks.

Professor Sandmo argues that environmental taxes should be added on top of other taxes - on goods liable to VAT, but only on those goods that actually cause environmental damage.

'Should environmental taxes serve as a corrective to consumers?'

'They should confront consumers with a correct price that reflects as accurately as possible the social costs of their consumption.'

The community's interests

'The point of departure of the articles is that we have to act without certainty and that our possibilities for action are limited. Markets and social institutions function far from ideally. Does this apply to any significant extent to the environment?'

'The environment is the supreme example of an area in which an unregulated market does not function well. In my opinion, a sensible environmental policy is a policy that utilises market incentives in a way that makes people more aware that their own interests are compatible with the interests of society at large.'

'Do you think that levying environmental taxes and then not spending the revenues on environmental measures undermines the system?'

'No, I don't think that matters much. There are plenty of measures the authorities can take to improve the environment, but ensuring a one-to-one relationship between environmental taxes and what the money is spent on is not so important. Perhaps we should spend more - or perhaps less.'

'But does the public at large not have to have a general understanding that this is the right way to solve our problems as a community?'

'Yes. No taxes are popular. If you ask people whether income tax should be lower, they will inevitably say yes. Most taxes generate revenues for the government, but they lead to loss of efficiency.'

'Environmental taxes generate income for the government, and improve efficiency and resource use - so why aren't they more popular? Why do politicians fail to find them a marvellous alternative? I have no real answer, but I think is has something to do with people seeing many of these taxes as being an attack on their way of life. This has to do people's car driving, foreign travel and such. The conservation of unspoilt nature areas is another example. There are several areas where people tend to react with a 'No, I must have unlimited possibilities to do what I want.'

Others following in Sandmo footsteps

'And what many people fail to realise is that the costs to themselves as individuals are offset by the advantages to themselves that result from the costs inflicted on others.'

'Through the years there have been many references to your article «Optimal Taxation in the Presence of Externalities», but few of them date back to the 1970s?'

'No, they appeared long after I published the article. The reason for this is that the 1970s was not a good decade for environmental issues. Most economists at that time did not find them particularly interesting. They failed to see the practical applications or implications of the analysis. '

'We had to wait until the 1990s, when interest in the topic suddenly blossomed and people rediscovered both this article and another article that I wrote at the same time. I had picked up on something that people were starting to get interested in. It was the first time anyone had carried out research into the tax system and environmental incentives.'

Interest in Agnar Sandmo's work from the 1970s really took off in 1996, when he was invited by the University of Uppsala to give the Lindahl Lectures.

A series of three lectures entitled 'The Public Economics of the Environment' formed the basis for his book of the same title published four years later by the Oxford University Press.