Environmental Taxation - Empirical and Theoretical Applications

Abstract

This thesis consists of five self-contained articles, and hence each paper can be read independently. Still, all five papers have one important feature in common: environmental taxation.

Paper 1: The Phase-Out of Leaded Gasoline in the EU: A Successful Failure? (with Henrik Hammar) The objective of this paper is to analyze in both descriptive and econometric terms the phase-out of leaded gasoline consumption in the EU countries. The phase-out process is characterized by increased consumption of unleaded gasoline. We analyze the importance of price differences, share of catalytic converters, income per capita, and country characteristics in the phase-out process. Since the expected maintenance costs of using unleaded gasoline in cars without catalytic converters compared to the use of leaded gasoline differ insignificantly according to available evidence, and consumers still use leaded gasoline even though unleaded gasoline is cheaper; we interpret this as a lack of reliable information. The results indicate that countries, which have not yet phased out leaded gasoline, should do this by either banning leaded gasoline or use a larger tax differential complemented with information.

Paper 2: The Determinants of Sulfur Emissions from Oil Consumption in Swedish Manufacturing Industry, 1976-1995. (with Henrik Hammar) Using a structural decomposition analysis, we analyze the causes of reduction of emitted sulfur originating from oil consumption in the manufacturing industry in Sweden during 1976-1995. Our decomposition results provide a good point of departure for a discussion on the causes of the large reduction of emitted sulfur. The Swedish case is of interest since Sweden is one of the countries that have pursued the most ambitious policy when it comes to combating the precursors of acid rain. A large part, 59 percent between 1989 and 1995, of the reduction of emitted sulfur from the manufacturing industry can be attributed to the announcement and implementation of the Swedish sulfur tax.

Paper 3: Political Economy Obstacles to Fuel Taxation. (with Henrik Hammar & Thomas Sterner) Many studies have shown that fuel demand is quite elastic and that the best way to reduce fuel use (to deal with global warming) is by taxing fuel. Yet it seems almost impossible to do so, particularly in those countries with low prices and high demand. We show, by a Granger non-causality test, using data on rich OECD countries that the direction of causality is ambiguous. We find evidence that the causality runs from consumption to price rather than, or in addition to, the conventional causality from price to quantity. We believe that one of the reasons for this is that lobby groups influence the political decisions regarding taxation of gasoline consumption. Following our results we argue that it is essential to take into account the political environment as an important factor when designing environmental policy instruments such as gasoline taxes.

Paper 4: The Effect of Addiction on Environmental Taxation in a First and Second-best world. We examine the effect of addictive behavior on a socially optimal environmental tax. If utility in part depends on past consumption and individuals are time-consistent, the socially optimal environmental tax is shown to be equal to the conventional Pigovian tax. In a second-best world where the social planner has a restriction on the future environmental tax level, the current optimal tax is no longer equal to the Pigovian tax. We extend the analysis with time-inconsistent (myopic) individuals to both the first (no restriction on future environmental tax) and second-best world (restriction on future environmental tax). Also, the importance of addiction in an environmental framework is discussed.

Paper 5: Habit Formation in Environmental Quality: Dynamic Optimal Environmental Taxation. In this article we propose a model in which individuals experience habit formation in environmental quality. Further, a consumption good causes a negative external effect on the environment. A benevolent social planner maximize utility given the negative effect of the consumption good on the environment, taking into account that there is habit formation in environmental quality. Given a simple model we show that the level and time path of the corresponding optimal environmental tax is affected by the assumption of habit formation; more specifically the stronger the habit, the higher the optimal level of environmental quality in steady state, and the faster the transition towards the steady state tax level. Furthermore the initial value of the habit stock is of crucial importance for the time path of the tax. Also, we solve for, and analyze, dynamics and the existence and characteristics of equilibria in the model and discuss how the characteristics of the habit formation affect steady state.