Taxes
Levying a tax is the foremost economic instrument for achieving environmental improvements. Unlike charges a tax should, ideally, be set at a level which takes account of the social costs generated rather than solely the private costs of the activity. If correctly estimated, it induces a move to an economic optimal position which maximizes net social benefits and reduces environmental degradation, as shown above in the section on payment to improve environmental quality and business performance, in figure 10.2 and the textual reinterpretation of figure 9.4 in section 10.8.1. In theory, taxes can be applied on capital, for example, to deter the use of inefficient and polluting technologies, and/or products or activities that pollute.
Much debate in the economics literature is concerned with the merits of taxes (see for example Turner, 1988) in comparison with regulation. The principal argument is that with regulation producers have no incentive to reduce pollution below the standard imposed, which, in any case, may be arbitrary and bear no relation to the costs, and therefore remedial expenditure falls on society. However, notwithstanding other advantages of taxes, such as the lower cost of implementation, difficulty in avoiding them, the possibility of inducing investment in new, cleaner technologies or substitution to less polluting product or processes, there are some disadvantages. There are mostly concerned with the practical difficulties of applying them, in particular the problem of identifying the source, measuring the impact physically and estimating accurately the environment cost on the one hand and the social benefits generated by production of the good or service on the other. There are even wider issues, for example regarding the eventual tax burden and acceptability, but since these are common to any form of intervention which affects cost and prices, observations on them are deferred at this point.