This paper provides a review of the experiences with environmental taxes and charges in OECD countries, as well as in selected former Eastern European Socialist countries. From this review, some conclusions are drawn on how the latter should approach the whole issue of environmental taxation. These cover the basic questions of the circumstances under which some form of environmental taxation is desirable, to more detailed concerns relating to the design of the taxes.
The debate on the use of environmental taxes and charges is set in the wider context of the desirability of fiscal instruments versus other forms of environmental regulation. This debate raises many issues, both empirical and theoretical. It is not the intention of this paper to provide a comprehensive review of all the relevant problems. Since the purpose is to offer practical advice on the choice of instruments and their design, especially in the Baltic States, most of the theoretical issues will only briefly be touched on. In addition, although some reference is made to other instruments such as tradable permits and legal/market solutions, these alternatives are not discussed in depth. Finally this paper only looks at the regulation of environmental pollution and not at the pricing and taxation of natural resources. Although the two are related, detailed questions relating to natural resource pricing and taxation are dealt with in another paper (Sedjo, [1993]).
The structure of this paper is as follows. Section 2 reviews the principles of environmental taxation. It begins with what an ideal environmental tax would look like, outlines the reasons why such a tax is almost never feasible, and concludes with an examination of what alternatives can be implemented. The arguments for and against the use of each of these 'feasible' alternatives are evaluated. In addition, Section 2 examines a number of general issues that arise in connection with the design of an environmental tax. These are: the question of 'earmarking'; fiscal neutrality and fiscal restructuring; value versus quantity based taxes; inflation indexation; institutional arrangements for implementation; combination with other forms of regulation; intermedia-substitution; regulation in the presence of public abatement measures; and the creation of a stable regulatory framework.
Section 3 of the paper reviews the actual experience with environmental taxes in OECD countries. The main features of the taxes and findings about their effectiveness are summarized in tabular form. From these, some broad conclusions are drawn about what ÒworksÓ and what does not, as far as environmental taxes are concerned. Section 4 looks at the same factors with respect to the experiences of Estonia, Hungary, Latvia, Poland, and Russia. As these taxes have been implemented for shorter periods than those in OECD countries, there is even less evidence on their effectiveness. Nevertheless, some impacts are becoming clear and these are reviewed. Finally Section 5 offers some conclusions on what lessons have been learned from the implementation of environmental taxes in OECD countries and in economies in transition, as well as what their implications are for the evolution of such taxes.