The Eighth Annual Global Conference on Environmental Taxation
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Workshop 1: Policy design and public choice 

Pollution Tax Heuristics

Prof. Shi-Ling Hsu, University of British Columbia, Canada

Despite nearly universal agreement among economists that pollution taxes are the most cost-effective means of reducing emissions of pollution, particularly emissions of greenhouse gases, such taxes remain unpopular.  While they are most unpopular in North America, various other countries have also experienced to varying degrees hostility to pollution taxes.  And despite the fact that many redistributive schemes have been put forth that would ameliorate the distributional consequences of a tax, concerns are both persistent and widespread that such taxes would unfairly visit extreme and uncompensable hardships upon certain individuals or groups.  Even in the midst of furious backpedaling on global climate change by governments in the U.S., Australia, and Canada – all governments that have either explicitly or implicitly rejected the Kyoto Protocol – virtually no consideration is being given to tax instruments to reduce greenhouse gas emissions.

The popular hostility to pollution taxes and gasoline is a puzzle.  Why do prospective emitters so strongly oppose taxes, especially when faced with other more costly and intrusive forms of regulation?

This paper explores the various heuristics that people apply to taxation.  Bounded rationality prevents people from seeing the hidden costs that would be imposed by other forms of regulation, whereas the costs of a tax are usually very straightforward to calculate.  Prospect theory posits that people are risk-averse when considering prospective gains, but risk-seeking when considering prospective losses.  If a tax appears to be a certain loss, people will favor a riskier proposition with a larger expected loss.  For the same reason, optimism bias may explain resistance to taxation because while people believe that other forms of regulation may or may not affect them, the certainty of a tax presents itself to emitters as a certain loss. 

To overcome these and other heuristic biases, this paper proposes a more careful presentation of tax proposals.  Sellers of energy-efficient appliances and light bulbs have made significant inroads by presenting energy savings as a trade-off over time rather than a flat cost at the point of sale.  Just as labeling strategies have made the purchase of energy efficient devices more palatable to consumers, pollution tax proposals that are described as trade-offs will be more likely to gain popular acceptance.


Conditions for instrument change in environmental policy
An analytical framework and the case of the German ecological tax reform

Michael Boecher, Georg-August-University, Germany

Although many studies have been dedicated to the choice of policy-instruments, little general theoretical insight has been generated as to the question why a specific instrument and not another one is chosen and how instrument change can be facilitated. On the one hand public choice theory which understands the policy process as interest-driven explains instrument choice as the result of the well defined rational interests of key actors of the policy process. On the other hand more technocratic approaches which understand public policy as rational problem-solving process emphasize instrument choice as a logic answer to the question which instrument suits best the demands of the policy problem. In this approach politicians are able to choose the best instrument from their - in principle - unlimited tool box. Against the background of the German environmental tax debate my paper wants to show that both of these approaches are not able to explain the empirical phenomenon of environmental policy instrument change during the last years adequately since (1) although there have been strong interest groups lobbying against eco-taxation in Germany as well as in many other European countries ecological taxes have been applied which is difficult to be explained by referring only to public choice. (2) The ecological tax reform seems not to represent environmental economic textbook’s rationality so also the technocratic approach is not able to explain this instrument choice adequately. As an alternative I propose a dynamic analytical framework based on modern approaches of public policy analysis which consists of (1) the underlying institutional settings (2) emerging discourses about special instrumental “philosophies” (3) the political problem structure and its resulting distributional conflicts (4) the feasibility of policy-learning and (5) the role of policy entrepreneurs in the policy process as agents of change. This analytical framework aims at explaining the dynamics between policy change and policy persistence better than classic approaches and shows the difficulties of applying environmental economic knowledge into political practice. The usefulness and the empirical characteristics of the aspects of the suggested analytical framework are demonstrated against the long road to eco taxation in Germany. The paper aims at offering a more elaborated model on the conditions under which economic environmental policy instruments are being applied to the scholarly debate and to political practitioners.


Environmentally harmful subsidies and environmental fiscal reform in Belgium

Kris Bachus, University of Leuven, Belgium

Due to the problem of climate change, environmental taxation has become a rather hot political topic in Belgium recently. On the other hand, the Belgian subsidy policy and its environmental, economic and other impacts are much less debated. Yet, doubts can be raised on the efficiency of increasing environmental taxation on certain goods and services while maintaining support measures on environmentally harmful activities. This rather short-sighted policy approach can lead to conflicting policy instruments, which endangers the effectiveness of both types of instruments and creates both a number of important side effects and efficiency problems for government and society as a whole.

Interest from scientists on this issue has equally been rather limited. In 2007, the Flemish environmental reporting agency (MIRA), commissioned a study aiming to list and analyze the existing environmentally harmful subsidies. An inventory will be made for the sectors of transport, energy and agriculture. A concise analysis will also be carried out: the objectives of the listed subsidies will be studied, which will allow us to categorize them according to the underlying policy theory. This reconstruction of the policy theory will allow us to weigh up the most striking environmental, economic and other impacts of a fiscal reform, which would abolish a number of these subsidies or decrease their importance. The paper will summarize the most important findings and policy recommendations of this study.


Energy Taxation and Renewable Energy: Testing for Incentives, Framing Effects and Perceptions of Justice in Experimental Settings

Dr. Roland Menges, University of Flensburg, Prof. Stefan Traub, University of Bremen, Germany

Almost any political measure to support renewable sources on certain markets is directly or indirectly linked to issues of taxing energy. Apart from optimal tariff arguments, the use of renewable energy sources may be increased indirectly by taxing fossil sources (e.g. CO2-taxes) or directly by paying subsidies for green electricity generation (e.g. feed-in-tariffs). The introduction of taxes in order to correct for externalities is in line with the so-called polluter-pays-principle. Paying subsidies involves second-best-considerations and is a case of the opposed public-pays-principle. Generically, the choice between these principles leads to the normative question, how to transform collective environmental objectives into individual behaviour and how to allocate the financial costs of improving environmental quality.
Leaving aside related supply side problems this paper presents an empirical investigation of individual preferences and attitudes concerning alternative tax regimes for supporting renewable energy.  The approach reported in this paper differs in three major points from former experiments to measure the individual willingness-to-pay for green electricity, treated as a public good. First, instead of setting/varying quantities and asking for the willingness-to-pay (thereby revealing demand curves for green electricity), certain tax-prices for green electricity are given and individuals are asked to determine the quantities they would like to consume. Second, instead of fixing an exogenous level of publicly financed green electricity, tax-prices and quantities of green electricity are endogenously bound to individual preferences (which are represented by the median voter). Third, the experimental design involves three different treatments, representing alternative tax designs (head tax, electricity tax and CO2-tax). The experiment, in which individuals act in their two roles as tax payers (allowing them to vote on the level of different energy taxes) and as market participants (enabling them to vary their individual green electricity share) contains an incentive mechanism (random lottery incentive mechanism). It is complemented by a questionnaire, where participants are asked a set of questions concerning their perception of public measures in the field of supporting and financing renewable energy.
The following questions are to be addressed in the paper:

1. How does the individual willingness-to-pay for green electricity react on different institutional settings and tax regimes?
2. Are individual votes on tax levels subject to framing effects resulting from different institutional settings and do these votes correspond to different perceptions and attitudes concerning public finance and environmental policy in general?

A survey, which was conducted as a pre-test for the experimental design, has led to the following results: The huge majority of those participants who prefer the public-pays-principle is willing to pay higher taxes for supporting green electricity. Regression analysis shows that the individual willingness to pay higher taxes can be explained by variables concerning the subjective cost-benefit-ratio and some normative attitudes, such as to the question, who should bear the cost of renewable energy and climate protection at the national and international level.


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