Cross-border and cross-sector harmonisation of environmental taxes; a comment on Stephen Smith's paper

Environmental taxes have the purpose of changing the economic behaviour so as to equalise the costs for damage caused by emissions and the costs for emission reduction at the margin. Fiscal taxes are intended to provide revenue for the government at a minimum cost for the distortion it causes in the economic behaviour. The function of tradable permits is similar to that of environmental taxes. A policy of environmental taxes can be applied to certain pollutants, e.g. CO<SUB align="right"><SMALL>2</SMALL></SUB>, SO<SUB align="right"><SMALL>2</SMALL></SUB> and NO<SUB align="right"><SMALL>2</SMALL></SUB>, and is clearly more efficient than a command and control policy. A policy of environmental taxes that is uniform across countries is more efficient than a policy stipulating national abatement targets. The highest efficiency is achieved with a policy of environmental taxes that is uniform across countries and sectors. In sectors with highly mobile tax bases, constraints are places on national tax policies. This has been demonstrated by the changes of the carbon dioxide taxes on power generation in the Nordic countries.