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The Public Choice Problem of Green Taxation

Research output: Working paperResearch

  • Department of Economics
Economists have traditionally suggested that politicians should simply impose a uniform tax on harmful emissions, as the first-best solution prescribes. However, a closer look at the actual design of green taxes in the OECD reveals that the they are differentiated and far from this first-best optimal design. Public choice theory suggests that this is so because the industry is, in contrast to households, capable of lobbying against green taxation. When organized interests are considered, taxation either with or without a full refund of the revenue turns out to be problematic due to the energy-intensive firms' ability to organize and form stable interest groups. The paper presents empirical findings on CO2 taxation within the OECD countries, which confirm this theoretical prediction. Taxes are not uniform, and households pay a tax rate which is five times higher than that paid by the industry on average. Finally, it is suggested that a CO2 tax may successfully be applied to non-organized interests, such as households and the transportation sector, because these are large and non-organized groups. As such, a mix of green taxes (in relation to non-organized interests) and grandfathered permit markets (in relation to organized interests) should be considered in the search for cost-effective and politically feasible instruments.
Original languageEnglish
Publication statusPublished - 1998

    Research areas

  • Green taxation, OECD, CO2, Public choice, Households, Transportation sector, Industry, Electric Utilities, Tax refund, Group size

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ID: 32298944