On the distributional effect of environmental taxes

Environmental taxes, as I have often argued on this blog, are an excellent way to raise revenue for the government while taking care of negative externatilites. But as almost any taxes, they are redistributive. In particular if environmental taxes are used to substitute for distorting income taxes, which is good, they may also change redistribution in ways that are not preferred.

Mireille Chiroleu-Assouline and Mouez Fodha admit that environmental taxes are regressive, but this is not a problem. Indeed, they show that it is possible to introduce environmental taxes by making everyone better off. This Pareto improvement comes from lowering average income tax rates with an increase of their progressivity, no matter how regressive environmental taxes are. Interestingly, this result is obtained without even using the environment in the utility of households. In other words, this could also be applied where there are no environmental externalities.