Behavioral responses to environmentally-related taxes

The aim of (regulatory) environmental taxes is to reduce, through higher prices, the use of scarce resources or emissions of pollutive substances. The effectiveness of an environmental tax can be defined as its capacity to achieve these goals. If the response of consumers or producers to the introduction or increase of an environmental tax were known a priori, governments could set adequate environmental taxes to realize a given environmental target. Over the past years, the OECD has highlighted the importance of more research on the magnitude of behavioral responses to environmental taxes once they have been introduced, as a necessary precondition to implement correct instruments of environmental policy. For a better understanding of behavioral responses it is necessary to focus on consumer and producer behavior.

The aim of this report is to provide an overview of the estimated magnitude of behavioral responses to higher prices, including price rises as a consequence of the introduction of environmental taxes. This collected evidence will improve the understanding of the effectiveness of environmental taxes in reducing pollutive emissions and the use of environmental resources. The present report will exclusively focus on price elasticities related to energy and transport as most environmental taxes are applied to these tax bases. Another sector sometimes taxed is water (OECD, 1997a). Espey et al. (1997) offer a meta-analysis of water price elasticities. In the area of transport, the report focuses principally on the demand for gasoline (i.e., an energy carrier). Less attention is given to the demand for alternative modes of transport (car, public transport, or airplane).