Nov. 28, 2008 “People do not understand environmental taxes. If politicians don’t provide better information about how these taxes work, it might not be politically feasible to implement them”, says Steffen Kallbekken, researcher at Center for International Climate and Environmental Research – Oslo (CICERO).
He continues: “Without environmental taxes it will be much harder to meet climate targets”.
Kallbekken recently completed a Ph.D. on environmental tax schemes, where he looked at the trade-off between political feasibility and economic efficiency.
In a laboratory experiment, participants voted on different environmental tax schemes. They were asked which alternative would give the highest welfare: A situation with an environmental tax in place, or a situation without such a tax.
“By improving the environment and providing tax revenues that can be used to benefit the public, environmental taxes can increase overall welfare”, says Kallbekken. The experiment was designed to reflect this, so that imposing the environmental tax would increase welfare.
However, only 23 percent answered correctly that the tax would increase welfare. Fully 45 percent believed that the highest welfare would be gained if no tax was implemented.
“There seems to be a big divide between what economists recommend and what people find acceptable. A main reason for this seems to be that people do not understand how taxes can increase welfare”, says Kallbekken.
“Earmarking is not a popular tool amongst economists because it is not efficient. However, it looks like it sometimes can be worth considering because it can increase the political feasibility of taxation”, Kallbekken explains.
The congestion charge in Stockholm is an example of how an environmental tax can lead to increased welfare: During a trial period, traffic to the city fell by 22 percent. Travel times during rushour dropped by nearly a third, accidents with injuries fell, and emissions fell by 10 to 14 percent, according to Lindsey (2007).
“The congestion tax was very controversial before the trial period. However, as people experienced the positive effects of the congestion tax during the trial period they adopted a more favourable view of the tax”, says Kallbekken.
Polls found that the number of people likely to vote in favour of permanently introducing the tax increased by 18 percent during the trial period.
In the actual referendum after the trial period, the tax received a 52.5 percent majority, and the tax was permanently implemented.
“The Stockholm example shows that demonstrating the benefits of environmental taxes can substantially increase public support”, says Kallbekken.
This is in line with Kallbekken’s studies. When investigating how politicians should respond to the public’s beliefs about environmental taxation, he found that politicians need to give thourough information about how such taxes lead to higher welfare.
“The politicans need to inform the public much better about the environmental benefit of taxation, and they also need to show clearly and credible how the revenues will be used. A trial period can be one way to give the public this information by letting them personally experience the benefits”, says Kallbekken.
“If informing the public is not sufficient to get the necessary political support, politicians should consider different kinds of earmarking systems”, he concludes.
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The above story is based on materials provided by Centre for International Climate and Environmental Research (CICERO).
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