Why use environmental taxes?
Without government intervention, there is no market incentive for firms and households to take into account environmental damage, since its impact is spread across many people and it has little or no direct cost to the polluter. Therefore, protection of the environment generally requires collective action, usually led by government.
In the past, environmental policy was typically dominated by “command-and-control” regulations. These approaches were generally prescriptive and highly targeted – e.g., banning or limiting particular substances or requiring certain industries to use specific technologies. Over recent decades, interest has grown in using market-based instruments such as taxes and tradable emission permits. There are a number of reasons for the increasing use of environmental taxes.