ENVIRONMENTAL TAXES Don Fullerton Andrew Leicester

This chapter provides an overview of key economic issues in the use of taxation as an instrument of environmental policy in the UK. It first reviews economic arguments for using taxes and other market mechanisms in environmental policy, discusses the choice of tax base, and considers the value of the revenue from environmental taxes. It is argued that environmental tax revenues do not significantly alter economic constraints on tax policy, and that environmental taxes need to be justified primarily by the cost-effective achievement of environmental goals. The chapter then assesses key areas where environmental taxes appear to have significant potential – including taxes on energy used by industry and households, road transport, aviation, and waste. In some of these areas, efficient environmental tax design needs to make use of a number of taxes in combination – a "multi-part instrument".