Environmental Taxation: Pigouvian or Leviathan ?

This paper empirically examines for what purposes governments actually use environmental taxes and how efficient they are in achieving such goals. The theoretical literature proposes four alternative interpretations: strictly or loosely Pigouvian, the double dividend and the Leviathan hypotheses. We consider the EU-27 countries that committed themselves to correcting a negative environmental externality, the greenhouse gas (GHG) emissions, by 2020. A dynamic system of simultaneous equations shows that data fail to support both Pigouvian interpretations, since ET neither bring countries closer to the GHG reduction targets, nor governments use them for broader purposes of environmental protection. As no evidence is found that governments substitute ET to more distortive forms of taxation, the analysis suggests that the Leviathan interpretation, which views ET as any other type of tax that governments use to maximize revenues, is the most consistent with reality. Creation-Date: 2017-08