The Korean Economic Review
Principle of Targeting in Environmental Taxation
Firouz Gahvari (University of Illinois at Urbana-Champaign)Year 2010Vol. 26No. 2

This paper re-examines Sandmo’s (1975) celebrated “additive property”and the principle of targeting in environmental taxation. It argues that, in theabsence of direct emission taxes, one cannot in general divide commoditytaxes into two mutually exclusive separate components of Pigouvianexternality-correcting and Ramsey revenue-raising. Externality-correctingterms appear also in the expressions for the taxes on non-polluting goods–aswell as in the expressions for taxes on the polluting goods–unlesspreferences are additively quasilinear either in one of the non-pollutinggoods or in the labor supply. On the other hand, in the presence of directemission taxes, one can use emission taxes for externality correction andleave commodity taxes for revenue raising. Nevertheless the optimalemission tax is, in general, different from the marginal social damage ofemissions.