emissions tax attaches a price to any amount of pollution and so firms
have an ongoing financial incentive to innovate so as to reduce emissions.
As long as the tax is in place, firms will continually have an incentive to
innovate ways to reduce their emissions.
Problems with Emissions Taxes
Emissions taxes can only be applied if it is possible for the government
regulator to measure emissions with reasonable accuracy. For some kinds
of pollution-creating activities, this does not pose much of a problem, but
for many other types of pollution, good measuring devices that can be
installed at reasonable cost do not exist. In these cases, emissions taxes
cannot work, and direct controls are the only feasible approach (although
appropriate enforcement may still be a problem).
Another problem with emissions taxes involves setting the tax rate.
Ideally, the regulatory agency would obtain an estimate of the marginal
external cost of each pollutant and set the tax equal to this amount. This
ideal tax rate would perfectly internalize the pollution externality.
However, the information that is needed to determine the marginal
external cost (MEC) shown in Figure 17-1 is often difficult to obtain. If
the regulatory agency sets the tax rate too high, too many resources will
be devoted to pollution control. If the tax is set too low, there will be too
little pollution abatement and thus too much pollution.