Journal of Environmental Protection, 2013, 4, 154-160
http://dx.doi.org/10.4236/jep.2013.48A1017 Published Online August 2013 (http://www.scirp.org/journal/jep)
The Misinterpretation of Pigouvian Taxes
Annegrete Bruvoll
Research Department, Statistics Norway, Oslo, Norway.
Received April 26th, 2013; revised June 1st, 2013; accepted July 15th, 2013
Copyright © 2013 Annegrete Bruvoll. This is an open access article distributed under the Creative Commons Attribution License,
which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
ABSTRACT
The tax revenues from Pigouvian taxes are difficult to calculate. The optimal pollution taxes are weighted averages of
Ramsey taxes and Pigouvian taxes, and the entanglement of environmental, fiscal and other taxes complicate the meas-
urements. The present international environmental tax statistics do not rely on a theoretical basis, and include several
fiscal and resource taxes. Starting with the additivity theorem by Sandmo [1], we propose theoretically consistent
guidelines for environmental tax statistics. Calculations based on this framework prove that the present international
official statistics (Eurostat, IEA, OECD) severely overestimate environmental taxes. The lack of theoretical consistency
forms arbitrary results and the statistics used as measures of environmental taxes may cause major flaws in research and
policy-making based on such statistics.
Keywords: Environmental Taxes; Fiscal Taxes; Pigouvian Taxes; Ramsey Taxes
1. Introduction
Taxes and tradable permits are cost efficient instruments
in internalizing negative externalities. Statistics on the
use of such taxes can be usable in several contexts. In
international policy comparisons, environmental taxes
are frequently used as indicators of environmental con-
cerns. Environmental tax statistics are potentially valu-
able inputs in environmental instruments efficiency ana-
lyzes, and the environmental economics literature advo-
cates recirculation of emission tax and permit revenues to
reduce efficiency losses, c.f the double dividend litera-
ture (Bovenberg [2], Goulder and Parry [3]).
Great effort is devoted to measuring environmental
taxes and tax revenues in international statistical agencies.
The OECD, Eurostat and the IEA have set in place ex-
plicit routines for the definition, collection and publish-
ing of environmental tax data across OECD countries
(Eurostat [4,5]. OECD [6,7]), hereafter referred to as the
“international statistics”. In their ongoing work on a
manual for environmental economic accounting, the UN
seems to follow the same approach (United Nations [8]).
In this article, we show that the international statistics
are misleading in that they depart from the theoretical
definition of environment taxes.
According to economic theory, environmental taxes
should correct the marginal effects of environmental ex-
ternalities, and the optimal environmental tax rate equals
the marginal damage cost (Pigou [9]). The tax revenue
becomes the product of the environmental tax and the tax
base. When moving from theory to practice, measuring
the extent of environmental tax rates and revenues is far
from straightforward for two main reasons. First, the
presence of both environmental and fiscal taxes influ-
ences the optimal tax structure (Sandmo [1]). Only part
of the tax on the externality should count as correction
for the externality. Second, the entanglement of different
forms of taxes complicates the statistical definitions. Part
of the taxes on polluting goods relates to externalities,
while other parts may be politically motivated in fiscal
concerns, income distribution or as corrections for other
market failures. Although theory advocates one instru-
ment per target, in practical policy, each political target
involves use of several types of instruments, and each
instrument is adjusted to achieve several targets (Bye and
Bruvoll [10]). This complicates the calculations of how
large parts the tax should be ascribed to the environ-
mental elements. Taxes may be described and incorrectly
labeled as environmental, even if there is no or only a
small direct link with the environmental externalities.
The statistics developed by the OECD, Eurostat and
the IEA cover all tax bases that have a “… particular
environmental relevance”, i.e., taxes related to energy,
transport and pollution, as well as taxes levied on re-

The Misinterpretation of Pigouvian Taxes 155
sources (Eurostat [4], OECD [6,7])1. The statistics then
clearly include additional elements, such as fiscal taxes
and resource rents, and can per definition not be inter-
preted as environmental taxes as defined by economic
theory.
Data failures may have important implications for sci-
entific analyses, and for the comparisons of environmen-
tally friendly policies. Sterner and Köhlin [13], for in-
stance, use the international statistics and conclude that
European countries have consistently higher levels of
environmental tax revenue than the USA, and Ekins [14]
states that the environmental taxes comprise an increas-
ing proportion of total tax burden in European countries
up to 1994. Eurostat [5] concludes that there has been a
steady fall in environmental taxes from 2003 to 2008,
after which the level has remained constant. These con-
clusions are not reliable, since the data include large
shares of other taxes than environmental taxes. In an
econometric analysis, Morley [15] rejects the double
dividend theory2 applying the Eurostat data set, and con-
cludes that environmental taxes have had a negative ef-
fect on economic growth. In fact, what this study shows
is that environmental taxes and fiscal taxes reduce
growth, which does not enlighten the double dividend
theory. Failures in the statistical foundation may lead
scientists and politicians to draw misleading conclusions
on the causes and effects of environmental policy. In the
end, such information failures can bring along wrong
advice to the decision makers and a less efficient envi-
ronmental policy.
This paper discusses the separation of environmental
taxes from other taxes in light of tax theory and suggests
solutions to the classification problems disturbing the
official international statistics. Following Pigou [9], the
proper tax base is the environmental externality, or the
most closely related tax base. We take the additivity
theorem by Sandmo [1,16] as a starting point, and pro-
pose theoretically consistent guidelines on how to disen-
tangle and consistently calculate the environmental tax
elements. The aim is to improve the data quality and the
scientific basis for analyses of environmental instru-
ments.
We illustrate the consequences of the measurement
problems empirically by calculating the revenues from
the environmental taxes based on our guidelines and
compare our results with the tax revenues defined and
published as official international statistics, taking Nor-
wegian taxes as an example. Our conclusion is that the
present international statistics tend to significantly over-
estimate the taxes and tax revenues; in our example, by
more than five times the actual environmental taxes. This
gives an incorrect picture of the environmental policy in
and between countries and the potential efficiency im-
provement by tax revenue recycling. Using the interna-
tional statistics as environmental tax estimates, analytical
research on efficiency, revenue recycling, double divi-
dend, and environmental impacts based may be severely
flawed.
2. Theoretical Framework
Principally, Pigouvian taxes internalize environmental
externalities into markets (Pigou [9], Sandmo [1]). Ac-
cording to economic theory, an optimal environmental
tax should be levied directly at the externality and equal
the marginal damage cost (MDC) of the pollution. In
contrast, the purpose of fiscal taxes is to raise revenue for
publicly provided goods. Fiscal taxes should be levied
where they are least likely to distort economic activity to
avoid any deadweight loss. Under simplifying assump-
tions, e.g., disregarding externalities, the fiscal tax rate
on a good should then be inversely proportional to the
corresponding own price elasticity of demand (Ramsey
[17], Diamond and Mirrlees [18]).
For polluting goods3, total taxes should vary according
to the externality rule and the elasticity of demand by
taking into account the additivity theorem in Sandmo
[1,16]. Importantly, the optimal taxes will not simply be
the sum of the fiscal tax and the MDC, rather a weighted
average of the tax computed under the Ramsey inverse
elasticity rule and the Pigouvian marginal social damage.
More formally, let the weights be a and (1 − a), and TR
the inverse elasticity of demand. The optimal tax rate for
the good then becomes:
()
1
01,
R
TaT aMDC
a
=+−
<< (1)
where the first element reflects the fiscal element, and
the second element reflects the Pigou element. The pa-
rameter a then reflects the tightness of the government’s
budget constraint or the marginal cost of public funds
(Sandmo [16]).
Consistent guidelines for environmental tax calcula-
tions should take this additivity theorem into account.
We continue by developing a framework including this
1Indeed, the international framework uses the term environmentally
related taxes in their original definition. However, the meaning is
clearly to illuminate the trends in environmental policy, and the term
“environmental taxes” is normally used in reports of the international
statistics. E.g. Eurostat [5] uses this concept when reporting the latest
version of the international data base, other examples are European
Environment Agency [11] and OECD [12].
2The double dividend refers to an increase in environmental taxes re-
ducing levels of emissions as well as increasing economic growth.
3A polluting good should be defined as closely to the externality as
p
ossible, i.e. in most cases in terms of environmentally damaging emis-
sions. It may also be in terms of the quantities of goods causing the
emission. E.g, since the CO2emissions and the use of gasoline are
p
roportional, carbon taxes on petrol can be levied at the energy use,
rather than the emissions.

The Misinterpretation of Pigouvian Taxes
156
element. When decomposing the total revenue into its
respective fiscal and environmental elements, each as-
cribed part (a TR and (1 − a) MDC) will be equal to or
lower than the respective optimal fiscal and Pigouvian
taxes (TR and MDC). As such, the higher the govern-
ment’s budget requirement, the lower the weight of the
environmental element. Hence, the environmental tax
rate counts for only a share of marginal social damage:
()
1EnvironmentaltaxaMDCMDC=−≤ . (2)
The theoretical framework refers to an optimal situa-
tion where the value of a is a simple function of the
shadow prices on the public and private budget con-
straints. Thus, a is the same for all goods and all tax rates.
In practice, the formulation of the tax system generally
deviates from the theoretical framework because of mar-
ket failures, conflicting political stands, pressure groups
and considerations other than pure efficiency concerns.
Consequently, a varies over goods. In practice, goods-
and tax-specific estimates do not exist, and so it is not
clear how one should decompose an observed tax rate
into a fiscal contribution and the share ascribed to MDC.
This is not an argument against using the general princi-
ples underlying the optimal tax structure as guidelines
when evaluating the actual tax structure. It is difficult to
see how one can avoid arbitrariness in the evaluations
when using a theoretically optimal structure as a refer-
ence for the evaluation. We should regard the weighted
average in (1) as one such principle. Moreover, as we
demonstrate, one can derive policy-relevant conclusions
concerning the actual tax structure without knowledge of
the weights.
We provide two separate cases, when the applied tax
rate T is set higher and lower than T*, T* being the opti-
mal tax rate where T* = MDC = MAC.
Figure 1 illustrates the case the tax is higher than the
optimal tax rate, under the general assumptions of in-
creasing marginal abatement costs and increasing mar-
ginal damage costs. In this case, the tax is also higher
than the marginal damage at the actual emission level, T
= Th > T* >MDC' . The revenue from the tax equals both
shaded areas. This revenue includes more than the opti-
mal Pigouvian tax and the marginal social damage. Con-
trary to what may be perceived as standard intuition, part
of the total revenue, i.e., corresponding to at least Th −
MDC', is then classified as fiscal and should be sub-
tracted from the revenue. The question is how much. As
long as a in practice is unknown, we do not obtain any
assistance from theory. To define the entire MDC' as the
environmental tax is rather radical in that it implies that
the marginal cost of funds (a) is zero, cf. (2). An ap-
proximation is to identify MDC' times the emission as an
estimate of the maximal environmental tax revenue.
Discrimination of e.g. carbon taxes are common out of
Figure 1. Tax higher than marginal damage cost.
competitiveness concerns (Babiker et al. [19]). Typically,
taxes are relatively high for emission sources with low
price elasticites, such as transport and residential heating
(Bruvoll and Larsen [20]). Clearly, it is debatable what is
the “correct” level of MDC estimate for greenhouse gas
emissions and other externalities. This must rely on dif-
ferent estimates in the literature. Given that the MDC
estimates are agreed upon, the taxes higher than MDC
estimates have no foundation in environmental taxation,
but rather involve efficiency losses, since the marginal
abatement costs are larger than the marginal benefits.
Instead, these should be counted as non-environmental,
or fiscal, taxes. Also, the fact that the Ramsey elasticity
rule closely corresponds with the differentiation of the
taxes, indicates that fiscal considerations heavily influ-
ence the politicians’ determinations of carbon tax levels.
We find many examples of taxes set equal to the esti-
mated marginal costs. In other instances, taxes are dif-
ferentiated and certain industries face lower tax rates
than the assumed MDCs out of competitiveness concerns.
This represents the cases where T = Tl ≤ T*, the tax is
equal to or lower than the marginal damage, Tl ≤ MDC''
at the actual emission level, see Figure 2. Typically, sec-
tors with high price elasticites are exempt from the tax,
or face lower rates (Bruvoll and Larsen [20]). Even if the
tax is lower than the MDC, the environmental tax is prin-
cipally lower than the applied tax level, given that a > 0.
Again, defining the entire revenue as environmental tax
revenue implies an assumption that the marginal cost of
funds, and hence the Ramsey tax, is equal to zero. As
above, given that a is unknown, the revenue from the tax
Tl can be defined as an estimate for the maximal envi-
ronmental tax revenue.
This implies the following rules for the calculation of
environmental taxes and their respective revenues:
• Rule 1: If the tax rates on pollution are higher than the
MDC, the revenues according to the estimates of the
MDC equal the estimates of the maximum environ-
mental tax revenues.

The Misinterpretation of Pigouvian Taxes 157
Figure 2. Tax lower than marginal damage cost.
• Rule 2: If the tax rates on pollution are equal to or
lower than the MDC, the full revenues equal the esti-
mates of the maximum environmental tax revenues.
• Rule 3: If a is known, the maximum environmental
tax should be corrected accordingly by a rate (1 − a)
to obtain a closer estimate of the environmental taxes
and the accordant environmental tax revenues.
3. Use of the Framework and Comparison
with the Official International Statistics
To investigate the impact of using a theoretically based
framework, we calculate the related revenues and com-
pare them with the numbers reported in the international
statistics (Eurostat [5]).
As the MDC values cannot be observed in the market,
our calculations are based on MDC estimates4. Accord-
ing to our Rule 1, we subtract the difference between the
tax rates and the MDC estimates when the tax rates are
higher than the MDC estimates to obtain the maximum
environmental tax revenues. Total taxes on greenhouse
gases contribute to the largest share of the total income
from taxes on emissions in Norway, amounting to 1081
million euros, see Table 1. Due to the global, long-term
and uncertain nature of the effects of greenhouse gases
and varying effects across regions, it is particularly
problematic to choose MD C estimates for these emis-
sions. As a point of departure, we used the highest price
of emission permits in the EU ETS 2007 (25 euros per
tonne CO2). This price level is also in line with the aver-
age Norwegian CO2 tax, which may be a proxy of the
willingness to pay for CO2 reductions in Norway. The
tax on CO2 emissions from petroleum activities on the
continental shelf and on gasoline were about 50 - 80 per-
Table 1. Real revenues from Norwegian environmental
taxes, and revenues according to the OECD, Eurostat and
IEA definition in millions of euros, 2007.
Revenues from
environmental
taxes
OECD,
Eurostat,
IEA statistics1
Taxes on greenhouse gases (Rule 1) 715 1081
Taxes on sulfur (Rule 1)
Taxes on NOx, waste incineration,
beverage containers, pesticides,
trichloroethane and tetrachloroethane
(Rule 2)
246 248
Petrol and diesel taxes (Rule 2) 655 1816
Other taxes according to the OECD,
Eurostat, IEA guidelines2 0 5083
Total 1616 8228
1Data reported to Eurostat/OECD (Næss and Smith 2009, Eurostat 2011).
2Motor vehicle registration tax, reregistration tax on motor vehicles, annual
motor vehicle tax, annual weight-based tax on motor vehicles, electricity
consumption tax, tax on mineral oils, tax on lubricating oil, base tax on
disposable beverage packaging.
cent higher and taxes on greenhouse gases from landfills
four times higher than the MDC estimate. Rule 1 also
applies for the sulfur tax on mineral products. This tax
addresses environmental externalities associated with
acid rain. Relative to the target set in the Gothenburg
Protocol, the tax is 13 percent higher than the corre-
sponding marginal abatement cost (Ministry of Finance
[22]). We reduced the revenue accordingly.
The remaining environmental taxes in Table 1 are
emission taxes set equal to or lower than according MD C
estimates, c.f. Rule 2. These taxes include taxes on NOx,
emissions from waste incineration, environmental costs
associated with beverage containers, pesticides, tri-
chloroethane and tetrachloroethane, and the share of the
petrol and diesel taxes including road transport related
emissions and noise5.
According to Sandmo and Rule 3, the fiscal element
should also be separated from the taxes. Principally, cor-
rect adjustment requires a specific a for each taxed good,
but such estimates are not available. Estimates on the
average marginal cost of funds in the Norwegian econ-
omy vary between 20 and 50 percent (Brendemoen and
5The taxes on NOx emissions are designed to meet agreed targets under
the Gothenburg Protocol. The taxes are lower than the estimated opti-
mal tax to reach the emission target (Ministry of Finance [22]), T<
M
D
C
, cf. Figure 2. The Norwegian tax on waste incineration is ad-
j
usted to correspond to the estimated MDC. The taxes on pesticides,
trichloroethylene and tetrachloroethylene are considered to have ful-
filled their intentions with respect to emission reductions (Ministry o
f
Finance [22]), cf. a reduction to the optimal level at MDC = MACin the
figures above. The taxes on beverage containers assumedly reflect the
M
D
C
(Raadal et al. [23]). The MDCs related to local road emission and
noise are estimated to constitute about a quarter of total taxes on petrol
and diesel fuels (ECON [24]).
4Environmental economics theory offers several methods for estimating
the values of environmental externalities as approximations of the true
shadow prices, the most important being contingent valuation, hedonic
p
ricing, travel costs, choice experiments and market-
b
ased methods
(see, e.g., Pearce and Turner [21]).

The Misinterpretation of Pigouvian Taxes
158
Vennemo [25], Holmøy and Strøm [26]). The rule of
thumb in the Norwegian public sector allows for an av-
erage marginal cost of 20 percent (Ministry of Finance
[27]). Using this as an estimate, the environmental tax
revenues should be further reduced. If we use 20 percent
as an approximate, we estimate the total environmental
taxes in Norway to about 1300 euros.
The International Statistics
The Norwegian tax revenues according to the definition
for the international statistics, published in the OECD/
Eurostat/IEA database, amount to 8200 million euros
(Næss and Smith [28], Eurostat [5]), cf. Table 1. This is
more than five times the environmental tax revenues ac-
cording to our economic theory-based definition. The
difference is partly due to the reduction of the surplus
fiscal elements according to Rule 1 outlined above. The
main reason however, is the inclusion of a range of
purely fiscal taxes in the international statistics. As
pointed out also by OECD [7], creating any definition of
environmentally related taxes is problematic. Taxes have
been implemented for a number of reasons, and some
taxes have likely been implemented without stringent
assessment of the costs and damages of the pollution.
This contributes to explain why the international statis-
tics rely on a broad definition. The EU, OECD and IEA
refer to an “environmentally related tax” as “A tax whose
tax base is a physical unit (or a proxy of it) of something
that has a proven, specific negative impact on the envi-
ronment. It was decided to include all taxes on energy
and transport in the definition of environmental taxes.
Value added type taxes are excluded from the definition
(Eurostat [4])6. As all manufacturing requires factor in-
puts with a negative environmental impact, and all taxes
and charges affect pollution through the equilibrium ef-
fects, this definition in principle covers all taxes and
economic activities. The framework excludes some large
tax bases, such as VAT and taxes on oil and gas, but
without any principal justification7.
The lack of theoretical foundation creates disturbing
adjustments that increase the gap between statistics and a
consistent and interpretable framework. For example, the
statistics include the full revenues from petrol and diesel
taxes, i.e., the costs related to road usage and accidents,
and all other fiscally motivated transport-related taxes
except VAT. E.g., the numbers include the motor vehi-
cles registration tax, whose original purpose was to cre-
ate revenue for the state (Ministry of Finance [22]), see
line 4 in Table 1. Indeed, the tax has a differentiated
element according to CO2 emissions, but defining this as
environmental would in any case imply double counting,
as CO2 and the other environmental externalities from
road traffic are already internalized in user-dependent tax
bases. This also applies for the annual tax on motor vehi-
cles that is higher for vehicles without particle filters.
The purpose of other transport-related taxes (the reregis-
tration tax, annual tax and the weight-based tax on mo-
tor vehicles) is mainly to fund infrastructure.
The international statistics also include the entire
electricity consumption tax on electric power. Consump-
tion of electricity has no known adverse environmental
effects; the externalities origin from the production of
power. The electricity good is based on a mixture of
production technologies, ranging from zero emissions
(e.g. wind, nuclear and hydro power) to emission inten-
sive technologies (fossil fuels), and consumption taxes
are only consistent to theory if they constantly vary with
the current energy mix. According to theory, any pollu-
tion related to production should be regulated at the
emission sources. Given taxes on power production,
consumption taxes should not be included as it would
imply double counting. Finally, 100 percent of Norwe-
gian electricity production is based on renewable energy
sources, and hence emission free. Hence, our judgment is
that the Norwegian electricity consumption tax does not
include any Pigouvian tax elements. The purpose of the
tax on lubricating oils is to fund a collection system and
the responsible handling of oil waste. Consequently, it
should be considered a charge covering the costs of
abated emissions, not an environmental tax covering the
costs of the remaining emissions. For the remaining taxes
included by Eurostat and other (the taxes on mineral oils
and disposable beverage packaging), we base our judg-
ment on the Ministry of Finance [22], and conclude that
these taxes are pure fiscal taxes.
Environmental tax and revenue calculations require
careful examination of the set of special duties in the
light of tax theory for each country, evaluations of the
marginal damage costs and the marginal rate of fund. All
environmental tax calculations are thus encumbered with
uncertainty. For example, the marginal costs of green-
house gas emissions are particularly uncertain and sub-
ject to normative judgments. It is clearly debatable
whether the EU ETS price, as we used, is the most rele-
vant estimate. The MDC may be defined as the necessary
global carbon price to stabilize the atmospheric concen-
tration at a widely agreed level. Globally efficient solutions
6A specified list of tax bases is included in the guidelines (Eurostat [4]).
7Neither VAT nor resource taxes should be included according to the-
ory, as neither are directed toward externalities. VAT is fiscal taxes,
and resource taxes are normally imposed to tax economic rents on the
extraction of natural resources (including Ricardian, Hotelling and
monopoly rents). However, the reasoning for excluding them is not
based on theoretical principals. VAT are excluded on the erroneous
argument that they do not influence relative prices in the same way as
taxes on environmentally related tax bases and Eurostat justifies the
exclusion of resource taxes by invoking the wide variation in revenue
from taxing oil and gas and across national tax systems. Hence, data is
adjusted to avoid variation in the use of instruments.

The Misinterpretation of Pigouvian Taxes 159
implies the lowest possible price, while the price may be
higher than any current CO2 tax if only a group of coun-
tries should contribute to the necessary emission reduc-
tions. However, these questions are out of scope of this
paper, and do not influence the principal theoretical
problems in the production of environmental tax statistics.
Our aim in the empirical part of the paper is to illustrate
the potential gains from basing the statistics on a theo-
retically consistent framework. Even with a wide range
of uncertainty, our comparisons strongly indicate that the
current international statistics present estimates that are
too imprecise to indicate the extent of environmental
taxes.
4. Discussion
International environmental tax statistics could be valu-
able inputs in research and political decisions, and as
indicators for the use of economic instruments in the en-
vironmental policy and the environmental protection
over time and across countries. Creating any definition of
environmentally related taxes is inherently problematic.
The entanglement with fiscal and other taxes complicates
the calculation of these statistics. The problem is twofold.
First, part of any tax on polluting emissions includes a
fiscal element. Contrary to standard approximation, the
environmental tax element is generally even lower than
the marginal damage cost in the presence of fiscal taxes.
This should be corrected when calculating environmental
tax revenues. Second, the present official international
statistics incorrectly include pure fiscal taxes and other
non-environmental tax bases. Due to such conceptual
challenges, the definition underlying the official interna-
tional environmental tax statistics include a too wide
range of tax bases.
This paper suggests theoretically consistent guidelines
for the calculations of environmental taxes, starting with
the theoretical definition of Pigou taxes and the additivity
theorem (Sandmo [1]), and illustrates the potential meas-
urement failure empirically.
Using Norwegian taxes as an example, we find that the
tax revenues as published by official international statis-
tics (OECD, Eurostat and IEA) are several times higher
than the environmental tax revenues following our theory
based definition. This is a serious warning that scientists
using the international data can draw misleading conclu-
sions on the causes and effects of environmental policy
(see, e.g., Ekins [14], Sterner and Köhlin [13], Morley
[15], Eurostat [5]).
It is fundamental for the reliability that the underlying
principles for the official data are based on robust and
consistent theory. The framework presented in this paper
represents principal economic theory and significantly
improves the statistics on environmental tax revenues,
and the statistics’ relevance to research and international
comparisons of Pigouvian taxes.
5. Acknowledgements
The author is grateful to Torstein Bye and Erling Holmøy
for valuable comments on an earlier version of this pa-
per.
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