The Announcement Effect And Environmental Taxation

TitleThe Announcement Effect And Environmental Taxation
Publication TypeTyndall Working Paper
SeriesTyndall Centre Working Papers
Secondary TitleTyndall Centre Working Paper 53
AuthorsAgnolucci, P., and P. Ekins
Year of Publication2004

This paper investigates the existence of, and provides a theoretical basis for, an 'announcement effect' (AE) following a decision to impose an environmental tax. An AE is defined as an action taken to reduce the environmental impact that is the target of the tax, between the time of the announcement of the tax and its implementation, when this action would not have been taken if the tax had not been announced. >The term 'announcement effect' has been used a number of times in the environmental policy literature. Although the most well known cases are the sulphur dioxide (SO2) tax and the nitrogen oxides (NOx) charge in Sweden, the term was first used in the case of the German water effluent tax. The paper briefly presents the evidence for an AE in these three cases. >The existence of an AE is potentially problematic in a neo-classical economic context, in which actors are possessed of perfect information and are on a optimal technological path before the tax is announced. However, the paper constructs several models to show how the AE can be theoretically explained. The seven simple models distinguish between capital and operating costs and benefits. They show that an AE is theoretically possible even under neo-classical assumptions, although it becomes more likely when the assumption of perfect information is relaxed, and most likely when abatement actions open up opportunities for innovation or entry into new markets. >The models are then applied to the three taxes and charges discussed earlier. It is shown that they can explain the evidence of an AE in the SO2 and NOx cases, but that its existence in the case of the German effluent charge is more questionable. It seems that the evidence for an AE is more likely to have been the result of the introduction of new maximum emission standards coupled with subsides, rather than due to an AE as such.

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