• Journal of Environmental Policy
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• v.11 no.4
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• pp.131-154
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• 2012

Existing researches on tax efficiency of environmental taxes mostly focuses on taxes imposed on the consumption process of the final output, or goods that create pollution during the input process of intermediate goods. The assumption here is that there is a significant relation between the consumption of polluting goods and the pollution itself. However, in reality they are not identical. This signifies that the above assumption may distort the actual results. This study classifies environmental tax into two different forms, output tax and emission tax. Theformer is the tax that is imposed on the consumption of polluting goods, while the latter is directly levied onto the emission of pollution. It then compares the efficiency of these taxes through the computational general equilibrium simulations. After analyzing the simulation, it was proven that the direct imposition on pollution, or environmental tax as emission tax, was more effective in terms of tax efficiency. Furthermore, these results were revealed as irrelevant to the assumption of homotheticity in utility function. Thus, if market-distortionary tax already exist, then the effectiveness of revenue neutral environmental tax reform will be sensitive to the assumption of homotheticity for utility function. However, environmental taxes as emission taxes have been shown to be more effective in tax efficiency than output taxes.