Political Economy of Environmental Taxation

The political economy of environmental taxation examines how fiscal instruments designed to reduce pollution and greenhouse-gas emissions are shaped by political incentives, economic structures and societal values. Central debates address the tension between efficiency—levelling environmental costs through taxes—and equity, assessing how tax burdens and revenue recycling affect different income groups. Scholarly work investigates the role of interest groups and lobbying in influencing tax rates, the design of border measures to prevent carbon leakage, and the impact of institutional credibility on long-term policy commitment. Comparative studies highlight how federal versus unitary governance affects tax adoption and how public acceptance hinges on transparent use of revenues, for example through direct rebates or investments in clean infrastructure. Overall, the field blends rigorous economic modelling with analysis of legislative processes, aiming to identify policy packages that deliver environmental ambition without provoking political backlash or social hardship.

Research from Nature Portfolio

Recent studies have explored the distributional effects of carbon taxes linked to targeted revenue recycling. One analysis uses large-scale computable general equilibrium models to show that directing a portion of proceeds towards low-income households can neutralise regressive impacts while preserving environmental stringency. Another investigation examines policy sequencing under uncertainty, demonstrating that an initial modest tax rate combined with credible commitment devices fosters stronger long-term emissions reductions than ad hoc rate hikes. A third contribution assesses proposed border carbon adjustment mechanisms, finding that well-designed imports levies can mitigate carbon leakage without provoking major trade disputes, provided revenues are channelled into decarbonisation funds.

Political Economy of Environmental Taxation publication trend

The graph below shows the total number of articles in political economy of environmental taxation across all publications each year (not limited to Nature Index journals).

Technical terms

Political economy: The study of how political institutions, the political environment and economic systems influence each other.

Environmental taxation: Fiscal measures that impose charges on pollution or resource use to internalise negative environmental externalities.

Revenue recycling: The practice of redistributing tax revenues, for example via rebates, lower labour taxes or green investments, to enhance equity and political acceptability.

Carbon border adjustment: A tariff or tax applied to imported goods based on their embedded carbon emissions to protect domestic producers and prevent carbon leakage.

Cap-and-trade: A market-based system that sets an overall emissions cap and allows firms to buy and sell permits or allowances.

References

1. Refunding of a climate tax on food consumption in Sweden. Food Policy (2021).
2. Lobbying for size and slice of the quota. International Tax and Public Finance (2021).
3. Strategic capital taxation, tradable emission permits and global pollution. Canadian Journal of Economics/Revue canadienne d économique (2024).