Environmental taxation in the natural resource extraction sector: is it a good idea?

The purpose of this paper is to analyze the economics of taxing virgin raw materials for environmental reasons. The theoretical discussion is general in scope but empirically we focus on the case of aggregate taxation in three European countries. The motives for environmental taxation of aggregates are mixed, and not all motives find strong support in the economics literature. For instance, the conservation motive may be valid if a relevant market failure can be identified, but, in the presence of a well defined owner of the resource, resource scarcity is often not a sufficient condition for policy intervention. Under some conditions a tax levied per ton of aggregates extracted may be motivated by the presence of environmental externalities at the extraction stage. Still, such a tax provides no direct incentives to reduce the relevant externalities, since the only way of avoiding the tax is to reduce production. In this respect the UK tax appears to be particularly inefficient; it uses one policy instrument to address a number of different environmental externalities at the extraction stage (noise, dust, visual intrusion, loss of amenity and damage to biodiversity), and it is uniform across quarries although the associated externalities are likely to be highly site specific. Overall the paper concludes that taxing output or use typically represents a ‘second-best’ policy alternative, which could be used when, for instance, the monitoring of non-point-source emissions and/or efficient property rights regimes are hard to implement. The fact that virgin resource taxes often address rather diffuse (not to say unimportant) environmental problems may however make them hard to promote effectively on the political arena. Copyright © 2006 John Wiley & Sons, Ltd and ERP Environment.