Environmental Injustice: The Effects of Environmental Taxes on Income Distribution in an Oligopolistic General Equilibrium Model

Abstract

We apply a static oligopolistic general equilibrium model to investigate the effects of an environmental tax on labor incomes, capital incomes, profits, and the distribution of income. The study is motivated by the fact that environmental taxation is one main political tool to realize environmental sustainability and support sustainable development. However, to ensure social and economic sustainability, the taxes applied must be perceived as fair by the majority of the civil society. Moreover, efforts to determine a fair taxation policy would ensure, inter alia, responsible consumption and production, and lower inequality in the economy, which are one of the two priorities of the United Nations Sustainable Development Goals (SDG 10 and 12). Therefore, it is necessary to determine the tax incidence to inform policymakers regarding the distribution of the tax burden. To examine environmental policy, we assume the government applies a policy objective to realize strong environmental sustainability, as proposed by the Dutch economist Rofie Hueting. The main result is that oligopolistic firms can shift the whole tax burden resulting from environmental taxes to workers and capital owners. Consequently, we show that environmental taxes can lead to more income inequality, and the more concentrated the markets, the bigger the social and economic inequality. Noting that addressing environmental problems is a priority of the UN SDGs, our analysis shows that approaching the issue using just environmental tax propositions is not advisable. These results of the analysis also provide a justification of why many members of the society tend to oppose environmental taxes.