The dilemma of environmental taxation – case study of Estonia.

Environmental tax rhetoric in the Estonian policy discussion leads to a dilemma. Policy makers want to increase environmental charges for budgetary reasons and at the same time achieve environmental goals. The article examines the empirics of this issue, i.e. whether pollution charges have been successful as a fiscal or as an environmental instrument. By index analysis the authors find that pollution charges were fiscally successful in the beginning of the 2000’s and have since 2004 been successful environmental taxes. The proposition that environmental charges do not cover the damage costs of pollution is also under investigation. It is found that the damage cost estimates have incorrectly been interpreted as average costs. The implication is that the damage costs which have been used as evidence for increasing pollution charges are incorrect and that the over-estimation of damages is in the order of a magnitude of two or more.