Political uncertainty and the earmarking of environmental taxes

Far from being used to secure a 'double dividend' by reducing distorting taxes, revenues from environmental taxes seem quite often to be earmarked to particular spending programs. In the US, for example, a range of such taxes feed into environmental trust funds. Such earmarking runs counter to standard notions of good practice in taxing and spending. This paper develops and explores an explanation of such apparent inefficiencies in terms of political uncertainty: roughly, a green incumbent may chose to earmark revenues if the efficiency loss from doing so is outweighed by the value of constraining subsequent and potentially non-green policy-makers from 'wasting' the funds raised. It emerges, for example, that those most likely to earmark are green politicians who are politically weak, and that earmarking then enables such a policy-maker to set the corrective tax higher than they otherwise would but nevertheless lower than the Pigovian tax. (C) 2000 Elsevier Science S.A. All rights reserved. JEL classification: D62; D72: H20: H50.