Chapters 1 and 2 have shown the rationale for Finance Ministries to take a more active role in environmental policy by implementing environmental taxation. How-ever, this is clearly not happening – quantifications of the economic costs of en-vironmental damages point to a vast tax gap. Even though countries have agreed on increasingly ambitious mitigation objectives in emerging international envir-onmental law, they have even regressed in their envirenvir-onmental taxation.
This situation must alarm scholars who are concerned about the efficiency of en-vironmental law, for two reasons. Firstly, it appears as if all the results on the efficiency of environmental taxation carried no weight for actual legal change:
thus calling into question the sense of our enterprise. Secondly, the overall costs of meeting a given climate change mitigation objective under Paris Agreement will escalate the longer policymakers wait. The cost of waiting could bring down any efficiency gains to be had from choosing the right mitigation instrument. We have hence looked at ten barriers that could explain the lack of implementation.
Two major barriers have been addressed before in Heine & Black (2019) and Coste, Calì & Heine (2019), but in the following, we proceed to address the other eight barriers.
Part II
Causation principles underlying environmental
taxation
Problems treated in this part
If it is known to all parties involved in the production and consumption of a product that the production of this product causes environmental costs to third parties, who should be regarded as the cause of the environmental costs and who should then pay the external cost – producers or consumers? For air pollution with diffuse, long-travelling particles, domestic environmental law and interna-tional climate treaties tended to have a simple answer: producers. Yet, this attri-bution of causality and costs has been criticised. In chapter 4, we analyse these problems in the general case of producers and consumers, before chapter 6 applies our framework to current controversies in emerging climate law.
Restrictions of the analysis
Where policy applications are considered, we restrict the analysis throughout to environmental taxation, given the focus of this thesis. Furthermore, the analysis assumes competitive markets. For environmental harms, we only consider CO2
and diffuse, long-travelling air pollutants. Through this focus on multilateral complex pollution problems, the text avoids replicating analyses of dual caus-ation in bilateral pollution problems that have already been treated at length in the Law and Economics literature (e.g. Coase 1960 and its many applications), and instead focuses on causation of pollution in a setting with high transaction costs and great information problems that prevent efficient bargaining. Where lawmak-ing bodies are analysed, we do not consider judges directly, as their decisions of causal attribution have already been analysed at length in the literature. Instead, we apply principles developed in that literature to institutions of fiscal policy and climate treaties, asking what the causation principles that the literature derived for judges imply for these other lawmaking bodies. The objective here is to use principles that have been developed in the context of courts and compare them to principles that we derive here to be in place in these other lawmaking bod-ies, rather than to contribute to the existing large literature on efficient court decisions.
Structure
In chapter 4, section 4.1 reviews the literature’s attribution of causation of envir-onmental harms to producers and consumers. Section 4.2 presents a model of the relation of causation to the pass-through of taxes. From the results of section 4.2, we derive a generalisation about the relation of Coase and Pigou, attempting to build a general theory of causation that satisfies the frameworks of both. Sec-tion 4.4 tests our causaSec-tion principles by relating them to some other causaSec-tion frameworks in tort law.
Chapter 6 applies our results to suggest solutions for two problems of emer-ging climate law for which current conceptions of causation appear to be fail-ing. These issues are the shared causation of emissions embodied in tradeable products (chapter 6.1) and the causation of emissions released in international space (6.2). We also apply our causation framework to tackle the recurring ques-tion of whether polluques-tion pricing should be weaker during economic downturns (chapter 5).
Chapter 4
Does Pigou make the true polluter pay?
A framework for prospective multilateral causation of
emissions in high-frequency market interactions ∗
4.1 Problem overview
There have been several types of critique on the relation between the causation of environmental harms and the burden that environmental taxation imposes on the person who is identified to be causing the harm. Here, we consider first where the
∗Contents from this chapter are included in the forthcoming journal article Heine, Dirk, Faure, Mi-chael, & Dominioni, Goran. 2020. The Polluter-Pays Principle in Climate Change Law: An Economic Appraisal.Climate Law,9.
Chapter 4. Does Pigou make the true polluter pay? Causation framework wider schools of thought shaping environmental law stand concerning the gen-eral attribution of causation and responsibility for environmental harms. Next, we consider critiques inquiring whether it is the producer or the consumer who caused the harm, and then move to critiques suggesting that both caused the harm but that government should “do nothing about the problem at all”. That analysis is followed by a consideration of authors suggesting that both producers and con-sumers cause the harm and that government, therefore, must do a lot to vary the burden put onto each agent efficiently. Lastly, we consider proposals that all fiscal policy towards environmental law would be flawed because the agent who caused the harm does not pay for it anyway.
4.1.1 Relation to economic objective of environmental law
The causation of environmental harms and the appropriate attribution of respons-ibilities to polluters is perceived differently by classical lawyers, Ecological Eco-nomists and Environmental EcoEco-nomists. To understand these differences, it is informative to consider how these traditions differ in their view of the overall objective of environmental law.
The objective of environmental law from both a classical legal perspective (e.g.
TFEU Art. 191) and from the perspective of “Strong Sustainability” favoured by Ecological Economics (Neumayer, 2013, p. 25, 28; van den Bergh, 2001, p. 17), is to reduce environmental harms. This is an objective that hinges upon physical units of pollutants (Daly, 1978; Ekins, 2003; Hueting & Reijnders, 1998; Huffman, 2000; van den Bergh, 2001) and their effects for maintaining ecosystem functions (Goodland, 1995), inter alia because “the essence of Strong Sustainability is that it regards natural capital as fundamentally non-substitutable through other forms of capital” (Neumayer, 2013, p. 27). With this focus on the physical problem, it seems natural to also consider physical control when attributing responsibility for emissions to actors who are physically capable of reducing the pollution. So if a lawmaker applies this framework to decide whether a producer or a consumer of a polluting product is responsible for reducing the physical amount of pollution, it appears natural to allocate that responsibility to the producer, since the producer certainly has the greatest physical ability to reduce the pollution. For example, unlike the consumer, the producer does have the physical and legal ability to fit pollution control equipment in his factory’s chimney.
4.1. Problem overview Attributing the responsibility to abate a social cost to private actors appears to necessitate attributing to them equally the causation of the damage itself. Ac-cordingly, classical environmental law attributes both the causation and the re-sponsibility for abatement to those agents who physically cause the damage, e.g.
by undertaking the act of combusting a fuel in the production of a product. The consumer of the product – in whose creation that pollution was released – is not normally seen as having caused the pollution.
As a result, current environmental law is firmly based on producer responsibil-ity and the producer being regarded as causing harm. The law rests on techno-logy regulation directed to producers, on an Emissions Trading System directed to producers, and generally on policy intervention at the point of releasing the emissions, which is in most cases where the producer is, not where the consumer is.
Neoclassical Environmental Economics tended to favour the same route, but for slightly different reasons, which are rooted in a different view of the overall ob-jective of environmental law. In the theoretical framework of “Weak Sustainab-ility”, which is “deeply rooted within neoclassical economic thinking” (Neumayer, 2013, p. 24, 28), the environment has no intrinsic value;1it is one of several sub-stitutable forms of capital,“natural capital”, which can provide goods and services such as clean water and visual amenity.2Therefore, what happens to physical pol-lution is considered pertinent only insofar as it raises the overall cost of providing goods and services by lowering the quality or quantity of natural capital. In this framework, the economic objective of environmental law is the same as the eco-nomic objective in other areas of the law. Law provides decision-makers with incentives to decide in a way that maximises the total payoff of society (Boven-berg & Goulder, 2002; van den Bergh, 2001).3 Decision makers shall engage in activities that increase the total amount of goods and services in society,4but re-frain from activities that merely redistribute values between themselves and other individuals whenever such redistribution does not create a net added-value. Un-der the framework of Weak Sustainability, there is a prima facie case for potential
1In the sense that, “Nature has value if and only if humans value nature” Neumayer (2013, p. 8). Note however that, while this approach is common in neoclassical Environmental Economics, there are exceptions in the literature where concepts of “existence value” are used.
2For ensuring Weak Sustainability, “natural capital can be safely run down as long as enough man-made and human capital is built up in exchange” (Neumayer, 2013, p. 23).
3Alternatively, that maximises the total wealth in society (Posner, 1983, 1985).
4Usually referred to as “social welfare” in neoclassical Welfare Economics.
Chapter 4. Does Pigou make the true polluter pay? Causation framework legal action in cases when, in the absence of the law, decision makers can en-gage in activities that externalise costs to other agents (Cropper & Oates, 1992).5 These are cases where, in the absence of the law, decisions can be socially detri-mental but privately optimal for the decision maker, because the decision maker can extract rents at the expense of others, while not generating a net added-value.
Environmental law here steps in to provide the incentives to create and innovate instead of seeking rents. Once all social costs are internalised, agents pursuing their own interests will undertake net-value-creating activities. The ability of a rule to achieve this internalisation is often called the “Pigouvian efficiency”, after Pigou (1932) whose name is most closely associated with the conception that the economic objective of environmental law is the internalisation of marginal ex-ternalities. This position might also be summarised as saying that the objective of environmental policy is efficiency (generally expressed in utility or monetary terms) rather than efficacy (in physical terms).
4.1.2 Reception of the Polluter Pays Principle in environmental law
This neoclassical perception that the objective of environmental law is to intern-alise social costs has been adopted in environmental lawmaking under the popu-lar expression of the Polluter Pays Principle (Cropper & Oates, 1992; Kettlewell, 1992). The Polluter Pays Principle has been officially endorsed by OECD countries (OECD, 1994), by the European Union (TFEU Art. 191, para 2), and by the United Nations (Rio Declaration, Principle 16). While lawyers have controversially de-bated the meaning of the Polluter Pays Principle (de Sadeleer, 2005; Sands & Peel, 2012), economists have commonly defined it as just another wording of the prin-ciple that external damages should be internalised (Cropper & Oates, 1992) – so just a restatement of the Weak Sustainability objective in environmental law. The adoption of the Polluter Pays Principle by lawmakers may then create the impres-sion that the Weak Sustainability perspective on the objective of environmental law would have come to dominate the classical legal perspective.6 This does not
5Or as Kuhn & Tivig (1996, p. 10) expressed it: “as long as production externalities are internalized in the exporting[producing]country, no economic environmental problem exists – independent of the level of[physical pollution]standards; whereas as long as the Pigouvian efficiency condition – marginal pollution equals marginal abatement cost – is not fulfilled, an economic environmental problem exists”.
6“The PPP is essentially an economic principle translated into law” (Bleeker, 2009, p. 291). Reflect-ing back to our earlier observation that neoclassical economics and classical environmental law do
4.1. Problem overview appear to be the case, however, because of the way in which the Polluter Pays Principle seems to have been interpreted in practice in environmental lawmak-ing and policy. An implicit assumption in many discussions of the Polluter Pays Principle is that the person who physically causes the pollution – for example by burning fuel during the production of a good – is also the one who causes that pollution and to whom the responsibility for that pollution should be attributed.
In the legal reception of the Polluter Pays Principle, the polluter tends to be iden-tified as the producer of a product, the operator of the production process, or the person controlling the process that physically generates the pollution.7 This
at-not necessarily share the same perspective on the basic objective of environmental policy, the legal scholar de Sadeleer (2012) exemplifies this conflict for the Polluter Pays Principle. “The principle con-tains neo-liberal overtones that appear to countenance the idea that the right to pollute can be purchased for the monetary equivalent of the environmental cost sustained” (de Sadeleer, 2012, p. 418), arguing that the PPP is not necessarily consistent with the objective of reducing physical pollution.
7For example, the EU’s Environmental Liability Directive which “lays down rules based on the polluter-pays principle” (European Commission, 2016, para. 1) attaches the responsibility for environmental harms to the “legal, private or public person who operates or controls the damaging occupational activ-ity” (Lawrence, 2006, p. 1). “The fundamental principle of this Directive should therefore be that an operator whose activity has caused the environmental damage or the imminent threat of such dam-age is to be held financially liable(European Union, 2004, para. 2, my emphasis)”. In some member states, secondary law implementing this directive has made the owner rather than the operator liable (or applied several liability to both) (Fogleman, 2013, p. 25), but also in that case the Polluter Pays Principle is being applied by holding the producer side, not consumers, responsible.
For transboundary pollution, Kettlewell (1992) describes how the Polluter Pays Principle is held to mean that either the company producing a polluting product or the state where this company is based should pay. Schrijver (2010, 2008, 1997) shows that this association between the physical origin of an environmental harm and responsibility for its occurrence is deeply ingrained in international environmental law.
For pollution caused in accidents, OECD member states agreed that “the Polluter-Pays Principle implies that the operator of a hazardous installation should bear the cost” (OECD Council, 1989, appx. para.
4, my emphasis). In case law for accidents, there is a “tendency to shift the risk of causal uncertainty to enterprises” (Faure & Hartlief, 1998, p. 690).
In the case of waste regulation, the entity held to be the polluter is the one “holding” the waste when it generates the pollution, which can be different from the company originating the good that has come to waste or the operator of a dump (de Sadeleer, 2012). Nevertheless, also in the case of waste regulation, it is true that the entity with the physical control is in general considered as the causal polluter (ibid). The same special situation holds for motor fuels, where – although end-consumers are considered responsible for some of that particular pollution – this attribution is again based on the their control the physical generation process of the pollution during fuel combustion.
For summaries of the theoretical legal literature applying the Polluter Pays Principle to associate responsibility for and causation of damages to producers or physical operators, see Mossoux (2010).
For a Law and Economics approach equating the Polluter Pays Principle with the binary attribution over the causation of damages to producers (and harshly criticising the principle on the basis of that
Chapter 4. Does Pigou make the true polluter pay? Causation framework tribution of responsibility to firms is made most explicit in waste regulation in the form of “Extended Producer Responsibility”.8 If the producer is also the one tak-ing all the decisions whether or not to pollute, then it is efficient to always treat the Polluter Pays Principle as if it was a Producer Pays Principle (Schmidtchen et al., 2009). If instead, the producer is not the one who is economically causing the pollution in the sense of deciding whether the pollution occurs or not, then the Polluter Pays Principle should be understood differently. Efficiency requires that all decision-makers internalise the cost of their decision. It is thus important to avoid an interpretation of the Polluter Pays Principle that attributes all costs to producers, since then there would be no extenral costs left for the consumer to bear.
4.1.3 Coasean dual causality view
According to Coase (1960), social costs are generally caused jointly by two or more parties, so he would see a problem with identifying producers as the sole source of environmental harm. We return to his theorem and its relation to Pigou (1932) below, but here note that Coase would regard pollution costs to be mutually caused, so that potentially also consumers could be seen as having contributed to the damage.
4.1.4 Attribution of causation in Ecological Footprinting
4.1.4.1 Early Environmental Footprinting
Such a shift, to regard consumers as contributing to the causation of environ-mental harms, comes from the rise of Ecological Footprinting. Unlike Coase’s conjecture, the view inherent in traditional Ecological Footprinting has not, how-ever, been that producers and consumers share causation. Instead, proponents of
conception) see Schmidtchenet al.(2009). Lidgren & Skogh (1996, p. 178) recommend this association on the basis that it is “simpler to control a few producers” than “a large number of consumers or suppliers” and that it is easier to identify owners of facilities than consumers.
8“The implementation of the EPR principle, within the Polluter Pays Principle framework, implies that producers are considered responsible for the environmental impacts of their products along their whole life cycle” (Monieret al., 2014, p. 124).
4.1. Problem overview Ecological Footprints traditionally suggested locating the full responsibility for emissions released with the end-consumer of any product (Rees, 1992).9
The causation by the consumer is seen to extend so far as to cover all the damages arising from the supply chain of the product that the consumer buys. To find all those damages, Ecological Footprints apply Life-Cycle Analysis to quantify the damages created along a product’s supply chain, and then traditionally present the sum total as the Ecological Footprint caused by the respective consumer.
4.1.4.2 Current Footprinting
Although Footprinting started by assigning all the causation of pollution to con-sumers, subsequently producers also started computing their Ecological Foot-print. This move made Ecological Footprinting part of the objectives to imple-ment the Polluter Pays Principle through Extended Producer Responsibility. The mix of approaches did not help in clarifying the question as to who really causes the pollution and who must hence pay how much, if the true polluter is to pay.
Instead, the joint usage of these different frameworks leads to double-counting of emissions. The same unit of emissions could now be part of the Footprint of a consumer and part of the Footprint and Extended Producer Responsibility of a producer, with the degree of causation (or responsibility)10being regarded as 100 % for both producers and consumers. In his treatment of Coase, de Meza (1998, p. 273) comes to the same conclusion that "Everyone involved is fully responsible for all the damage done", but double-counting does not seem right intuitively.
4.1.5 Relation to tort law
Despite these problems of double-counting, the intuitive base of the current form of Footprinting seemed right, that both consumers and producers might be
tak-9This form of accounting also transfers from consumers to countries.“The Ecological Footprint is based on the actual consumption of goods by a country’s inhabitants, so if something is produced in country X and used in country Y , the land requirement is registered totally within country Y . Thus, if the consumer of a final product is responsible for the entire ecological impact of the process which has generated that product, the consumer should be charged for the total emissions related to the process”(Bastianoniet al., 2004, p. 255).
10In general, mainstream economic texts do not distinguish between causation and responsibility.
Below we describe why it is often also impossible to distinguish causation, responsibility and liability when using fiscal approaches.
Chapter 4. Does Pigou make the true polluter pay? Causation framework ing some of the decisions that lead to pollution and that both might hence be perceived as causing parts of the pollution. This intuition is in line with Coase’s starting point that causation is shared, and "(...)it is intuitively clear that respons-ibility is somehow shared between the supplier and the recipient of a commodity, because the supplier has caused the impacts directly, but the recipient has demanded that the supplier do so" (Lenzen et al., 2007, p. 32). If “all parties with a role in designing, producing, selling or using a product are responsible for minimising the environmental impact of the product over its life” (McKerlieet al., 2006, p. 620), then
"an acceptable consensus probably lies somewhere between producer and consumer responsibility" (Lenzenet al., 2007, p. 32). But if we accept that causation and/or responsibility is shared, we may need to know exactly how much of it rests with which actor. Here environmental law can learn from many similar situations of shared causation that exist in tort law where frequently two agents are held to have jointly caused a tort. Different methods of attributing legal causation have arisen for partitioning the amount of losses that each of the agents causing a tort should individually pay for.
One such rule is liability based on negligence, where a producer bears all the losses that were caused if she11does not abide by a standard of care that the law prescribes, and where the other party bears the losses that still occur when she did take the prescribed level of care (Shavell, 2008). The strength of the negligence rule is that it recognises a cross-causation of torts, by providing both parties with incentives to optimise their contribution to the size of overall expected accident costs (Kahan, 1989; Landes & Posner, 1983). This liability rule has been criticised, however, as implementing a sharing of responsibilities that would not be in line with the Polluter Pays Principle in cases where harm is not foreseeable or avoid-able for the victim (International Law Commission of the UN General Assembly, 2006). Instead of the standard negligence rule, that UN Commission suggested that strict liability, another tort law principle where all losses are borne by the tortfeasor independent of his care levels, would be more in line with the Polluter Pays Principle. That recommendation to use strict liability does not, however, solve our problems of attributing causation; it just shifts the responsibility for that causation to one of the two agents. This shift, in itself, may appear not to be in line
11I excuse for the gender bias that an omission of writing “s/he” or the alternating use of “he” and
“she” may cause. To avoid confusion when switching genders in examples or repetitive use of “the agent”, I from hereupon use the pronoun “he” throughout the text and mean it just as a shorthand to indicate both genders.