Environmental taxes can be levied o

Environmental taxes can be levied on (a) the pollutant itself (i.e., on effluents, emissions, or solid waste), or (b) on final products associated with environmental externalities. Taxes on pollutants, known also as pollution charges, are applied directly to the offending substances thereby providing the maximum incentive and flexibility for the polluter to reduce pollution; therefore pollution charges are more efficient than indirect taxes on inputs or final products. The latter does not provide an incentive to limit the pollutant itself, only to use less of the input or produce (consume) less of the final product. For example, taxes on products or inputs do not provide incentives for the development and installation of pollution abatement technologies. Only when the pollution-product coefficient is fixed are pollution charges and polluting product taxes equivalent. Depending on the elasticity of supply and demand, part or all of the pollution charge would be reflected in the price of the final product—a strong incentive for the polluter to switch to products that are less harmful to the environment.
Emission and effluent taxes can be structured in such a way as to provide a progressive incentive for pollution control. For example, in Germany, polluters who more than meet the set effluent standards are charged a lower rate while those who violate the standards pay a higher rate than the charge set for those who meet the standard. Emission taxes face a number of difficulties: (a) to set the correct tax we need estimates of the marginal benefit and marginal cost curves to determine the optimal pollution level; (b) a low tax does not provide much of an incentive for environmentally sound behavior, yet higher tax rates require complex tax structures and administrative mechanisms; and (c) taxes based on actual discharges involve significantly higher administration and enforcement costs than taxes on products.