Optimal emission taxes for full internalization of environmental externalities

The present study proposes a set of optimal emissions fees that could be used to reduce the damages caused by industrial pollution. The approach we use allows for the setting of pollution taxes at their economically appropriate level. In particular, tax rates are computed for China, India and 19 Sub-Saharan African countries. All other world regions are grouped according to income level such as low-income, lower-middle-income, upper-middle-income and high-income economies. Our results show that constructed optimal pollution taxes range as high as 2.9% per 1 dollar of output for heavy manufacturing in the high income countries, and as low as 0.01% in the service sectors of the low income countries. These results show that a full internalization of the damages in each sector calls for raising the tax rates in some sectors and lowering them in others. (C) 2016 Elsevier Ltd. All rights reserved.