This paper re-examines Sandmo’s (1975) celebrated “additive property”
and the principle of targeting in environmental taxation. It argues that, in the
absence of direct emission taxes, one cannot in general divide commodity
taxes into two mutually exclusive separate components of Pigouvian
externality-correcting and Ramsey revenue-raising. Externality-correcting
terms appear also in the expressions for the taxes on non-polluting goods–as
well as in the expressions for taxes on the polluting goods–unless
preferences are additively quasilinear either in one of the non-polluting
goods or in the labor supply. On the other hand, in the presence of direct
emission taxes, one can use emission taxes for externality correction and
leave commodity taxes for revenue raising. Nevertheless the optimal
emission tax is, in general, different from the marginal social damage of
emissions.