Understanding the Implications of Environmental taxes: The Case of the Danish Weight Based Packaging Product Charge

Abstract

Packaging products, in particular those made from plastic, are playing an increasingly significant role in our everyday life. Because of the environmental issues associated with packaging, European countries, in particular EU member states, have long applied various policies to deal with this issue. One policy option that is rarely applied to packaging is taxation in the form of material levies or product charges. However, Denmark has applied product charges in the form of weight based tariffs since 1999. The purpose of the product charge is to stimulate a decrease in the demand for virgin packaging (packaging newly entering the market). This paper examines the effectiveness of Denmark's packaging charge, with a focus on non-beverage plastic packaging. Applying a trade gravitation regression model incorporating import quantity as the dependent variable and a tax dummy amongst the explanatory variables, the analysis explores the effectiveness of the tax policy in reducing import demand. From a sample of 19 major exporters and an analysis covering the period between 1994 and 2007, we conclude that the product charge policy did not produce the desired effect. We conclude by suggesting that policy makers adopt a cautious approach to the adoption of environmental taxes.