Tourism Management 24 (2003) 665–674

Tourism and environmental taxes. With specialreference to the ‘‘Balearic ecotax’’$

Teresa Palmer*, Antoni Riera

Department of Applied Economics and Research Economic Center (CRE), Universitat de les Illes Balears (UIB),

Ctra. Valldemossa, Km. 7’5 CP 07122 Palma de Mallorca, Balearic Islands, Spain

Received 30 June 2002; accepted 23 December 2002

Abstract

During the last few decades, tourism has undergone rapid growth. However, it seems clear that this growth is not exempt from

certain costs. Economists’ attention is increasingly directed at the economic, social, cultural and environmental repercussions of

tourism, regarded as externalities. Focusing on the aforementioned repercussions, the aim of this study is to confirm both the

existence of external environmental costs and the need to internalise them, with the aid of appropriate economic instruments. In this

respect, an outline is given of the recent proposal by the Government of the Autonomous Community of the Balearic Islands to

introduce a tourist tax on visitors, presented to public opinion in the form of an environmental tax, and a critical review is made of

the proposal, in the light of a number of criteria regarded as relevant in the description, design and implementation of these taxes.

r 2003 Elsevier Science Ltd. All rights reserved.

Keywords: Impact on tourism; Externalities; Environmental taxes; Ecotaxes

1. Introduction

One of the economic activities with the greatest rate ofgrowth, in the last few decades, must undoubtedly betourism. According to the statistics available, both thevolume and rate of growth of tourism can be consideredto be spectacular. Thus, from figures supplied by theWorld Tourism Organisation (WTO), trips abroad havemultiplied by twenty-five since the 1950s, whilst in theyear 2000 the income generated by these trips reached afigure two hundred times higher than that of 1950(WTO, 2001). Additionally, it is forecast that the growthrate for trips abroad will rise by 4% in real terms untilthe year 2011, with a subsequent increase in the touristindustry’s share of international output and employ-ment (World Travel & Tourism Council, 2001). Itshould be remembered that, in this respect, tourismexpenditure has a positive effect on production, incomeand employment in the tourist destinations, together

with government income. In addition, tourism is asource of foreign currency and this assists (in some casesquite considerably) the external equilibrium of thedestination’s economy.1 The repercussions on invest-ment should not be forgotten either, i.e. the provision ofthe necessary infrastructure to receive and accommodateboth seasonal workers and the tourists themselves.

Nevertheless, despite these beneficial effects, whichcan be calculated by means of multiplier models see(Archer, 1976, 1982; Archer & Fletcher, 1988; Fletcher& Archer, 1991) in the case of the Balearic Islands, seethe study by Payeras and Sastre (1994), we should notoverlook the existence of a number of tourism-relatedeconomic, social and environmental costs that arenormally not calculated and should be taken intoaccount when estimating the true social benefits oftourism. Unquestionably, the most important eco-nomic cost is the opportunity cost, due to the fact thatthe resources could be invested in other areas of

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$Research support from the Spanish ministry of Education and

Science (SEC 2002-01512) is gratefully acknowledged.

*Corresponding author. Tel.: +34-971-17-25-11; fax: +34-971-17-

23-89.

E-mail addresses: teresa.palmer@uib.es (T. Palmer), antoni.riera

@uib.es (A. Riera).

1 Internal tourism has similar economic effects. The only difference is

that there is no entry of foreign currency, but there is a redistribution

of money. Income generated in other regions is spent in the tourist

region, creating wealth in the tourist destination, with new companies,

jobs, income and tax revenue for local government.

0261-5177/03/$ - see front matter r 2003 Elsevier Science Ltd. All rights reserved.

doi:10.1016/S0261-5177(03)00046-3

production.2 Meanwhile, among the Social Costsinvolved, Tax Costs should be emphasised (Frechtling(1987a, b, Chaps. 28,29, 1994), Fleming & Toepper,1990). Public expenditure is caused by mass touristarrivals due to the creation of infrastructure and publicservices. These affect residents’ general taxes and apossible net tax cost if the increase in expenditure is notcompensated for by the tax revenue received fromtourism in the form of corporate taxes, VAT, incometax, etc. In addition, there are cultural (Archer &Cooper, 1994, Chap. 5) and environmental repercus-sions (see Mathieson & Wall, 1982; Briassoulis & vander Straaten, 1992; WTO, 1999a) as a consequence oftourism.

These are research fields in a constant state ofevolution, given the difficulties involved in measuringthe social and environmental costs. However, the aim ofthis study is not to assess these costs financially, but toconfirm their existence and the need to internalise themwith the aid of appropriate economic instruments.

With this in mind, the environmental repercussions oftourism are defined in terms of externalities, withemphasis on the use of taxes as a means of correction.These inefficiencies are subsequently examined in rela-tion to a tourist destination of some relevance: theBalearic Islands. Finally, the recent proposal by theGovernment of the Autonomous Community of theBalearic Islands to introduce a tourist tax on visitors, inorder to internalise part of the social and environmentalcosts of tourism is reviewed with reference to thedefinition, design and implementation of what arecommonly known as environmental taxes.

2. The environmental repercussions of tourism: the role of

environmental taxes

The economic literature contains a number ofreferences on the subject of the environmental repercus-sions of tourism and their implications on publicpolicies. Briefly, economists consider that the environ-mental repercussions of tourism represent a negativeexternality. However, when an analysis is made of theenvironmental impact of tourism, reference is normallymade to the devastating effects of mass tourism onnatural ecosystems, leaving aside the fact that urbanareas, towns and cities can also suffer from similareffects. The most pessimistic scenario is one in which,when mass numbers of visitors to a tourist resort exceedits physical capacity to absorb them, the long-term

negative external effects (i.e. pollution and congestion)can be really unacceptable. In this extreme situation, theuncontrolled growth of tourism gradually destroys thecity’s heritage: the quality of life of its residentsdeteriorates and the excessive pressure exerted bytourism reduces access to the centre and the maintransport networks to a minimum. Many other econom-ic activities are forced to search for more accessiblebusiness areas. The city slowly becomes uninhabitable,not just for residents but also for tourists and day-trippers, exhausting the area’s potential for tourism in acontext in which the globalisation of markets andgreater competition among tourist destinations is onthe increase.

Quite clearly, this excessive deterioration in environ-mental quality occurs when the pricing of tourist servicesis too low, as these prices do not contemplate publicinfrastructure and the environmental effects associatedwith the development of the tourist industry. Morespecifically, these external costs emerge during thecreation of tourist supplies because they are not takeninto account when determining optimum private produc-tion levels, leading to inefficient levels of productiongiven the fact that, at the point at which private benefitsare maximised, the total costs (including social andenvironmental third-party costs) are greater than theincome generated. Thus tourism services are undervaluedby the said tourists. Proof of this is the fact that, althoughthe decision regarding the final number of tourismservices to be produced and consequently purchased ismade in a way that is efficient for each individual supplieror consumer, it is inefficient for society as a whole.Therefore, given the absence of prices that encourage areduction in the activities that lead to this state ofcongestion, a surplus demand is produced which is higherthan the destination’s capacity to absorb it.

To achieve an efficient or optimum social solution, thedivergence between private and social costs must beeliminated, so that the maximum social benefit isobtained. The obvious solution is to establish a suitableprice, tax or levy for tourist activities in order tointernalise the external costs (OECD, 1989). Marshalland Pigou3 suggested just this decades ago and thesetaxes, since then known as Pigouvian taxes,4 havebecome a field of study in literature on microeconomics.

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2When resources invested in tourism produce a greater yield when

used in alternative ways, there are high opportunity costs and the net

social benefits of tourism might be negative. However, we should

emphasise that this assessment has been ignored traditionally, given

the difficulties in estimation involved.

3According to Pigou (1920): ‘‘It is possible for the State to make the

difference disappear for any activity (in which there is no contractual

relationship), by promoting or limiting, by extraordinary means,

investments in such activities. The best known methods of promoting

and restricting investments can take the form of incentive payments or

taxes’’.4At this point, a criticism put forward by certain authors, like

Aguilera (1991), should be mentioned, regarding the false definition of

these taxes as Pigouvian taxes, if one takes into account what Pigou

(1920) really wrote about these levies. Nevertheless, the term is

accepted, given its general use both inside and outside the academic

world.

T. Palmer, A. Riera / Tourism Management 24 (2003) 665–674666

The Pigouvian solution (see Pearce & Turner, 1990),by which optimum social benefits can be obtained,consists of applying a tax equivalent to the externalmarginal damage produced at the point at which privatebenefits equal the external costs (should the option ofreducing congestion without reducing production beconsidered, the private benefits curve becomes themarginal reduction costs curve and the explanationremains equally valid). In this way, the tax is estimatedas yet another cost, when determining the level ofproduction. However, among the different drawbacksinvolved in its practical introduction, one of the mostimportant is the difficulty in calculating the socialmarginal costs (the curve including the external margin-al costs) and the private marginal benefits.

The main alternative to Pigouvian taxes is a proposalby Baumol and Oates (1971), consisting of the use of agroup of standards and taxes to achieve a certain level ofenvironmental quality. With this measure, the aim is notto achieve the social optimum, as is the case ofPigouvian taxes, but a sub-optimum situation, in whicha certain standard of environmental quality is achieved,although at a lower cost as compared with thecommand-and-control regulatory programs. This ex-plains why they are known as cost-efficient taxes or sub-optimal ones. In this way, it is no longer necessary toassess the external marginal damage, but instead it issufficient to have at one’s disposal certain informationregarding the private marginal costs in order to definethe tax rate that encourages businesses to achieve theexogenous environmental goal, considered optimum bythe authorities. A good example is the Swedish tax onnitrogen oxide emissions that was levied on big energy-producing combustion plants. The tax level wasestablished taking into account the possible reductioncosts for each level of emissions. It was set at 40 Swedishcrowns per kg (the costs fluctuated between 3 and 80).The tax has shown itself to be very effective and has ledto a higher reduction in emissions than the levelsoriginally forecast.

Nevertheless, tourist congestion and its control viacost-efficient taxes are not as simple as they seem.Firstly, in the political arena, it seems clear thattraditionally, instead of introducing taxes or othereconomic measures, politicians have opted for regula-tion. Secondly, despite the hundreds of articles on thetheory of externalities and its applications, on thePigouvian solution and its limitations and on thepotential of other economic instruments, it seemsevident that the design of optimum tourism policiesdoes not just involve the search for a tax that equals thesocial marginal cost. Basically, tourism’s influence onthe environment not only depends on the damage that itcauses, but on efforts made to rectify this damage, i.e.on the externalities and on the public expenditureinvested in its reduction.

Therefore, in order to understand some of the mosturgent problems faced by a mature tourist destinationlike the Balearic Islands, both factors must be taken intoaccount: the existence of big external costs with regardto tourism, but also the problems of the provision ofpublic services.

3. The proposal made by the Government of the Balearic

Islands

The Autonomous Community of the Balearic Islands(the CAIB) is one of the tourism industry’s main growthcentres, reflected not only by its contributions to theregion’s gross added value5 and to employment,6 butalso in the most strategic of senses, given the fact that itaffects the development of the entire economy.

Although it is true that the arrival of mass numbers oftourists has had significant beneficial effects on theeconomy of the islands, leading their inhabitants tohold one of the leading places in the list of the richestregions, it should not be forgotten that it has had anegative effect on the environment and on the islands’natural resources and has led to a decrease in the qualityof life of their inhabitants. The costs of the pressureexercised by mass tourism have not been measuredobjectively, although the extent of the congestionproduced by tourism can be inferred from some partialindicators, such as the capacity of beaches, vehicle trafficcontrols or an increase in the region’s number ofvehicles. These facts, together with the generation ofsolid urban waste,7 CO2 emissions and water consump-tion per head8 (which are all well over the Spanishaverage) are a clear example of the effect of congestionin the islands.9

As we indicated before, because of the presence ofnegative external effects, the level of output at whichprivate benefits from tourism are maximised is excessive,as it does not take into account the possible third-partycosts, leading to a divergence between private and socialcosts and, therefore, to inefficient production levels. In

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5 In the year 1999, half the CAIB’s gross added value, more

specifically 50.40%, was directly derived from the tourist industry, as

can be seen in the ‘‘Economic & Social Report’’ drawn up for the said

year by SA NOSTRA, Caixa de Balears Savings Bank.6Also, the number of people employed in the tourist industry in the

Balearic Islands is higher. In the year 1993, they represented 67.4%,

whilst the equivalent figure for Spain was 57.5%.7As can be seen from the study by Riera et al. (2001), the CAIB has

the greatest per capita production of waste in Spain.8According to calculations contained in the Balearic Hydrological

Plan, drawn up by the Autonomous Community Department of the

Environment (1999), big water shortages are forecast for the years

2006 and 2016 for all the islands except Minorca.9For a general vision of the environmental situation in the Balearic

Islands, it is worth reading the report drawn up by Sa Nostra, Caixa de

Balears (1997) Savings Bank (annual).

T. Palmer, A. Riera / Tourism Management 24 (2003) 665–674 667

this respect, the application of a tax that internalises theexternal costs generated by tourism would maximise thesocial benefits.

Within this framework, the CAIB has created a tax ofits own.10 The final purpose of this tax is to obtainsufficient financial resources to be able to fundexpenditure focused on reducing the environmentaldamage caused by tourism: a purpose that has beenused to justify its definition as an environmental tax.However, the authors query whether this is actually thecase.

Nevertheless, the financial instrument in question isan autonomous community tax, in accordance withlegislation regulating the financial mechanisms of theautonomous communities for the development oftheir own individual areas of authority. More specifi-cally, the legal framework for financial instruments islaid down in the Spanish Constitution,11 in the OrganicAct for the Funding of the Autonomous Com-munities (the ‘‘LOFCA’’)12 and in the Statute ofAutonomy of the Balearic Islands.13 Of the exclusiveareas of authority granted under the Statute, the mostimportant are regional planning, tourism, areas ofnatural heritage or heritage of interest to the commu-nity. In addition, under Article 149 of the Constitution,the autonomous communities have authority over thedevelopment and execution, within their region, of allbasic State legislation regarding matters related toecology and the environment, although the articlespecifies that this authority must be exercised in such away that it does not prejudice the powers of theautonomous communities to establish additional pro-tective regulations. Meanwhile, in Article 148, it alsoacknowledges the possibility of jurisdiction over matters

relating to environmental protection within the commu-nities’ limits.

Thus, the Government of the Balearic Islands’ taxproposal comes under the framework of plans to createand develop means of finance for activities focused onimproving the environment and level of basic infra-structure. To be more specific, the legal basis of the‘‘ecotax’’ is Parliamentary Act 12/1999 of December23rd on Fiscal, Administrative, Public Authority andEconomic Measures, in Article 20 of which a ‘‘fund forthe rehabilitation of tourist areas, as a financialmechanism for the redesign and rehabilitation of touristresorts and the recovery of natural resources, naturalareas and heritage of relevance to tourism’’ is estab-lished. Likewise, the same article indicates that ‘‘theyearly revenue for the fund is solely and exclusively forthe purposes of expenditure directly related to theobjectives specified in the previous section’’. Thus thetax is created to obtain financial resources for the saidenvironmental fund.

Although, on a colloquial level, this tax is known asthe ‘‘ecotax’’, in reality it is a direct tax levied on staysby individuals, whatever their place of residence may be,in tourist accommodation in the Balearic Islands, as canbe construed from the said act. The taxable base,therefore, is the stay in tourist accommodation in theBalearic Islands,14 calculated per day or fraction, andthe taxpayer is the visitor (regardless of the visitor’splace or residence, thus avoiding the possibility ofdiscrimination, in accordance with EU principles), eventhough it is the tourism company that collects the taxand transfers the revenue to the Autonomous Commu-nity Inland Revenue Offices, thus acting as a substitutefor the taxpayer (so, the substitute is responsible for thesettlement, paying in and submission of the declarationin the place and within the time limit established bylegislation). In order to determine the taxable base, threepossible systems are proposed: flat-rate, direct andindirect systems. The amount of tax is calculated bymultiplying the number of days by the tax liability,which is always a fixed amount per day or fraction, inaccordance with the following rates:

5-star hotels and 4-key apartments 2 euros3 and 4-star hotels and 2 and

3-key apartments1 euro

1 and 2-star hotels and1-key apartments

0.5 euros

Rural and inland hotels 1 euroCampsites or tourist camps 0.75 eurosRural tourism 0.25 euros

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10See the complete text of Parliamentary Act 7/2001, of April 23rd

regarding the ‘‘tax on stays in tourist accommodation to supply funds

to improve the tourist industry and the environment’’. This law was

appealed against as being anti-constitutional by the Treasury Council

on behalf of the President of the Government on July 30th 2001.

Subsequently, a Constitutional Court ruling of January 17th 2002

lifted the suspension, allowing the Balearic Government to apply the

law provisionally.11The Spanish Constitution of 1978, in Article 156, establishes the

principles for the financing of the autonomous communities, acknowl-

edging their financial autonomy, whilst the following article lists the

possible financial resources of autonomous community tax offices,

including their own taxes.12Spanish Organic Act 8/1980, of September 22nd, for the Funding

of the Autonomous Communities (the LOFCA). In Articles 2 and 6, it

establishes as basic principles the possibility of establishing autonomic

taxes and of having sufficient means to exercise the functions that fall

within their scope of authority.13Spanish Organic Law 3/1999, of January 8th, amending the

Statute of Autonomy. In Article 58 of the said law, it acknowledges

that the Autonomous Community of the Balearic Islands has the

financial autonomy required to achieve the principle of financial

sufficiency in order to exercise the powers pertaining to an

autonomous community.

14Children (up to 12) are exempt from the tax, in addition to stays

subsidised in accordance with the social programmes of any EU

member state (Spain’s Inserso programmes etc).

T. Palmer, A. Riera / Tourism Management 24 (2003) 665–674668

4. A critical review

Having analysed the basic characteristics of the taxproposed by the Government of the Balearic Islands, inthis section we intend to carry out a critical review of thetax, applying different aspects that are consideredfundamental in the definition, design and introductionof a levy that might be called an environmental tax. Atthis point, mention should be made of the confusionthat exists regarding this concept, given the differentnature and objectives of environmental taxes that areapplied in practice (European Commission, 1997; Ekins,1999). Despite this, a number of elements can beidentified, which will be analysed in this section, thatallow us to gauge whether a tax is an environmental taxor not. Thus the European Commission (1997) indicatesthat ‘a levy is considered as environmental if the taxablebase of the levy has a negative effect on the environ-ment’. Meanwhile, in a report drawn up by a group ofexperts, the OECD (1997b) defines an environmental taxas ‘tax whose tax base is a physical unit (or a proxy of it)that has a proven specific negative impact on theenvironment’. As for the European EnvironmentAgency, EEA (1996), it states that ‘an environmentaltax provides an incentive to avoid the tax by using, orgenerating less of, the substance being taxed’, whichrequires a certain relation between the item on which thetax is levied and the environmental problem to bealleviated. Thus, from the definition that is generallyaccepted, we can infer that a tax can be defined as beingan environmental one depending on its greater or lesserability to modify the conduct of agents so as to benefitthe environment.15

Factors concerning the tax’s greater or lesser linkswith the environment are analysed, together with otheraspects that may be of relevance to its final implementa-tion.

4.1. The optimality of the tax proposed

First, an analysis will be made of the capacity of thetax designed by the Government of the Balearic Islandsto achieve the Paretian optimum or, if applicable, whatis known as a ‘‘second-best optimum solution’’. Toachieve the Paretian optimum, a tax must be establishedwhose tax rate, when applied to a taxable base with aperfect link with the environmental problem, is equal tothe external marginal damage at optimum levels ofactivity. This involves knowledge of the demandfunction of the goods or services leading to the

externality, the private costs function of producing themand the external marginal damage function, so that thecorresponding authority can determine the optimumlevel of output for the activity in question, Meanwhile,given the fact that many externalities are publicly ownedassets16, the tax’s scope of jurisdiction must guaranteethat the spatial repercussions of the tax coincide with thegeographic limits of the corresponding environmentalassets.17 Finally, so that there is no change in the degreeof efficiency of the optimum tax, the revenue must bereturned in the form of non-distorting lump sums.18

In contrast, to achieve the second-best optimumsolution, a cost-efficient tax must be applied whichguarantees the fulfilment of the previously establishedenvironmental objectives at the lowest possible cost.19 Inaddition, it should be discriminatory, discerning howmuch to blame the agents causing the pollution are. Thismeans that single tax rates would be established in thecase of uniform environmental problems and variableones would be established in the event of non-uniformproblems.20

It seems obvious that the ‘‘Balearic ecotax’’ does notseek to achieve either the Pigouvian optimum solution,as it does not apply a tax rate equivalent to themonetary value of the external damage, as would bedesirable,21 or a certain minimum-cost environmentalquality standard (the case of cost-efficient taxes), as taxrates dependent on the marginal costs of reducingtourist congestion are not applied. Indeed, it does noteven distinguish between tax rates for greater or lesser

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15The definition of an environmental tax has clearly evolved over the

course of time. Thus, originally environmental taxes were considered

to be all tax levies created for obvious environmental reasons, whilst

the latest studies are directed at perfecting the concept by introducing

the final effect of the tax, its incidence or impact, which must benefit

the environment (Gago & !Alvarez, 2001).

16 In accordance with a relatively widespread definition, according to

which the lack of rivalry in the use or consumption of many

externalities means that they can be considered assets or, more

specifically, in the case of pollution or congestion, public evils.17This is a requirement that must be demanded, based on the Theory

of Fiscal Federalism According to the theory, public assets, such as the

quality of the environment, must be allocated by order of preference to

jurisdictional units that consume their products.18As demonstrated by Baumol and Oates (1975), with inexhaustible

externalities, the revenue from a tax levied on the thing/person

generating the external damage must not be used to compensate the

victims. The revenue’s return in the form of fixed sums is compatible

with efficiency. In this sense, we should highlight the correction made

by Freeman (1984) regarding the inefficiency of compensating victims

in the case of exhaustible externalities, as defended by Baumol and

Oates (1975) and subsequently rectified by the said authors in Baumol

and Oates (1988).19Explaining its greater popularity among economists as regards the

use of regulatory instruments.20This complies with the need to differentiate spatially in order to

try and achieve the optimum Pigouvian tax, in accordance with

Gonz!alez Fajardo (1988).21Environmental policies designed to correct price gaps involve the

estimation of the marginal environmental damage caused by tourism.

Despite the large extent of environmental damage associated with the

tourist industry, no study of this type has been carried out in the

CAIB. The only attempt, although it cannot be directly extrapolated, is

a monetary assessment of the benefits of tourists’ recreational use of

nature reserves, carried out by Riera (2000).

T. Palmer, A. Riera / Tourism Management 24 (2003) 665–674 669

degrees of tourist congestion, which would haverepresented a move towards an optimum tax.

4.2. The degree of environmental effectiveness

In cases in which it is not possible to apply optimumtaxes, if the aim is to achieve the maximum degree ofenvironmental effectiveness, it is vital for there to be aminimal relationship between the environmental pro-blem and the tax being designed. Depending on the itemthe tax will finally be levied on22 and the method ofestimation chosen,23 there will be a greater or lesserconnection between the taxable base and the environ-mental damage, and this will no doubt be an essentialvariable when assessing how environmentally effectivethe tax is, as derived from the previously citeddefinitions. Secondly, an analysis of how environmen-tally effective the tax is can be carried out by observingthe tax rates applied. Whilst they are high, a certaincorrective intention is guaranteed.

In the case of the ‘‘Balearic ecotax’’, the relationshipbetween the problem in need of alleviation and the itemtaxed is clear. Thus, a levy on the number of days staycan be justified, given the fact that the congestionproblems that the government aims to reduce are causedby the presence of mass numbers of tourists.24 For thisreason, by taxing tourists for their mere presence alone,attempts are being made to fulfil the regulatory principlefor environmental policies contained in both the SpanishConstitution and the 1986 Single European Act, knownas ‘‘who pollutes pays’’. In this way, the costs of anyenvironmental damage (and its repair) are included inthe price of the tourism products, services and activitiesthat give rise to the said damage, thereby contributing tothe application of the Community principle. However,choosing tourist accommodation as a taxable base isnot without its defects. Among these we should high-light the fact that tourists staying in unregulatedaccommodation are not subject to payment of the

ecotax, or the fact that not all tourist accommodation,depending on its location, contributes equally to theproblem of congestion.

Although it is true that a levy could be placed onvisitor arrivals without taking into account how longthey stay on the island, this would represent a moveaway from the tax’s theoretical purpose, despite the factthat it would have a positive effect, given the highpercentage of unregulated hotel accommodation and thegrowing importance of second-home tourism.

Going back to the analysis of how environmentallyeffective the tax is, in addition to the item being taxed,the means used for the calculation of the taxable basemust also be taken into account. Of the three possiblemeans of estimation, the use of a flat-rate scheme isencouraged25 as opposed to direct methods. This lastmethod enables a greater link to be established betweenthe tax base and the environmental problem, whilst aflat-rate scheme does not allow any link to beestablished at all, so that the use of this methodprobably means that the tax is less environmentallyeffective.The tax rate applied is another aspect involvedin an analysis of how environmentally effective a tax is.With the ‘‘Balearic ecotax’’, the rate chosen, i.e. the fixedrate, is acknowledged in the corresponding law to be a‘‘reasonable’’26 sum of money, so that its dissuasivepurpose is removed, with the clear predominance of theaim to generate revenue. Furthermore, it would seemlogical, given the seasonal nature of tourism to theBalearic Islands, for the tax rate to vary each seasonaccording to tourist numbers. In this way, not onlywould it be coherent with an efficiently designedenvironmental tax, but it would also contribute towardsmaking the economy less seasonally dependent.

Having analysed these criteria, we can conclude byemphasizing the scarcity of environmental argumentsbehind the tax under study.

4.3. The degree of fiscal effectiveness

In this section, an analysis is made of those aspectsthat might facilitate the approval of a tax that, in thelight of the previous criteria, might be considered to beenvironmental from a fiscal perspective. Thus, for taxesto be fiscally effective as well as environmentally so, thefollowing aspects must be taken into account.

The capacity for the tax’s administrative manage-ment, i.e. the possibility of inserting it into the existing

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22Practical difficulties may lead to the tax being levied on other

items that are indirectly linked to the problem in question, thus

reducing its degree of environmental effectiveness.23There are two possible means of estimating the taxable base: (1)

the direct method, in which the base is calculated by direct means

whereby the units taxed as measured via ‘‘end of process’’ type

techniques and (2) the indirect or flat-rate method used for situations

in which, for technological reasons, a multiplicity of sources, too many

measurement points etc, it is very complicated to use the direct

method. This alternative method consists of determining the taxable

base by means of physical or economic indicators that are considered

representative of the environmental damage produced.24Although staying in certain tourist accommodation does not in

itself cause congestion (as it naturally depends on the number of hotel

beds in the area where the hotel is located), for practical purposes,

using the choice of hotel as a taxable base is a good approximation, in

the sense that the hotel is clearly the base for its tourists’ activity,

thereby contributing to the congestion of beaches, roads, areas of

countryside etc.

25To quote from section (D) of the act’s legal considerations, it

states: ‘‘Although the act establishes the direct method of estimation as

a general means of calculating the taxable base, the legal text regulates

the option of using a flat-rate scheme and it clearly does so to promote

this method of determining the taxable base’’.26More specifically, in the section on the benefits of introducing the

tax, it indicates that ‘‘it is a reasonable sum per tourist, between 160

and 170 ptas. Per person per day’’.

T. Palmer, A. Riera / Tourism Management 24 (2003) 665–674670

tax system in such a way that the costs of its application,control and investigation are lower than they would be ifa totally new tax were established.

The capacity for the generation of revenue, i.e. thegreater or lesser extent to which it can generate publicincome. In cases in which the introduction of a tax ismore dependent on the revenue that it might generateand on seasonal stability than on the correction of anexternality, this criterion is clearly incompatible with thecriterion of how environmentally effective a tax is, asanalysed above.27

The capacity to achieve the desired tax repercussions,i.e. for the tax to lead to a change in economic behaviourin the desired place, as initially foreseen.

The capacity for integration in ‘‘green tax reforms’’(Gago & Labandeira, 1999), i.e. the possibility of itfitting in the process of reducing direct taxes andcompensating for this by the presence of environmen-tally based indirect taxes. With regard to this last factor,it should be emphasised that, when the income from anenvironmental tax is used to reduce other taxes thatcause inefficiencies or distortions, there is the possibilityof an additional benefit known as a ‘‘double dividend’’,in addition to environmental improvements. Thisadditional benefit derives from a reduction in theexisting system’s surplus contributions (due to areduction in the inefficiencies generated by traditionaltaxes). In this way, it seems clear that the emergence of adouble dividend, as defined here, is subject to the priorexistence of a distorting tax system. Thus, the possibilityof a double dividend is yet another factor to take intoaccount (see Goulder, 1995; Killinger, 2000).

In the case of the Balearic tax, this is a tax that clearlyfulfils two of the above tax criteria, as, firstly, it is anearmarked tax, since its tax revenue is to be used forfinancing the costs of an environmental fund, meaningthat the criterion of capacity to generate revenue hasplayed a decisive role in the tax’s definition. Because it isearmarked, one drawback is that it encourages thedesign of a tax whose purpose is clearly the generationof revenue, leaving aside the prime objective of anenvironmental tax, i.e. the correction of a type ofbehaviour that is detrimental to the environment.Moreover, because the sums of money spent onsatisfying environmental goals may vary over the courseof time, depending on the amount of revenue received,rather than attending to authentic environmental needs,this leads to a high level of inefficiency (see OECD,1997a, b). Meanwhile, in the case of the Balearic Islands,it can be demonstrated that tax rates have beenestablished with the clear need to create revenue. Thus,

as Smith (1996) states, earmarking taxes does not seemto lead to optimum levels of environmental expenditureor to an environmental tax with adequate levels ofincome. In this sense, a tax that is not earmarked isnecessary to ensure efficiency (although the earmarkingof the tax may lead to a greater support).

On the other hand, for the simpler administration ofthe tax, the calculation of the taxable base via a flat-ratescheme can be justified, as it is similar to the VATmethod of collection (for instance). The desire forsimplicity of administration is also reflected in thesystem of calculating the tax rate, i.e. with a constantdaily rate.

Even though its fiscal effectiveness, in terms of itscapacity for the generation revenue and administrativesimplicity, leads to a greater practical acceptance of thetax, it represents a clear move away from the environ-mental purpose of the levy.

An assessment must also be made of the potential forintegrating the ‘‘Balearic ecotax’’ into green tax reforms.One of the objectives of such reforms28 is to use therevenue from the environmental tax to reduce levies onemployment, in such a way that improvements can bemade to both the efficiency of the system (the economicand fiscal dividend) and employment (the employmentdividend). As regards the potential for applying theargument that it is lacking in environmental effective-ness, the possible effects of the tax’s introduction on theeffectiveness of the tax system must be considered. Inthis sense, the existence of a ‘‘double dividend’’ cannotbe anticipated.

Finally, to analyse the tax implications of theproposed Balearic tax, we must know the effect on thesupply and demand of the product on which the levy isplaced, i.e. on the number of tourist stays. Theintroduction of the ‘‘ecotax’’ involves a leftward supplymovement, given the rigidity of the factors in the short-term. The effects depend on the price-demand elasticityof the demand for tourism. In this regard, in an attemptto model the demand for tourism and estimate theelasticity of the price-demand, a recent study by Aguil !o,Riera, and Rossell !o (2001) (currently being published)indicates how the global price effect on the demand forBritish and German tourism gives a 1% elasticity value(while the income and relative price elasticities forGerman tourists converge at values close to zero, British

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27For this reason, taxes whose revenue is financially designed to

cover a certain cost (earmarked taxes) are often criticised, as, in many

cases, the objective of collecting revenue prevails over its corrective

purpose.

28According to Gago and Labandeira (1999), there are three

objectives behind the extensive model of green tax reform: one aim

is a fiscal and economic one, consisting of reducing losses in efficiency

caused by high marginal tax rates and the lack of neutrality of the

system, a second is a strictly environmental one, for which taxes of this

characteristic are used and a third one is an economic and labour-

related one, responding to the model of fiscal policy defended by the

European Commission (1993), in which a reduction in employers’

contributions is suggested to compensate for the loss of revenue caused

by the establishment of new environmental taxes.

T. Palmer, A. Riera / Tourism Management 24 (2003) 665–674 671

tourists seem to be more greatly affected by changes inprices and variations in income, with elasticities thatconverge at 2%), which, when applied to the totalnumber of international arrivals, represents 125,000 lessarrivals.29 The authors point out that, as supplyelasticity estimations were not available, the preciseamount of tax affecting tourists cannot be assessed,although the low demand elasticities seem to confirmthat a large part of the tax is transferred. Finally, itshould be stressed that, given the low value of thedemand elasticity, the tax has a high capacity forgenerating revenue, calculated approximately by usingthe daily amount of tourist tax, the average number ofdays stay and the number of international arrivals,giving a value of 13,664 million pesetas per year.

4.4. The economic implications

From an economic point of view, two aspects must betaken into account when designing an environmentaltax. They are as follows:

The possible implications in terms of growth andemployment. As is well known, in practice, environ-mental taxes are associated with an increase in short-term costs, which, in the final instance, can lead tomodifications in the workforce.

Problems related to competitiveness and the reloca-tion of businesses. From the previous point it can beinferred that industries subject to an environmental taxwill probably be affected by a short-term loss ofcompetitiveness in comparison with foreign industries.In some cases, this could lead to the relocation ofbusiness activities in those countries that are morepermissive and are not subject to any kind of environ-mental tax.30

When analysing the potential economic effects of theintroduction of the ‘‘ecotax’’, the important question isto know to what extent it has implications on the priceof the tourism product, since, in the last instance, thisaffects the competitiveness of the economy in terms ofprices, i.e. its short-term ability to compete. Eventhough the price repercussions are low, the ‘‘ecotax’’will no doubt affect business costs and the level ofemployment in the short term. However, with a long-

term vision, the main component of competitiveness isproductivity, thus increases in productivity necessarilyinvolve increasing the average output per worker, whichis only possible by increasing the quantity (which wouldlead to greater environmental damage) or by increasingthe price (increasing the quality and differentiatingamong tourism products). The introduction of the‘‘ecotax’’ may, therefore, involve a long-term increasein competitiveness, encouraging the greater specialisa-tion of better quality tourism products and the redesignof Balearic tourism.

4.5. The distribution implications

All environmental policy related measures lead toredistribution but, in the case of environmental taxes(and other economic means of generating income), theimpact on family income gives special cause for concernas, on many occasions, the environmental tax is leviedon the usage of assets that are a prime necessity, such aswater resources or energy. One of the characteristics ofthe green tax reforms of the last few years is precisely thegreater presence of taxes on energy, the revenue fromwhich compensates for the reduction in governmentincome due to decreases in direct taxes whilst alsohaving an environmental focus.31 Although there aremany other interesting issues involved (see Ekins &Speck, 2000), the distributive aspect is one that has beenmost influential in the rejection of this system by itsopponents. However, as several studies point out, theforeseeable effects on income distribution are not asregressive as they might initially seem (see Barker andKh .oler (1997) for the impact of a European Energy Tax;or Labandeira and Labeaga (1999), for a study of theeffects of an energy tax with a wide base, type CO2, inSpain).

Meanwhile, depending on how the financial resourcesobtained from the environmental tax are used, it ispossible that they may also have greater or lesser effectson distribution.32

At this point, it should be highlighted that the incomeprogressivity of the ‘‘Balearic ecotax’’ seems to beincompatible with the optimum design of the tax, whichwould involve the application of variable tax ratesaccording to tourists’ individual effect on pollution, asopposed to their purchasing capacity as indicated by the

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29 It should be mentioned that a study commissioned by the Balearic

Federation of Hoteliers, carried out by the consultant firm Ernst &

Young, forecasts that the ‘‘ecotax’’ will have a negative effect of some

104,000 million on the Gross Added Value, although the effect of the

‘‘ecotax’’ was calculated using the nightly hotel expenditure figures and

not the total expenditure.30 In the case of taxes on energy, the nucleus of green tax reforms, it

is interesting to highlight the large number of exemptions applied to

the group of industries most affected by taxes on energy. This leads to

big differences between the nominal tax rate and the real one. The

objective of the exemptions is none other but to reduce the possible

negative impact on the competitiveness of energy sectors. For a review

of the situation, see Ekins and Speck (1999).

31 In accordance with the previously proposed definition of environ-

mental tax, including those taxes that have a positive effect on the

environment even though they were not originally created for

environmental purposes.32As Gago and Labandeira indicate (1998), if the revenue obtained

is used for the reduction of distorting taxes, as the theory of the

‘‘double dividend’’ proposes, the effects will either be more or less

regressive, depending on the distributive repercussions. Nevertheless, it

is possible to introduce measures to counteract any undesired

distributive effects, should these occur.

T. Palmer, A. Riera / Tourism Management 24 (2003) 665–674672

category of accommodation chosen. The correct envir-onmental tax policy ought therefore to be to imposegreater levies on hotels that offer accommodation to thetourist stratum most responsible for the BalearicIslands’ main environmental problems, i.e. their con-gestion.

From the previous analysis, it can be seen that thedesign of the ‘‘Balearic ecotax’’ differs in many respectsfrom the optimum design of environmental tax. How-ever, we should not forget that an important factor,when establishing environmental taxes, is the socialfactor, i.e. the sociological and institutional response tothe introduction of the tax. The economic agents thatare in some way affected by the environmental tax mayact strategically in response to its introduction. Govern-ments will try to obtain political benefits, ecologicalgroups will always demand that the tax applied isstricter and the agents who levy affects, in this case thehoteliers, will try to influence matters by forminglobbies. Nevertheless, the social acceptance of the taxwill be greater if the tax is more effective in its protectionof the environment and when it generates less fiscalpressure. In this regard, it seems that neither of thesefactors is fulfilled in the case of the Balearic Islands,given the characteristics of the tax’s design and theresponse of hoteliers to its introduction. For this reason,the social support that the Balearic tax may havereceived is based almost exclusively on the earmarkingof its tax revenue for certain environmental plans ofaction, clearly a priority objective when this tax isanalysed in depth.

5. Conclusion

The search for solutions to alleviate tourism-relatedenvironmental damage is one of the fields of investiga-tion that shows most future promise. Several argumentssupport this claim.

Firstly, forecasts regarding the future growth of thesector force us to take into account all the effects of thedevelopment of tourism, in a context in which thedevelopment of world tourism is suffering from struc-tural problems that cast doubt on the degree of well-being attained and the possibilities of maintaining it inthe future. Thus studies of the environmental effects andcorresponding assessment analyses are becoming essen-tial.

Secondly, the internalisation of the environmentalimpact is vital if we are to guarantee continued growthwithout the damage having a negative effect on theproduct offered to tourists and also reducing the qualityof life. Environmental costs have traditionally beencovered by means of environmental taxes, although thisdoes not prevent other proposals that substitute orcomplement taxes from being considered.

Thirdly, although environmental damage occurs as aresult of too much activity, it must not be forgotten thatthe influence of tourism on the environment not onlydepends on the damage that it produces but also onefforts made to correct the problems, i.e. on theexternalities and on public spending to minimise thesaid externalities. To understand some of the mosturgent problems faced by the Balearic Islands, thefollowing two factors must be considered: the existenceof high levels of congestion and pollution related to thedevelopment of tourism, and also problems related tothe provision of public services, in a context in whichfewer and fewer resources are available and the existingones are becoming increasingly ineffective. In reality, the‘‘Balearic ecotax’’ is purely and simply an instrumentdesigned to generate revenue, so that it can financeactivities aimed at improving the surroundings andcreating a level of infrastructure more in line with needsgenerated as a result of the pressure of tourism, makingone think that there is indeed a problem with finance.This introduces a new perspective to analyses of theenvironmental damage caused by tourism and the publicpolicies designed to reduce it.

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