The ‘polluter pays principle’ (PPP) is one of the four principles that govern the European Union's environmental policy. Although PPP justifies Pigovian taxation as a legitimate policy means to internalise externalities, there is a potential contradiction between PPP and Pigovian taxation depending upon the definition of pollution control costs. We summarise this debate and focus on the lump-sum refunding of tax revenues in order to reconcile the PPP and Pigovian taxation. We propose equity as the guiding principle to select among various refunding schemes, and empirically examine a specific application.
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