Standalone regulatory taxes are unsustainable---only the perm solves.

5. Limitations for and barriers to the potential of environmental taxes

Notwithstanding the moderately positive conclusions on the potential of environmental taxation for enhancing transitions, we identify six barriers and limitations that should not be overlooked. First, public and political support for environmental taxation is limited. People dislike taxes in general (Avi-Yonah and Uhlmann 2009), and environmental taxation in particular, because they see it as an illegitimate source of revenue for the government (Green Fiscal Commission 2009). One way of making environmental taxation and green tax reform more acceptable is using insights from behavioural economics. For example, to make people accept a budget-neutral tax reform, the value of what they receive should be higher than the value of what they sacrifice. This phenomenon is called the endowment effect (Kahneman, Knetsch, and Thaler 1991). Second, an environmental tax in a socio-technical system such as the energy system will need to be implemented for a long period (more than 10 years) before it starts living up to its potential, for both technology and practices. However, politically this is a long period, and the environmental tax reforms that survive the first political decision process, are often reversed when a new government takes office. This happened to the Australian carbon tax in 2013 (Carl and Fedor 2016). A rare counterexample is the Swedish carbon tax, which has been in place since 1991 (Daugbjerg and Svendsen 2003). Third, choices made for or against a certain technology or practice will influence policy options in the future (path dependencies) (Rotmans 2003). Misalignment of a tax with the transition vision could result in a lock-in or even system breakdown (van der Brugge and Rotmans 2007; Kemp and Pontoglio 2011), although a subsidy poses a larger risk of a lock-in than a tax. Fourth, the lack of sufficient, appropriate or promising niches is a barrier, because niches that do not perform consistently will not provide any benefits (Sopha, Klöckner, and Hertwich 2013). Fifth, environmental taxes could have some undesired side effects, such as a negative competitiveness impact and a regressive impact. However, those deficiencies can be largely redressed by careful design and compensating measures as part of a green tax reform (Andersen and Ekins 2009; Klenert and Mattauch 2016). Finally, sixth, a stand-alone policy instrument, taxation or other, will always have a number of downsides, part of which can be overcome by using smart instrument and policy mixes (Oikonomou, Flamos, and Grafakos 2014), such as an environmental tax in combination with a large communication campaign explaining the benefits of the tax to citizens, and with revenue recycling, for example, a subsidy, to increase social support.