Taxing emissions reveals hidden costs, leading to stricter environmental standards.
Environmental taxes can provide valuable information for setting pollution standards. Firms may reveal their abatement costs by adjusting their pollution levels to match the tax rate. Regulators can use this information to update standards over time, aiming for better environmental outcomes. However, firms may try to hide their true costs by only meeting the minimum requirements. In Sweden, firms subject to a NOx tax see more frequent and stricter standard updates compared to exempted firms.