Choice experiments and environmental taxation: An application to the Italian hydropower sector

This paper represents the first attempt to simulate the introduction of an incentive-based environmental tax to the hydropower sector. As hydropower can negatively affect fluvial ecosystems, the paper shows how to design and determine per unit tax values for a taxation system that would then be able to provide producers with incentives to opt for more environmentally friendly solutions. The simulation is carried out in the Province of Sondrio (home to 20% of the Italian hydropower production). First, the paper determines the monetary value of the fluvial ecosystem by means of a Discrete Choice Experiment (DCE); then, it compares the models estimated in WTP and preference spaces in order to opt for the most effective punctual values to be used as inputs in a newly designed incentive-based environmental tax; finally, it simulates the effects of the introduction of such a tax to a real case. According to our results, the magnitude of the environmental tax is such that it would certainly stimulate environmentally friendly production, without hindering operators’ profitability.