Energy Taxation as a Policy Instrument to Reduce CO2 Emissions: A Net Benefit Analysis

Abstract

This study evaluates the costs and benefits of energy taxation as a policy instrument to conserve energy and reduce CO2 emissions. The study combines economic cost estimates generated with a CGE model and monetary estimates of environmental damages in a comprehensive cost/benefit framework. We find that optimal CO2 emissions reductions range from 5 to 38%, depending on different assumptions about energy substitution elasticities and environmental damages. CO2 emissions reductions of between 8 and 64% can be attained at no additional welfare cost relative to a policy of not undertaking any action to control CO2 emissions.