Environmental Tax Reform in the European Union: Impact on CO2 Emissions and the Economy

Abstract

Economic instruments in environmental policy try to correct prices in order to internalise externalities. The environmental tax reform is a specific policy approach, which raises taxation of ‘bads’ such as resource use or emissions and reduces other taxes on ‘goods’ such as labour that are felt as a burden so that the total tax revenue remains constant. On a small scale some European countries introduced this instrument, and the results have been evaluated broadly positive by the literature. The paper at hand gives answers to the question, what might happen to CO2 emissions and the economy, if this instrument would be used in all European countries in a scale that allows reaching the European CO2 emission targets. The instrument of the analysis is the global economy-energy-environment model GINFORS. The simulation results show that the targets can be met with only small losses in GDP and gains in employment.