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Panorama
Hacienda Pública Española / Review of Public Economics, 208-(1/2014): 145-190
© 2014, Instituto de Estudios Fiscales
DOI: 10.7866/HPE-RPE.14.1.5
*67:*5*766.:0@#*?.;*6-C:..6#*?!./7:5;
ALBERTO GAGO**
XAVIER LABANDEIRA**
XIRAL LÓPEZ-OTERO**
Universidade de Vigo and Economics for Energy
Received: September, 2013
Accepted: July, 2014
"=55*:@
This article provides an overview of specific and systemic applications of energy taxes and environmental
(or green) tax reforms. To do so it combines a theoretical and empirical assessment of the literature, with a
non-exhaustive description of the practice of these instruments and packages in the real world. Besides
yielding a comprehensive approximation to the specific and systemic use of energy taxes, the paper con-
tributes to the research in this area by reflecting on the present and future of these instruments in a particu-
larly shifting world.
Keywords: Taxes, Energy, Environment, Externalities, Natural Resources.
JEL classification: H21, H23, Q48, Q58.
B6<:7-=,<276
Energy issues play an increasingly important role in contemporary developed and devel-
oping societies. This is due to the fact that the availability of reliable and sufficient energy
is crucial for the development of economic activities and, therefore, the energy sector is
nowadays very relevant and quite sizeable in most economies. But energy is also the source
of important external (negative) environmental effects, particularly those related to the emis-
sions of greenhouse gases (GHG) that are the cause of climate change phenomena. More-
over, the varying availability of energy resources across the globe brings about dependence
relationships among countries that give prominence to energy security concerns.
*The authors acknowledge funding from the Spanish Ministry of Economy and Competitiveness project
ECO2009-14586-C2-01 and Fundación Iberdrola (Labandeira and López-Otero). They also thank Emilio Cerdá,
Michael Hanemann, Frank Jotzo, José M. Labeaga, Andrew Leicester, Pedro Linares, María Loureiro, Carlos
Ocaña, Miguel Rodríguez, Stephen Smith and two anonymous reviewers for their helpful comments and sugges-
tions. Yet the authors are responsible for any errors or omissions that may remain.
** Rede, Universidade de Vigo, Facultade de CC.EE., Campus As Lagoas s/n, 36310 Vigo, Spain. Economics for
Energy, Doutor Cadaval 2, 3E, 36202 Vigo, Spain.
In this setting, the importance of public policies in the energy domain is obvious and
growing. Energy policies are now topping the agendas of policymakers almost everywhere,
and they are getting more complex due to the above-mentioned several objectives and trade-
offs associated to energy production and consumption. Within energy public policies, the
taxation of energy products has been applied with diverse intensity and scope (across coun-
tries and across energy goods) for several decades, although it is now rather generalized
along the world and has seen remarkable increases since the 1980s. The reasons behind the
wide and growing use of energy taxes are, first of all, purely fiscal: the size of energy con-
sumption and its low reaction to price changes mean that this is a perfect candidate for tax-
ation. Yet, environmental and energy security (in the form of a lower consumption of ener-
gy goods or a less-dependent energy supply structure) also explain many of the tax
applications, especially in the last twenty years.
This article yields a general overview of the field of energy taxation that provides an in-
terpretation on the reasons for energy taxes and on its practical applications. Yet the article
does not attempt to be exhaustive, as the field is huge and many previous literature reviews
have been already carried out quite successfully (see below). Our aim is to present a story
on the development of energy taxes, showing both their theoretical foundations and some ac-
tual or hypothetical experiences. Moreover, we do not restrict the paper to the study of spe-
cific energy taxes as we feel that, increasingly, energy taxation is playing a wider role with-
in tax systems and reforms. Finally, given the importance of these taxes and the changing
fiscal, environmental and economic environments, this article is especially interested in a
prospective analysis on the future of these fiscal instruments and packages.
As indicated above, the literature reviews on these matters have been abundant, with
several recent examples. For instance, Newbery (2005) provides a good overview on the
theoretical reasons behind energy taxes, and Lazzari (2005) studies different approaches
to energy taxation. Metcalf and Weisbach (2009) focus instead on the different informa-
tional difficulties to determine optimal tax rates on energy. Also within an optimal tax ap-
proach, Bovenberg and Goulder (2002) or Fullerton et al. (2010) deal with environment-
driven taxes, whereas Banfi and Filippini (2010) or Garnaut (2010) are interested in taxes
levied on natural resources. Those are just a few illustrative examples within a very large
and rich literature on specific applications of energy taxes, but their wider fiscal roles have
also been quite explored after the seminal paper by Pearce (1991) on revenue-neutral car-
bon taxes. In this context, Ekins and Speck (2011) provide an updated overview of the the-
oretical conditions pointed out by the academic literature for the existence of a positive
double dividend (environmental and economic) associated to an environmental tax reform.
Besides, plenty of papers have been interested in the empirics of energy-related environ-
mental tax reforms, as reported by the surveys of Bosquet (2000) or, more recently, Speck
et al. (2011).
This article deals with specific and systemic applications of energy taxes, with theoret-
ical and empirical approaches, and with a report on the practice of these instruments and
packages in the real world. We feel that this comprehensive approach constitutes in itself a
146 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
contribution to the literature, but perhaps the main novelty of the article is related to the re-
flection on the present and future of energy taxation in a particularly shifting world. The
paper is thus structured in five sections, including this introduction. In Section 2 we present
the theoretical reasons for the application of energy taxes: revenues, correction of environ-
mental damage and capture of rents associated to an energy resource. The following section
deals with the practice of energy taxes and environmental tax reforms, with an overview of
the existing empirical literature and a selection of some applications in different countries.
Section 4 focuses on the new environment for energy taxes and on the subsequent new pro-
posals or alternatives both with specific and systemic approximations. The article concludes
with a summary of the main findings and prospects regarding these matters, an extensive
enumeration of references and an empirical appendix.
B<1.7:.<2,*4,76<.?<
There are several reasons that justify the existence of energy taxes, which can be rough-
ly grouped in three main headings: revenue-raising motives, correction of environmental ex-
ternalities, and capture of rents associated to natural resources that are used in energy pro-
duction or consumption. In a recent paper, Labandeira (2011) suggested that each of these
reasons had its ‘golden’ period: getting revenues for the public sector was behind the intro-
duction of the first ambitious energy taxes in the developed world, back in the 1950s and
1960s, but are regaining momentum in this age of sizeable public deficits and weakening
conventional taxes; environmental motives (particularly those related to climate change)
were quite important in the 1990s and early years of this century; and the capture of rents as-
sociated to fossil fuels was first considered during the 1970s oil crises but has seen a recent
surge together with energy efficiency and energy security concerns. The resulting vector has
led to higher taxes on energy products in most developed and emerging countries, with ob-
vious effects on energy systems, the economy and society 1.
In this section we present the theoretical foundations of energy taxes, largely from an ef-
ficiency point of view and in a rather superficial manner (e.g. without a proper general equi-
librium framework). Our objective, as stated in the introduction, is confined to offering a wide
vision of current and future developments in this area. In any case, it should be noted that the
introduction of energy taxes may also bring about regressive effects on income distribution be-
cause, as energy products are generally necessary goods, the incidence of these taxes usually
falls disproportionately on lower incomes (see Aigner, 2011). These distributional problems
may justify the application of offsetting measures, which depend on the type of energy prod-
uct (see Ekins and Dresner, 2004), with some practical illustrations later discussed in the paper.
B!.>.6=.;
The nature of energy products makes them suitable candidates for revenue-raising pur-
poses, as they may be the source of sizeable and stable public receipts. Indeed, energy goods
147
A Panorama on Energy Taxes and Green Tax Reforms
generally show a low (inelastic) elasticity of demand (see table 1), so tax-induced price vari-
ation has limited effects on consumption and thus on the amount and stability of revenues.
Moreover, the relationship between energy demand and income is not monotonic, with a
trend for energy intensity to grow (decrease) with output in low-income (high-income)
economies (see e.g. Galli, 1998 and Wu, 2012). The main reasons that explain this phenom-
enon are changes in the structure of final demand, increases in end-use energy efficiency,
and substitution of less efficient fuels (Bernardini and Galli, 1993). The preceding means
that taxes on energy are an increasing revenue source for emerging and developing countries,
as long as they are in a growing economic path, although development may actually limit the
growth of such revenues (see also footnote 1).
#*+4.
!( !"##"##!#$!
=<17:; 7=6<:@ 6.:0@8:7-=,< :2,..4*;<2,2<@
Bentzen and Engsted (1993) Denmark Energy [–0.47, –0.14]
Rothman et al. (1994) 53 countries Energy [–0.78, –0.69]
Koopmans and te Velde (2001) Netherlands Energy –0.29
Hunt et al. (2003) United Kingdom Energy –0.18
De Vita et al. (2006) Namibia Energy –0.34
Filippini and Hunt (2011) 29 OECD countries Energy [–0.4, –0.2]
Holtedahl and Joutz (2004) Taiwan Electricity –0.16
Kamerschen and Porter (2004) USA Electricity –0.93
Narayan and Smyth (2005) Australia Electricity –0.26
Labandeira et al. (2012) Spain Electricity –0.25
Baker et al. (1989) United Kingdom Natural Gas –0.31
Baker and Blundell (1991) United Kingdom Natural Gas [–0.62, –0.41]
Maddala et al. (1997) USA Natural Gas –0.01
Vásquez et al. (2011) USA Natural Gas [–0.41, –0.11]
Baltagi et al. (2003) France Gasoline –0.01
Pock (2010) 14 European countries Gasoline –0.09
González-Marrero et al. (2012) Spain Gasoline –0.29
Lin and Zeng (2013) China Gasoline [–0.497, –0.196]
Source: The authors from the literature above.
The theoretical, efficiency-related, basis for energy taxes is to be found in the theory of
optimal taxation. This theory assumes that the introduction of any tax (except lump-sum al-
ternatives) affects the behavior of individuals and thus reduces welfare. On the one hand, the
tax payment involves the transfer of resources between the private and public sectors, reduc-
ing disposable income of agents and thus creating an income effect. Moreover, taxes alter
relative prices and introduce a substitution effect (favoring the consumption of the goods that
are less affected by taxation) that produces a second welfare loss. The objective of optimal
taxation is to minimize welfare losses through a second-best (i.e. sub-optimal) tax structure.
148 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
Optimal commodity taxation is based on the seminal work of Ramsey (1927), whose partial
equilibrium model will be next employed to justify the use of energy taxes following a Sand-
mo (1976) simplification.
Let us thus assume a closed economy, with perfect competition, where n+1 goods and
services (including labor) exist. The public sector levies an ad-valorem tax, tr
i, on the con-
sumption of each good ito obtain revenues which cover public expenditures (T) that are as-
sumed to be exogenous and fixed. The public sector seeks the minimization of the welfare
losses of the preceding taxes, with the following optimization program,
where uis the utility function of a representative consumer, pithe producer price and xithe
consumed quantity of each good.
Consumers, on the other hand, look for a combination of consumption of goods that
maximizes its individual utility, subject to their budget restriction (with x0as time devoted
to work and w unit salary),
(3)
Max u(,x01
x,...,xn)
{,tt
1...,}
n
n(1)
st.∑p
ii
trx
i=T
i=11
Max u(,x01
x,...,xn)
{,xx
0...,}
n
n(2)
st.(
∑p
ii
1+=tr)x
i=wx0
i=1
From the first-order conditions of the previous problems, assuming that demand func-
tions have null cross price elasticities 2and with some further simplifications, we obtain the
optimal tax rates,
αλ
+
tr
k= k=1,...,n
λα
ekk
where ekk is the price elasticity of good kand αand λare the Lagrange multipliers of the
previous optimizations. This result indicates that goods with a lower price elasticity of de-
mand should be more heavily taxed. As the empirical evidence shows that price elastici-
ties of energy demand are quite low, this justifies the widespread use of these taxes in the
real world.
Yet energy products, as well as being consumed by households, may be employed as in-
puts in the different production processes. In this context, the theory of optimal taxation is
contrary to the use of taxes on intermediate goods to avoid productive inefficiencies because,
in absence of profits, the introduction of such taxes would also bring about changes in final
prices but with further inefficiencies in the production area (Diamond and Mirrlees, 1971).
This result explains the generalized use of neutral consumption taxes, such as ideal VAT (i.e.
far from many actual applications), in most of the developed world and of lower intermedi-
−+()
λ
149
A Panorama on Energy Taxes and Green Tax Reforms
ate consumption taxes on some energy goods (e.g. diesel for transportation, compared to
gasoline) to benefit commercial or productive activities.
2.2. Environmental correction
A second important reason for using energy taxes is the control of the environmental ex-
ternalities that are widely present in energy production and consumption: from the emission
of local or global pollutants to water usage or, among many others, to the risks associated to
the management of nuclear waste. This is the classical example of market failure and public
intervention to solve it, as first stated by Pigou (1920).
To illustrate the theoretical foundation of energy-related environmental taxes, we now
employ a model with a representative consumer and a single firm that produces a good x1
using an energy input zand discharging pollution to the atmosphere (e) that causes environ-
mental deterioration [b(e)]. In this context, if social welfare is maximized,
Max u (,x1b)
{xb
1,}
st.(4)
xx
11
=(,ze)
bb=()e
F.O.C
∂u db
∂x1∂
=− b de (5)
∂e∂u
∂x1
That is, the optimum requires that marginal private benefits (or marginal abatement
costs) and marginal external costs are equal. However, in a free market situation without en-
vironmental regulations the firm would seek maximum profits,
Max x1(,z e)−pzz(6)
{,ez}
150 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
where p x
1, the price of good 1, is normalized to 1.
F.O.C
∂x1=0(7)
∂e
This means that the firm would produce until its marginal private benefits are zero, with-
out achieving the optimum. To solve this problem, a corrective or Pigouvian tax could be in-
troduced with a tax rate, te, that would be equal to the marginal external costs of emissions
in the optimum 3,
However, implementing the preceding tax in the real world is problematic due to the
large informational requirements. Indeed, to determine the Pigouvian tax rate, it would be
necessary to know the optimal levels of marginal external costs (MEC) and private margin-
al benefits (MPB), thus requiring the estimation of both curves in a long interval 4. But ob-
taining reliable information on the preceding curves is not straightforward: estimating mar-
ginal external cost functions is costly and usually a very complex endeavor 5, whereas the
calculation of private marginal benefits (or marginal abatement costs) is subject to problems
of asymmetric information 6.
The previous problem can be overcome through the so-called second-best approach to
environmental taxes: by using taxes, the regulator knows that all polluters will reveal their
marginal abatement cost because they would prefer abatement to paying taxes as long as the
former is a less costly option. This would lead to minimization of total abatement costs for
achieving a certain (exogenously pre-determined) environmental objective without the need
of calculating the external and abatement cost curves (i.e. with implicit revelation of those
curves), although the result would be obviously sub-optimal (see e.g. Fullerton, 2001 and
Stavins, 2003). An example of such approach in climate policy would be using carbon taxes
to attain the 2ºC objective.
∂u db
b de
te∂
=(8)
∂u
∂x1
151
A Panorama on Energy Taxes and Green Tax Reforms
Figure 1. Pigouvian (left) and cost-effective (right) approaches to environmental taxation
Source: The authors.
Figure 1 depicts the first-best Pigouvian tax rate, derived from a cost-benefit optimal
analysis of pollution, and the second-best sub-optimal option when two emitters (1 and 2)
are present. In the illustration the sub-optimal level of pollution (Es) is below the Pigouvian
optimal outcome (E*), and thus the suboptimal environmental tax rate (tes) is larger than the
Pigouvian tax (te*), but the opposite may also occur. Note that in both cases the level of emis-
sions is achieved at a minimum total abatement cost.
B*8<=:.7/.,76752,:.6<;
Energy products are either natural resources themselves or their production involves the
use of renewable or non-renewable natural resources such as wind or petroleum. This is rel-
evant to this paper because natural resources are usually associated to the existence of the
so-called economic rents: the present value of the economic benefits that are related to their
exploitation (as a difference between discounted real income and costs; see Boadway and
Flatters, 1993). Policymakers may be interested in this issue because natural resource rents
can be ‘extraordinary’, i.e. well above the usual retribution of the productive factors that are
needed to carry out an economic activity. This explains several recent tax applications on
non-renewable or renewable energy-related natural resources, notably the Australian tax on
some mining activities. However, most academic and policy discussions on this matter have
referred to the distribution among producing and consuming countries of the economic rents
associated to non-renewable natural resources of energy nature (particularly, oil).
Indeed, a casual observation of the strategies by oil exporting and importing countries
provides some interesting insights. On the one hand, most exporting countries operate with-
in cartel structures that manipulate supply to achieve certain price levels that obviously in-
fluence the size of economic rents. On the other hand, many consuming countries use taxes
on energy consumption to try to capture part of the economic rent associated to the energy-
related resource. To illustrate rent capturing by importing countries we next use the simple
single-period Bergstrom (1982) model.
Let us assume that there are mcountries that exploit an energy natural resource, with ir-
relevant extraction costs, and ncountries that import the energy resource. We further assume
that producers devote all the resource to exports and have a perfectly inelastic supply (per-
haps because they are fully exploiting the resource and changing the level of production
would be quite costly). In this sense, Sis the total supply of the energy resource in the inter-
valid for all countries due to arbitration possibilities) price of the resource.
Let us suppose, in this context, that the importers jointly agree to set an ad valorem tax
on the consumption of the energy resource, tc. Consumers will pay in this case,
m
national markets,
SS=∑
j
, with Sjas the supply by country jand ^
pthe international (i.e.
j=1
pp=+
ˆt
c
()1(9)
152 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
Given that demand is in each country a decreasing function of price, there will be an ag-
gregate reduction of demand and thus an excess supply. As producers have an inelastic sup-
ply, exporters will reduce prices so that importers pay the same gross of tax price as before,
i.e. the new price received by exporters, ^
p’, will be
This means that, after introducing the above-mentioned tax, the importing countries are
able to capture a share of the rent associated to the energy-related natural resource,
p
ˆ
p
ˆ'=(10)
+tc
1
t
p
ˆQ*(11)
tc
1+
153
A Panorama on Energy Taxes and Green Tax Reforms
with Q*as the total consumed quantity of the energy resource. This is also illustrated by fig-
ure 2, where Dis the aggregate demand function, D’ the aggregate demand function seen by
producers after the introduction of the tax, and Q’ the demand when the tax is introduced
(before the price adjustment by producers). The shadowed area depicts the part of the eco-
nomic rents captured by the consuming countries.
To conclude, and under the preceding restrictive conditions that may only hold in the
short term, when energy producers use a cartel to maximize the economic rents associated
to a natural resource, consuming countries could employ energy taxes to capture a big share
of the rent (in direct proportion to the size of the tax). And this would be achieved without
internal (i.e. in the consuming countries) efficiency costs, as the price paid by consumers
would be independent of the tax rate. Moreover, in terms of energy security such a tax could
be employed by the importers as a tool to tackle price volatility and would also reduce ener-
gy consumption and thus have positive effects on security through less external dependence
(see e.g. Labandeira and Manzano, 2012).
20=:.*8<=:.7/:.6<;*;;7,2*<.-<7*6.6.:0@:.;7=:,.<1:7=01<*?*<276
Source: The authors.
B.6.:*4<1.7:.<2,*45.;;*0.;
The preceding sub-sections have dealt with the three main reasons, in an independent
fashion, for using energy taxes. Since each of those reasons supports the introduction of en-
ergy taxes, a combined consideration of them would reinforce the case for energy taxation,
at least intuitively. Summing up, it seems that the best option would be to tax the final con-
sumption of inelastic energy goods whose use generates environmental problems and whose
supply is controlled by a limited number of foreign agents. Moreover, trade-offs between the
different reasons may exist, which introduce doubts on the previous simplistic message: by
increasing the energy tax due to environmental reasons, for instance, would affect the rev-
enue-raising capacities (perhaps reducing them substantially in the longer term). Therefore,
the design of an energy tax that simultaneously deals with all those matters is not straight-
forward, as we will observe in the following section. For instance, this would clearly apply
to one of the most important sources of energy tax revenues in most countries, oil excises
(see Section 3.3.1), as they also play environmental and rent-capture roles whose effective-
ness may be affected by their revenue objectives.
Actually, the theoretical literature on environmental taxation has been quite aware of the
multiple objectives pursued by a single tax instrument, a phenomenon that brings about sev-
eral analytical and instrument-design difficulties. Sandmo (1975), Bovenberg and van der
Ploeg (1994) and Cremer et al. (1998), among others, incorporated environmental external-
ities into the optimal tax problem concluding that in this case there were reasons for increas-
ing the size of the consumption tax: the final tax level should indeed be an average (weight-
ed by the marginal cost of public funds) of the good’s inverse price elasticity and the social
benefits of reducing pollution associated to the good (Sandmo, 2011). Moreover, the use of
energy taxes with simultaneous rent-capture and environmental purposes has been analyzed
by a number of papers (see, e.g., Bergstrom, 1982; Liski and Tahvonen, 2004; or Dong and
Whalley, 2012).
Yet the relationship between some of the preceding reasons for energy taxes is probably
best exemplified by the so-called theory of double dividend. Although Tullock (1967) first
mentioned the ‘extra’ fiscal benefits of environmental taxes many decades ago, the theoret-
ical enquiries on this matter boomed in the 1990s when the potentially sizable and stable
public revenues associated to carbon, i.e. energy-related, taxes made them suitable to lead
tax reform processes (Pearce, 1991). In this case the debate is slightly different to the pre-
sented in Section 2.1: now the environmental benefit brought about by the energy tax is
taken for granted and public revenues (T) are fully devoted to efficiency-enhancing reduc-
tion of other (distortionary) taxes, thus creating a kind of double benefit (Goulder, 1995).
This means that the revenue-raising side of the energy-related environmental tax would play
a substantial and additional role with obvious effects on other non-revenue-oriented objec-
tives and tax rates.
The large and intense research effort on the existence and size of the dividends associ-
ated to environmental taxes is behind the so-called green tax reforms, which are considered
154 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
in the following section. In this sense, the underlying theoretical assumptions and results on
multiple benefits from environmental taxes have been widely discussed and analyzed (see
e.g. Bovenberg, 1999; Katrena, 2002), although the mainstream view now acknowledges the
existence of a tax interaction effect that generally precludes the achievement of a strong dou-
ble dividend (simultaneous positive environmental and fiscal dividends from the package)
but still recommends full revenue recycling to maximize welfare (weak double dividend). In-
deed, the literature has clarified the importance of external factors for the sign and extent of
the second (non-environmental) dividend: Schöb (1996) stressing the relevance of the pre-
existing fiscal structure, Bovenberg and de Moiij (1997) highlighting the role of capital mo-
bility when taxes on capital are considered for revenue-compensation, and Heady et al.
(2000) underlying the significance of institutional frameworks for wage-setting when using
tax receipts to reduce labor costs.
In sum, there is substantial theoretical support for the use of energy taxes from different
perspectives. It seems, however, that revenue-raising motives are playing an increasing role
due to external demands for expanded public receipts in many countries in recent years and
to the fact that energy-related taxes may be used as a core of tax reform processes (e.g. green
tax reforms). This requires a detailed and comprehensive approach to the issue, which is un-
fortunately lacking in most of the academic literature so far, especially in the fields of ener-
gy dependence and rent capture. In particular, we deem especially necessary to carry out a
deep analysis and reconciliation of the synergies and negative interactions between tax rates
that primarily seek environmental correction (te), reduction of fossil fuel imports (tc) and
public receipts (tr). Indeed, given that energy taxes may have as a primary aim to reduce en-
vironmental damages through changes in technologies and/or behavior of polluters, energy
tax bases and thus revenues may therefore be affected in the medium and long terms. Hence
the search for higher revenues may have negative effects on capture of rents associated to
energy resources or on environmental protection (e.g. through the use of lower-than optimal
or sub-optimal energy tax rates) and vice versa (e.g. energy efficiency improvements 7, with
environmental or energy security purposes, would reduce the energy tax base).
With all the preceding in mind, this section has attempted to provide the rudiments of
such an overall approach, as further developments are beyond the objectives and capacities
of this article. This will be complemented by the conclusions of the subsequent parts: given
that the fundamentals of energy taxation have obvious effects on tax design, including the
selection and structure of tax bases and tax rates, we next deal with that issue.
B#1.8:*,<2,.7/.6.:0@<*?*<276
B6.:0@<*?-.;206
When dealing with energy tax design in practice, a first enquiry should refer to the pos-
sibilities and constraints of transferring the previous theoretical insights and recommenda-
tions to reality. This is not an easy task, first of all because of the above-mentioned tax in-
155
A Panorama on Energy Taxes and Green Tax Reforms
teractions between objectives. Second, because energy taxation is a rather generic theoreti-
cal term that in practice includes a wide array of applications and technical solutions. For in-
stance, energy taxes could be levied on the appliances that consume energy, on the act of en-
ergy consumption or on both. Moreover, energy taxes could be calculated on the amount of
consumed energy (e.g. Liters of fuel), or on the calorific content of the energy products (e.g.
Terajoules), or on the emissions associated to consumption. Energy taxes could also use ad
valorem or unit tax rates, etc. We next discuss some of these issues, mostly with a norma-
tive approach, before surveying the empirical literature on the effects from energy taxes and
presenting some examples of real-world applications of these instruments and fiscal pack-
ages in different areas.
When consumption taxes seek different objectives, as is the case with energy goods, this
strongly influences technical design. In this sense, Sandmo (1976) showed that revenue-rais-
ing tax rates should be applied over and above the corrective tax rates. This result led Gupta
and Mahler (1994) or Crawford and Smith (1995), among others, to suggest the use of unit
taxes (i.e. levied on the physical levels of consumption) to control environmental externalities,
and to employ ad-valorem taxes (i.e. levied on the preexisting price levels) over and above unit
taxation to attain public revenues. This probably explains the actual applications of fuel taxes
in many developed countries (such as the EU), where unit taxes on physical consumption are
exacerbated by a subsequent application of the general sales tax. However, given the strong
price fluctuations of many energy goods, revenue stability may be better achieved through unit
taxation and thus introduces an exception to the general rule. Yet another reason for using ad-
valorem taxes with revenue-raising purposes is the availability of neutral value-added ap-
proaches that would minimize inefficiencies on the productive sector (see Section 2.1).
Energy taxes could be, on the other hand, defined in upstream or downstream fashions.
By using the more common upstream approaches, the (unit or ad-valorem) energy tax is
levied at some upper point and then transmitted through the economy. This obviously re-
duces administration and compliance costs, but may prevent a proper attainment of some of
the previously mentioned objectives of energy taxes. For instance, downstream energy taxes
may improve the behavioral reaction by agents to environmental tax signals (Hanemann,
2009) and thus be more effective.
Administration and compliance costs may be also behind the use of purchase (and re-
dundant) taxes on durables that are associated to energy consumption. In most countries that
is best exemplified by automobile taxation, or by specific taxes on household appliances and
new proposals on housing taxes (see Sections 3.3 and 4.2). In this sense and under certain
conditions, Fullerton and West (2002) showed that a combination of car and fuel taxes might
resemble a pure tax on emissions. Given that many (mainly local) energy-related pollutants
are not easily measurable, such a combination could help achieving the environmental ob-
jectives of energy taxes. However, a large focus in taxes on durables may affect revenue,
corrective and rent-capture objectives as such instruments usually show a low linkage be-
tween the tax base and energy consumption (e.g. it is not clear that actual energy consump-
tion will be well targeted by taxing car size).
156 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
Another problem related to (such) an imperfect taxation of energy consumption is cost-ef-
fectiveness. In figure 1 we showed how environmental taxes (or other pricing regulatory in-
struments) minimize total abatement costs associated to any emissions level. When minimiza-
tion of total energy use is the objective, in order to reduce energy dependence and improve
energy efficiency, a similar result would hold. In this context, this means that if environmen-
tal reasons are not considered, energy taxes should be extensive, i.e. should be applied across
all energy goods and with equal tax rates across the board. Figure 3 depicts current tax levels,
in implicit carbon and energy content taxes (respectively dark and light gray) for a number of
energy goods in Spain, although a similar situation is observed in most developed countries. It
is clear that the diversity of tax treatments across energy goods reflects a largely inefficient out-
come that could be explained by administrative, political or distributional constraints.
Indeed, distributional issues are an important factor for the definition of energy taxes
and tax packages. Since most energy services are often seen as necessities, as observed in
Section 2, taxing energy goods would be regressive. However, by excluding or benefiting
goods with a more regressive outlook, energy taxes could mitigate distributional problems
(which could be behind the erratic situation shown by figure 3). Moreover, energy tax rev-
enues could be also employed to offset negative distributional effects (see, e.g., Vandyck and
Regemorter, 2014), although using receipts with that purpose would contradict the main-
stream revenue-recycling (double dividend) efficiency view (see Sahlén and Stage, 2012).
157
A Panorama on Energy Taxes and Green Tax Reforms
20=:.5842,2<<*?.;76,*:+76.52;;276;*6-.6.:0@,76<.6<;"8*26
Source: The authors with information from IEA (2013)
Notes: All data are from 2013, except natural gas (2012) and electricity (2011); the conversion factors from GJ to
CO2-eq were obtained from European Commission (2007) and OCCC (2013).
In practice there are many other examples of earmarking energy tax receipts: environ-
mental protection, promotion of renewables, increases in energy efficiency, etc. Yet, as stat-
ed by Heine et al. (2012), earmarking should be ideally restricted to cases in which spend-
ing brings about efficiency benefits similar to those from revenue-recycling. With a different
approach, Loureiro et al. (2013) have shown that revenue-earmarking may facilitate the in-
troduction of energy tax packages given the existing public preferences on these instruments.
"75..582:2,;7/.6.:0@<*?*<276
Many research papers have explored the economic and environmental effects from the
introduction or increase of energy taxation, either individually or as part of wider tax reform
schemes. These papers have usually employed ex-ante simulations based on purely hypo-
thetical taxes and tax reform packages or on policy proposals by governments or suprana-
tional entities such as the EU. Ex-post empirical analysis on real energy tax experiences are
less common, due to limited tax applications or to lacking data, but have been occasionally
carried out. Bosquet (2000), Barker et al. (2011), Speck and Gee (2011) or Ekins and Speck
(2011) are useful overviews of the empirical methodologies and results from this rich liter-
ature. These issues have been also considered in several Spanish surveys and policy papers
(see e.g. Gago et al., 2004 or Labandeira et al., 2009).
In this section we report the results from a review of 699 simulations, using different
models and methodologies, from 100 papers on the effects of different taxes that have in
common that are applied to one or more energy products, in most cases with an environmen-
tal rationale and part of wider tax reform schemes (see footnote 5). These papers are specif-
ically reported in a separate section of the references of the article, with figures 4 and 5 sum-
marizing the main effects of energy taxes, presenting the percentage changes in key variables
from a business as usual situation.
Figure 4 shows the effects of energy taxes on prices and demand of energy goods. In this
sense, the price impact of energy taxes is significant (over 20%) in approximately 40% of
the empirical applications, although it does not lead to similar reductions of energy demand.
This confirms the above-mentioned low price elasticity of demand of these goods (one of the
reasons for taxing energy: see Section 2.1), as stressed by Beaumais and Bréchet (1995) or
Siriwardana et al. (2011). The empirical literature also indicates that when taxes are only
levied on particular energy goods, there might be a significant substitution by untaxed goods:
over 20% of cases there is an increase in the demand of other energy goods. Yet the overall
price-related demand variations are usually of little significance: about 70% of the empirical
papers show changes in the ±5% range.
The environmental effects of energy taxes have been also addressed by most of the em-
pirical assessments, as environmental protection was identified as a major reason for the use
of these instruments. Many papers have focused on greenhouse gas emissions (particularly
carbon dioxide), given the potentially large negative effects of climate change, although car-
158 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
bon dioxide emissions can be also used as a proxy of other fossil fuel related emissions that
generate local or regional environmental problems. Figure 4 also summarizes the effects on
carbon dioxide emissions (CO2) in the surveyed literature, showing that in general energy
taxes are effective in the reduction of carbon dioxide emissions, with 95% of the simulations
reporting decreases in emissions with respect to the business as usual scenario.
159
A Panorama on Energy Taxes and Green Tax Reforms
20=:.//.,<;7/.6.:0@<*?.;76.6.:0@-.5*6-.6.:0@8:2,.;*6- .52;;276;
Source: The authors from the empirical literature.
New or increased energy taxes may cause macroeconomic effects, as illustrated by fig-
ure 5. As depicted in the figure, impacts on GDP, welfare, employment or on the consumer
price index (CPI) are usually of little importance, again usually in the ±5% range. Results
are more favorable when energy taxes are part of tax reform schemes (Barker et al., 1993;
Welsch, 1996; Labandeira et al., 2004), and particularly good in terms of employment if en-
ergy-tax receipts are employed to reduce social security contributions (Barker, 1998; Con-
rad and Smith, 1998; Bach et al., 2002).
Regarding distributional effects, most empirical exercises (77%) report negative impacts,
which is also confirmed by recent surveys (EEA, 2011; Ekins and Speck, 2011). However,
such regressivity should be interpreted with care because there might be sizable differences
within income groups, and impacts are likely to be very different when considering the type
of energy consumption too. With respect to the former, Dresner and Ekins (2006) indicate that
differences within the same income group may be even bigger than across income groups, as
is the case with similarly affluent rural and urban households who are likely to face rather dif-
ferent energy tax burdens due to varying transport or heating needs. Regarding the latter,
Ekins and Speck (2011) or Kosonen (2012) point out that energy-related transport taxes are
usually less regressive than those levied on gas, coal or other heating fuels: indeed transport
taxes could be progressive at times, as observed in some emerging and (under certain condi-
tions) developed economies such as the U.S (Rausch et al., 2010), Poland (Kiuila and
Sieszynkski, 2003), Spain (Labandeira and Labeaga, 1999) or Serbia (Sterner, 2012a).
160 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
20=:.*265*,:7.,76752,.//.,<;/:75.6.:0@<*?.;
Source: The authors from the empirical literature.
Since we have a very heterogeneous set of simulations that also use different models and
methods, there is considerable variation in the effects of energy taxes on the considered vari-
ables. Thus, basic meta-regression analysis is used to synthesize the effect on each variable
in a single value, following the procedure suggested by Nelson and Kennedy (2009), through
the methodology proposed by Stanley and Jarrell (1989),
(12)
bZejL
jkjkj
k
K
=+ + =
=
∑
βα
( , ,..., )1 2
1
where bjis the reported estimate of the ‘true’ value of the effect (β) in the jth study, Zare the in-
dependent variables that measure relevant characteristics of the empirical study that influence
the estimated effects, αkare the meta-regression coefficients which reflect the biasing effect of
particular study characteristics, ejis the disturbance term, and Lis the number of studies used.
The papers used for the meta-analysis were selected from a detailed and wide review of
the existing literature on energy taxation. Although most papers have been published in peer-
review journals, we have also included several working papers due to their relevance and in-
terest. Most papers used to produce figures 4 and 5 were also used for the meta-analysis:
only 3 papers (over 100) were not considered due to lack of information on crucial variables,
although a number of specific simulations were not included in the analysis due to missing
details on the size of the tax 8.
Given the heterogeneity of empirical studies, which leads to a remarkable variation of
the effects from energy taxes, we introduce several dummies to gather the different sources
of heterogeneity. First, we use dummies indicating the type of model used to simulate the
impacts of energy taxes9. Dynamic general equilibrium models were used as benchmark be-
cause they are the most common models in the existing literature on these matters. We also
include other dummies that indicate the size of the tax reform (implemented ad valorem tax
rate), country characteristics, government level, tax characteristics, and whether the simula-
tion considers revenue recycling through a green tax reform and what kind of reform (see
table A.1. in the Annex).
To avoid heteroscedasticity and correlation problems we estimated the model for each
of the effects considered by generalized least squares, obtaining the results depicted in
table 2 10. We see again that on average the effect of energy taxes on energy prices is rele-
vant, although this increase does not result in important effects on energy demand and
macroeconomic variables. Moreover, the average CO2emissions reduction in the considered
studies is slightly above 14%. In fact, only the average effects on energy demand, energy
prices and CO2emissions are statistically significant. In general, the tax rate, the energy im-
port/export status of the country, and using tax revenues to reduce social security contribu-
tions are the variables with a bigger influence on results. In particular, the introduction of a
green tax reform that recycles tax revenues through a reduction of social security contribu-
tions has a statistically significant positive effect on GDP, employment and welfare and a
negative effect on the CPI.
#*+4.
%!#"!!(#'"# !#!#$!
)
b
Energy demand (END) –3.79%**
Energy prices (EP) 29.34%*
GDP –0.16%
Employment (EMP) –0.37%
Welfare (WEL) –0.04%
CPI –0.79%
CO2emissions –14.82%***
Note: We indicate significance by *** at the 1% level, ** at the 5% level, and * at the 10% level.
Source: The authors.
161
A Panorama on Energy Taxes and Green Tax Reforms
In sum, after the wide empirical research program carried out in the last few years, the
effects and incidence of energy taxes seem now quite clear. In general, energy taxes lead to
increased prices that hardly affect energy demand, with limited macroeconomic effects
whose sign is especially improved when preexisting labor taxes are lowered through energy
tax receipts. Indeed, green tax reforms can obtain significant emission reductions at limited
economic cost and with scarce effects on competitiveness (OECD, 2004; Agnolucci, 2011;
Speck et al., 2011). Moreover, most studies confirm the usual regressivity of energy taxa-
tion, although a more diverse distributional picture (with occasional proportional or progres-
sive effects of energy taxes) has been emerging in the last few years.
B6.:0@<*?.;*6-:.4*<.-<*?:./7:5;,1.5.;26:.*42<@
BEnergy taxes
In this sub-section we first deal with the revenue relevance of energy taxation, followed
by a discussion on the actual implementation of energy taxes in practice. The description in-
tends to cover the most relevant realities in today’s world: developed, emerging and oil-pro-
ducing countries.
Energy taxes were already mentioned as a major source of public revenues, especially
in advanced countries. For instance, in 2011 these taxes represented 4.6% of total receipts
(1.8% of GDP) in the European Union even without considering the VAT revenues from en-
ergy products (European Commission, 2013). Figure 6 reports the relative size of energy
taxes as a percentage of GDP across EU countries in 2011, which depicts quite a large vari-
ation between member states 11. Other developed countries such Australia or Japan show
similar figures (respectively 1.73% and 1.6% of GDP in 2010), whereas the US is quite
below: 0.77% of GDP in 2010, even far from the 1.28% of GDP represented by Chinese en-
ergy taxes in 2010 (OECD/EEA, 2013). For a general and updated assessment of energy tax-
ation in the OECD see Harding et al. (2014).
In most countries taxes are levied on the main energy products and on some durables as-
sociated to energy consumption, namely vehicles. Yet table 3 shows that energy tax revenues
may be highly concentrated in a few energy goods (as already depicted by figure 3 for the
Spanish case), with a large reliance on car fuels taxes, which amounts to as much as 50% of
final petrol and diesel prices in EU member states.
Actually, the EU framework for energy taxes (within the so-called harmonized Euro-
pean indirect taxation) has traditionally used minimum unit taxes that can be increased by
member states and are subsequently subject to the general VAT. At the beginning of the
1990s, after the first Rio summit, the Commission attempted to modify this scheme by in-
corporating much higher tax rates on implicit CO2emissions and energy contents, known as
‘ecotax’, within the preceding unit tax structure. Although this was blocked by different
countries and could not be applied due to fiscal unanimity rules, the European Commission
162 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
163
A Panorama on Energy Taxes and Green Tax Reforms
20=:.6.:0@<*?.;.?,4=-260%#*;7/ 26=
Source: European Commission (2013) and the authors.
is now proposing a Directive with the same philosophy: harmonized European energy taxa-
tion would have a CO2component, linked to the EU emissions trading scheme (EUETS 12)
prices and thus leaving electricity exempt, and an energy component that would respond to
revenue-raising and energy security matters. This general framework, quite related to the
theoretical and design recommendations of previous sections, would include a gradual im-
plementation and offsetting devices to protect European competitiveness.
Energy taxes in the EU, as in other developing and developed areas, are usually shared
by different administrations. The relevance of subnational administrations in these matters is
variable across countries, from mere revenue-sharing rules to capacity to design and/or reg-
ulate the main component of these taxes (see, e.g., Labandeira et al., 2009, for Spain). An
enumeration of reasons for subnational approaches to climate policies can be found in So-
manathan et al. (2014).
Energy taxation is structurally similar in other developed countries (IEA, 2013): Japan em-
ploys a tax scheme that is close to the EU except with automotive diesel (where the consump-
tion tax is applied to the price before taxes), whereas Australia applies a national tax on liquid
fuels used by households and state taxes are levied on natural gas and electricity. In the US there
is a federal motor fuel (unit) tax, although sales of motor fuels to non-commercial users are gen-
erally exempt because motor fuel taxes also exist in many states and municipalities. There is no
US federal tax on natural gas and electricity, although some states levy taxes on these goods.
#*+4.
!(#'""!( !""#% $#!"
201</=.4724
17=;.174-;
=<757<2>.
-2.;.4676
,755.:,2*4
$64.*-.-
0*;7426.
!
*<=:*40*;
17=;.174-;
4.,<:2,2<@
17=;.174-;
France 22.2 47.2 54.9 16.6 31.7
Germany 22.9 47.5 55.6 23.8 45.5
Italy 45.0 52.9 57.5 37.6b 30.5
Spain 25.0 42.4 48.0 16.5 19.4a
United Kingdom 20.5 57.5 59.5 4.8 4.8
EU-21 27.4 48.5 54.6 21.5 26.5
Australia n.a. 34.5 33.7 n.a n.a
Canada 10.1 n.a 29.3 4.8 7.9b
Japan 7.1 30.7 42.8 4.8a 6.5
United States 4.7 13.4 13.6 4.8 n.a
Source: IEA (2013).
Notes: a: 2011 data; b: 2010 data; n.a.: not available.
Emerging countries do also use energy taxes with some intensity. India, for instance, has
a variable VAT across states but a uniform excise tax throughout the country. As in the EU,
VAT is levied on energy goods (including the uniform excise taxation) but can also contain
an additional surcharge, whereas the excise tax contains both an ad valorem and a flat rate
component with the former to the price excluding the dealer’s commission (IEA, 2012).
State taxes levied on the consumption or sale of electricity are also applied in different Indi-
an states. China levies different taxes on vehicles, on the consumption of gasoline and diesel,
and on the extraction of energy resources such as coal and natural gas. VAT is applied above
those specific taxes, although at a lower rate for coal and natural gas (IEA, 2012). Many Chi-
nese comentators have recently suggested that the role of energy taxes is likely to be rein-
forced in the next few years given the large attention paid by the current Five-Year Plan to
climate change mitigation and to the use of market-based mechanisms to reduce GHG emis-
sions (Guo and Zusman, 2010; Yuan and Zuo, 2011).
Oil-producing countries usually present a completely different (and opposite) approach
to energy pricing, with a generalization of subsidies on most sources of energy (see e.g. Fat-
touh and El-Katiri, 2012). Table 4 shows the importance of these subsidies, which represent-
ed more than 50% of the costs of supply of energy products in 2011 and in several cases ac-
counted for over 10% of GDP. Energy subsidies can be explicit (government spending) or
implicit (revenue losses by failure to sell energy products at world prices) and cause a num-
ber of negative effects, such as a rise in energy intensity of GDP and low energy efficiency
rates, a higher emission of pollutants, or negative distributional outcomes (see IMF, 2013).
Although the lack of visibility of implicit subsidies and the popularity of generalized hand-
outs make subsidy-removal harder, the economic and environmental costs associated to
these schemes have prompted recent reforms in several countries such as Iran or Indonesia.
164 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
In any case, energy subsidies are not only an issue for oil-producing countries. They are
employed in many countries, developed and developing alike, often in the shape of tax ex-
emptions (Clements et al., 2014). These exemptions are often related to distributional con-
cerns or/and the protection of the competitiveness status of certain sectors. However, they
often collide with the environmental objectives and may even be counterproductive from a
distributional point of view (see e.g. the distributional considerations of Section 3.2).
#*+4.
!("$"""# !$$#!"
>.:*0. "=+;2-@ "=+;2-@8.:;76 "=+;2-@+@/=.4+244276-744*:;
;=+;2-2A*<276 $" Oil N. Gas Electricity
Saudi Arabia 79.50% 10.60% 2,291.20 46.12 0.00 14.82
Iran 70.00% 17.00% 1,102.20 41.39 23.40 17.40
Kuwait 87.80% 6.30% 3,729.30 4.34 2.08 4.68
U. A. Emirates 69.10% 6.10% 4,172.10 3.93 11.52 6.37
Mexico 16.60% 1.40% 144.40 15.90 0.00 0.00
Russia 18.40% 2.20% 283.40 0.00 21.87 18.28
Algeria 50.70% 7.00% 372.20 11.26 0.00 2.13
Egypt 54.20% 10.40% 296.50 15.27 3.78 5.42
Source: International Energy Agency
BEnergy tax-driven reforms
In the last twenty years the applications of energy-related tax reforms have been mostly
restricted to Europe. Several overviews of such experiences have been published, some of
them quite recently (e.g. Speck and Gee, 2011; Speck et al., 2011; Gago and Labandeira,
2011; Bakker, 2009), which basically report two generations of green tax reforms (GTR) that
would differ in both the guiding energy tax schemes and revenue-recycling procedures. We
next describe the most representative applications within those generations.
GTR were born in Scandinavia in the early 1990s, with the core use of energy-related
carbon taxes whose revenues were mainly devoted to income tax reductions. The first expe-
riences had numerous exceptions for energy-intensive sectors to avoid their eventual delo-
calization to tax-free havens, which led to a tax focus on final consumers. These solutions
were applied by Sweden (1991), which was soon followed by Norway (1992) and the
Netherlands (1992). The latter introduced the general energy tax described in the previous
section to increase fiscal, administrative and environmental effectiveness. More recently Es-
tonia (2006) introduced a similar tax reform scheme, with substantial increases in energy
taxes and similar reductions in income taxation. An epilogue to these experiences was, how-
ever, unsuccessful: in 2009 the French government tried to introduce a carbon tax whose rev-
enues would be recycled through household direct payments (a ‘green check’), but was op-
posed by a Constitutional Court that found the tax scheme unfair when compared to the EU
ETS (due to its free allocation of permits).
165
A Panorama on Energy Taxes and Green Tax Reforms
A second generation of GTR was first defined by Finland in the late 1990s, with an em-
phasis in the increase of conventional energy taxes and a targeted reduction of labor taxes
(i.e. social security contributions). Germany followed suite in 1999, with an ambitious tax
reform that was centered on the extension and increase of energy taxes on final consumers
and a subsequent reduction of social security contributions. However, the German GTR has
not progressed as expected, probably due to public dissatisfaction on its perceived regres-
siveness and negative effects on competitiveness (despite empirical evidence on the oppo-
site, see e.g. Ludewig et al., 2010). Moreover, a recent GTR carried out by the Czech gov-
ernment in 2008 has employed a similar scheme.
Finally, despite sharing some characteristics with the previous ‘second-generation’ ap-
plications, particularly the recycling of receipts in labor taxes, in the revenue-raising side the
British GTR model has shown two important particularities with respect to the continental
experiences: a wide use of non-energy related environmental taxes (e.g. landfill and aggre-
gates taxes) and of energy taxes on commercial and industrial activities (e.g. climate change
levy). Indeed, a recent tax increase of the climate change levy was not meant for revenue
swaps but to provide additional funding for the public sector, thus advancing some of the
trends that will be described in the following section.
B8:7;8.,<2>./7:.6.:0@<*?.;
We have already mentioned that one of the objectives of this article was to provide some
clues on the future developments of energy taxes and related tax reform packages. We feel
that the new tendencies are to be explained, first, by a rapidly changing context. Indeed, the
last few years have seen extremely deep changes in the economic outlook of most economies
and societies that are contemporaneous to mounting environmental and energy-dependence
concerns. We next provide an overview on such a changing environment before proceeding
to describe innovative proposals and practices in energy taxation and energy-related tax re-
forms.
B"12/<260/2;,*4.6>2:765.6<*4*6-.6.:0@,76<.?<;
This paper started by enumerating and analyzing the theoretical foundations of energy
taxes, with revenue-raising needs, environmental correction and capture of resource rents
seen as the main reasons for using these instruments. In the last few years, however, the fis-
cal, environmental and energy contexts have seen important changes. In this sub-section we
intend to provide an overall picture of such developments, with obvious effects on the rela-
tive importance of the reasons guiding energy tax applications.
The great recession of 2008 and the subsequent economic downturn seen in most devel-
oped countries have had important effects on public revenues and expenditure. Figure 7a de-
picts sizeable public deficits in the major Western economies, brought about by the decreas-
166 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
ing tax revenues associated to any economic crisis and the increasing (social protection) pub-
lic expenditures. Given that energy taxes are usually less pro-cyclical than other fiscal mech-
anisms (e.g. corporate or income taxation), one should expect an increasing revenue pressure
on these instruments. As this move would probably lead to a less progressive tax system, fur-
ther demands of equity-conscious revenue recycling may also arise.
The world has also seen recent important changes in the environmental domain. Green-
house gas emissions remain unchecked, as pointed out by the evolution of CO2emissions
(dark gray line) in figure 7b. The black line in that figure represents the likely evolution of
emissions, given the current set of corrective policies and instruments, and the light gray line
the emission path that would be necessary to keep future temperature increases below 2ºC
(as agreed in the Copenhagen and subsequent climate summits). Note that current actual
emissions are basically following the red path, which would lead to very high temperature
rises and to likely sizable environmental impacts and damages.
The preceding evolution of emissions responds to the absence of an effective interna-
tional strategy to cope with this global problem. But if the lack of international credible cli-
mate change agreements generally reduces the environmental weight of energy taxes, there
might be other collateral effects. It is thus possible that individual countries or a group of
countries embark on climate change policies, either because the likely costs of inaction are
very high 13 or because there are other significant (e.g. local) environmental problems asso-
ciated to GHG emissions. It could even be the case that such move is done by a sub-nation-
al level of government. In such a setting, energy-related environmental taxes may be accom-
panied of border adjustments to protect competitiveness, and may also target those sectors
that are the main contributors to the growing stock of emissions.
A third reason for energy taxes was related to energy dependence, which is behind the
appropriation of resource rents by producers. Figure 7c illustrates the evolution of energy de-
pendence in major European economies. If we match the evolution of energy dependence
with the recent and prospective evolution of oil prices (figure 7d), the main source of ener-
gy-related rent exports, energy taxes are likely to play an increasing role in this area. Note
that, as with CO2emissions, oil is following the high evolution path.
Finally, other diverse phenomena and factors are influencing energy tax developments.
For instance, large public promotion schemes for renewable or energy efficiency technolo-
gies, which intend to tackle the double externality14 associated to those technologies, are de-
manding increasing public funds precisely in a situation of acute shortages for public sec-
tors. In such a situation, revenue-raising motives may play an ever-increasing role and fiscal
reform schemes guided by energy taxes could face obvious difficulties.
Other less known factors may be also important. For instance, the development of new
fiscal technologies may facilitate the introduction of figures that were deemed as unpracti-
cal only few years ago, such as car usage taxes. The growing complexity of energy and en-
vironmental (particularly climate) policies can also play a prominent role in the future devel-
167
A Panorama on Energy Taxes and Green Tax Reforms
opment of energy taxes, so that negative interactions with other policy instruments are avoid-
ed or minimized. Finally renewed information on the distributional effects of energy taxes
may also play an important role in future tax design and implementation, with growing evi-
dence on their potential positive (or at least not so negative as previously reported) effects
for developed and developing countries (see e.g. Sterner, 2012b).
168 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
20=:.2;,*4.6>2:765.6<*4*6-.6.:0@,76<.?<;
Source: a/ Eurostat and US Presidency; b/ Oliver et al. (2012) and IEA; c/ Eurostat; d/ US EIA.
B667>*<27626.6.:0@<*?.;*6-.6.:0@-:2>.6<*?:./7:5;
The new context and trends described in the preceding section influence the specific ap-
plications of new energy taxes and, above all, the configuration of a new generation of GTR.
In the next sub-sections we deal with both issues.
BNew energy taxes
A shifting economic, fiscal, energy and environmental context has generated a wide
array of new proposals in the field of energy taxation during the last few years. We now pro-
vide some information and reflections on four instruments that reflect such a changing at-
mosphere and may play an increasing role in the future: border tax adjustments, carbon
added taxation, taxes on energy inefficiency and new car taxes. Bear in mind that this sub-
section does not intend to review, in an exhaustive manner, all new possibilities in this fis-
cal domain but rather to yield some light on some representative options.
Border tax adjustments: We already mentioned the challenges faced by countries that want
to mitigate GHG emissions in absence of a full and global international agreement, and how bor-
der tax adjustments (BTA) could be used in this setting (see Section 4.1). As GHG emissions
are largely caused by energy production and consumption, a BTA discussion is relevant in this
section. Indeed, BTA can protect industrial activities that are subject to a national or suprana-
tional (but incomplete) climate policy regime, but can also guarantee that climate policy objec-
tives are achieved15. BTA actually modify the price of imported and exported products through
tariffs and tax refunds to equal their climate tax burden. Therefore, BTA should not be viewed
as a barrier to trade; rather, the absence of a carbon price constitutes an implicit subsidy to pol-
luting production in unregulated markets (Helm et al., 2012). In that sense, we can interpret
BTA as a tax on emissions consumption (Mattoo and Subramanian, 2013).
However, practical difficulties for the application of these instruments abound. The lit-
erature has shown considerable advances, by progressing from a general and universal BTA
(Courchene and Allan, 2008) to more selective proposals that would be applicable to wide
groups of products with equivalent carbon contents and to the use of automatic standard tax
rules (McLure, 2010). Others suggested a less casuistic approach by using general averages
(Holmes et al, 2011) or by calculating BTA from data of the most carbon efficient European
facilities (Monjon and Quirion, 2010). In this sense, Metcalf and Weisbach (2009) and
Weber (2011) have provided two proposals that complete the previous framework: the for-
mer with a ‘presumptive’ BTA that would also use average emissions from exporting coun-
tries, and the later with a ‘virtual’ BTA that would calculate adjustments through standard
input-output techniques.
Carbon added taxation: A carbon added tax (CAT) would be levied on the addition of
carbon in each phase of the productive process, therefore resembling VAT in its functioning
and structure (Laurent and Le Cacheux, 2010). It is quite possible that this tax proposal re-
169
A Panorama on Energy Taxes and Green Tax Reforms
sponds again to the challenges of unilateral climate policies, as described in the BTA discus-
sion, because it would relate with hypothetical BTA in a nice and consistent manner. A
downstream CAT could also solve some of the problems associated to upstream carbon
taxes, already mentioned in Section 3.1, avoiding excessive cost-pass through of the tax and
improving the reaction of agents to the instrument. Of course there are difficulties for the
practical implementation of CAT, mostly related to the required assessment of the added car-
bon in each productive phase (Cockfield, 2011).
Taxes on energy inefficiency in buildings: In Section 4.1 we mentioned that some sec-
tors were crucial to control present and future energy demand and, therefore, energy-related
emissions and dependence. This is the particular case of buildings, mostly due to the irre-
versibility of emissions once the building is operative. In a recent paper Gago et al. (2013)
suggest that, due to a number of general and specific barriers to the implementation of ener-
gy efficiency in buildings, energy prices and conventional energy and environmental policy
instruments may not achieve the desired outcomes. They thus propose a package of comple-
mentary measures that would simultaneously tackle the problems of imperfect information,
split incentives among agents, uncertainty about cost and limited access to capital. The pack-
age would be defined around energy certification of buildings, would use flexible building
codes, smart metering and would particularly employ a new tax on energy inefficiency to
foster continuous incentives towards energy efficiency improvements and to obtain revenues
for an energy efficiency fund that provides capital to firms and poor households. In particu-
lar, the energy inefficiency tax would use existing tax information on the property size (i.e.
would be administratively feasible) that would be complemented with an increasing tax rate
on the energy certificate of the building.
New car taxes: A transition to cleaner cars (e.g. electric or hybrid automobiles) would
have, first of all, important revenue costs for public sectors. This was clearly observed in fig-
ure 6 and table 3, as car fuels are an important source of receipts in European countries (and
elsewhere). This, added to the persistence of sizable externalities associated to private trans-
port, would recommend the definition of a new tax regime for cars. There have been numer-
ous proposals to design new taxes on car mileage or, better than that, car usage (CUT), with-
out the need of employing proxy approaches such as those described in Section 3.1. Local
environmental emissions, congestion and infrastructure use, among other things, could be si-
multaneously tackled with a CUT, which would also be a potential source of sizable public
revenues. As hinted before, we have now the technological capabilities to introduce this fis-
cal innovation with a generalized use of GPS devices (Phua, 2011). Several questions re-
main, however, on how to organize an efficient transition from actual systems and how to
ensure protection of confidential and rather sensible personal information on car uses.
BNew energy-driven tax reforms
Growing revenue needs for many public sectors due to a persistent economic recession
or stagnation, increased crisis-related competitiveness and uncertain distributional concerns,
170 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
and the growing costs of renewable and energy-efficiency promotion in many countries are,
among other things, all having an important influence on the practical configuration of new
GTR. Indeed, the new applications show, for the first time, a departure from the standard
‘double-dividend’ reasoning (see Section 2.4) that strongly informed and influenced GTR
before the outbreak of the economic recession.
In this new setting a third generation of GTR is being conformed, with a number of ex-
periences that in essence share more flexible and heterogeneous revenue uses. Italy advanced
this trend in the early 2000s by devoting a third of the revenues of its GTR for distribution-
al compensatory measures and the promotion of energy efficiency. A recent proposal by the
Italian government insists in this course by introducing a carbon tax whose revenues would
be primarily earmarked to the promotion of low-carbon technologies and procedures (Sha-
heen, 2012). Even Sweden, the origin of GTR, can be now incorporated to this generation as
its 2002 ‘Green Tax Shift Program’ involved the use of increased tax revenues for fiscal con-
solidation.
The third generation also includes an Irish application that, in the middle of an intense
economic crisis, used carbon taxation with fiscal consolidation purposes (i.e. without rev-
enue recycling) (see Convery, 2010). Switzerland also introduced a carbon tax in 2008 with
mixed revenue recycling: transfers and specific tax exemptions to firms and citizens and
funding of energy efficiency improvements in buildings (FOEN, 2010). But perhaps Aus-
tralia has yielded one of the most interesting and relevant recent experiences with GTR. Its
recently approved Climate Policy Program establishes a carbon tax whose revenues are used
to reduce income taxes, fund renewable and energy efficiency investments, and to protect in-
dustrial competitiveness and R&D efforts.
Finally, although no actual applications have been rehearsed so far, there is an increasing
interest in the implementation of GTR by some emerging and developing countries (see Heine
et al., 2012). These tax reform packages could contribute to a better environmental perform-
ance, especially needed given the growing climate change concerns and acute local environ-
mental problems in the developing world, and could also attain a fairer (as already mentioned
in Section 3.2, given the progressivity of fuel taxes) and more efficient tax system.
B76,4=;276;
This survey has dealt with the foundations, practical experiences and prospective of en-
ergy taxes, providing, at the same time, some reflections on the probable future evolution of
these taxes and related tax reforms. The article suggests that the theoretical reasons behind
energy taxation have had different relative importance across the time, probably due to a
shifting economic, fiscal and environmental context. Nowadays revenue-raising motives are
playing an increasing role due to the decreasing conventional tax revenues and growing ex-
penditure needs that are related to the current economic downturn faced by many advanced
countries. Yet stagnant energy-dependency and energy-intensity ratios, coupled with a ris-
171
A Panorama on Energy Taxes and Green Tax Reforms
ing oil price, also increase the rent-capture role of energy taxes. Environmental reasons, par-
ticularly those related to GHG emissions, are at the moment less important due to the mount-
ing difficulties to reach global agreements in this matter, but they are likely to be relevant in
the tax policy making of many countries. Such a disparate and heterogeneous group of the-
oretical reasons behind energy taxes is sometimes difficult to transfer to practice. But even
when that is possible, the existence of trade-offs and negative interactions may abound.
Moreover, the paper has paid a strong attention to the practice of energy taxes and envi-
ronmental tax reforms, with an overview of the existing empirical literature and a selection
of some specific and systemic applications across different countries of the world. We feel
that the paper thus contributes to the academic literature by presenting a comprehensive the-
oretical and practical framework on energy taxes, and may be also useful for policymakers
and scholars interested in the use of these fiscal instruments in the energy domain.
Yet, one of the main novelties of the article is probably related to the reflection on the
present and future foundations and experiences of energy taxation in a particularly shifting
world. Indeed, a changing economic, environmental and energy atmosphere indicates that
both specific and systemic applications of energy taxation are likely to evolve in the future.
The article suggested that border tax adjustments, carbon added taxation, taxes on energy in-
efficiency and new taxes on cars might play a significant role in the future. Besides, a new
model or generation of GTR is taking shape, with a departure of the standard ‘double divi-
dend’ foundations through the use of tax revenues for, among other things, funding energy
efficiency/renewable programs or distributional offsets. The analyses of the preceding is-
sues, together with a much-needed attention to the behavioral insights associated with ener-
gy taxes and tax reforms (see e.g. Pollit and Shaorshadze, 2013), are likely to provide inter-
esting and useful avenues for research in the near future.
172 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
173
A Panorama on Energy Taxes and Green Tax Reforms
?.66
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7-.4-=552.; Partial equilibrium (PE) model 40 9 30 30 0 30 47
Static general equilibrium (SGE) model 75 23 93 75 77 35 115
Dynamic general equilibrium model 54 13 203 66 52 29 207
- Energy dependence
Energy exporting country 25 9 96 52 35 28 102
=552.; Energy importing country 157 53 307 190 94 109 376
/7:,7=6<:@
- Developmental level
,1*:*,<.:2;<2,;
Developed country 162 47 300 219 113 115 357
Developing country 20 15 103 23 16 22 121
=552.;/7: Central government 39 49 145 99 68 39 190
07>.:65.6< Other levels of government (regional or
4.>.4 supranational) 143 13 258 143 61 98 288
- Type of energy product taxed
Electricity 14 7 6 3 0 2 5
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=552.; Oil products 33 17 14 12 6 2 33
/7:<*? Coal 16 6 5 4 2 2 8
,1*:*,<.:2;<2,; All energy products 107 30 382 227 123 133 441
- Type of tax base
Consumption tax 173 56 372 228 116 135 437
Production tax 9 6 31 14 13 2 41
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Mean 0.1141 0.2524 0.1942 0.2139 0.1410 0.1920 0.2020
Standard deviation 0.1903 0.3291 0.2424 0.2191 0.2111 0.1415 0.3103
#*?:*<. Minimum –0.8522 0.0103 –0.2385 0.0004 0.0004 0.0068 –0.2385
Maximum 1.0544 1.4349 2.2400 1.4550 1.0544 0.9672 2.6675
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175
A Panorama on Energy Taxes and Green Tax Reforms
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176 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO
#*+4.Continued
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F(17,144)=75.58
p-value-=0.0000
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p-value-=0.0000
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p-value-=0.0000
F(16, 193)=15.54
p-value-=0.0000
F(13, 47)=25.27
p-value-=0.0000
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p-value-=0.0000
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p-value-=0.0000
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Source: Own calculations.
Note: We indicate significance by *** at the 1% level ** at the 5% level and * at the 10% level.
7<.;
1. Even though energy tax revenues have shown signs of stagnation in some developed countries during the last
few years (see e.g. European Commission, 2013), probably related to the effects of energy and environmental
policies on energy demand, energy tax rates are likely to maintain an increasing trend both in the developed
and developing world. Figure 6 shows the relevance of energy tax revenues in the EU.
2. Zajac (1974) extends this result when cross-product price elasticities are not null. In that case public revenues
should come from the taxation of all existing goods following the difference between prices and unit variable
costs when firms maximize profits.
3. Even though the preceding section indicated that taxing final consumers would avoid productive inefficien-
cies, in this case the existence of a negative externality (i.e. preventing an efficient outcome) justifies the in-
troduction of a tax on producers with corrective purposes.
4. Note that marginal external costs are likely to vary with the level of emissions and therefore using standard
damage estimates is usually suboptimal.
5. This may be less problematic in cases when the marginal external cost curve is highly elastic in the short term,
such as with greenhouse gas emissions or mortality-related local pollutants, and when some externality meas-
urements exist (Heine et al., 2012).
6. This is explained by the fact that polluters, despite having information on their abatement cost structures, are
not interested in revealing them to the regulator as this might bring about stricter requirements. The regulator,
on the other hand, has limited information on the technical possibilities of abatement by the numerous pol-
luters and also limited resources for an eventual assessment and inspection.
7. See Markandya et al. (2014) for a discussion of the role of energy taxes to foster energy efficiency.
8. In this sense, all simulations were considered to analyze the effect on energy prices and welfare (62 and 129,
respectively). Moreover, 182 simulations (of 235 employed for figure 4) were considered to compute the ef-
fect on energy demand. For the remaining variables, the considered simulations are in a wide range: 403
(GDP), 242 (employment), 137 (CPI) and 478 (CO2emissions), over a total of 547 (GDP), 287 (employment),
145 (CPI) and 656 (CO2emissions) of those used to draw figures 4 and 5.
9. These can be bottom-up, input-output, macroeconomic, partial equilibrium, static general equilibrium or dy-
namic general equilibrium models (see, e.g., Gago et al., 2004)
10. The detailed results of the estimation are provided in the Annex.
11. There seem to be no relationship between per-capita GDP levels and higher energy taxes (as a proportion of
GDP): some affluent European countries such as Denmark or Sweden have sizable energy taxes but so do
other less wealthy members like Slovenia or Bulgaria. This might be related to explicit environmental con-
cerns in the former and to general fiscal constraints in the latter.
12. An analysis of emission trading schemes is clearly beyond the scope of this paper but it is worth noting that
they, as market-based instruments, share many of the properties of environmental taxes. In the case of the
EUETS this is reinforced by the recent moves towards full auction of permits (see Ellerman et al., 2014).
13. Most experts believe that the window of opportunity, to keep global average temperature increase below 2ºC,
is now closing. Figure 7b illustrates the build up of a growing emissions gap (the difference between black and
light gray lines). As most GHG emitters have a strong stock component (i.e. they would contribute to emis-
sions for a long period), strong and immediate actions are necessary.
14. That is, external effects with a simultaneous environmental and technological nature (see Newell, 2010).
15. This can be done by reducing emission leakage and by sending the right price signals for final consumption.
Regarding the latter, unilateral climate policies without BTA may appear effective when computing produc-
tion-based carbon emissions but are usually a failure when assessing consumption-based emissions [a UK as-
sessment of this issue can be found in Druckman and Jackson (2009), while Wiedmann (2009) provides a sur-
vey of studies that estimate consumption-based emissions].
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!.;=5.6
Este artículo proporciona una visión general de las aplicaciones específicas y sistemáticas de los im-
puestos sobre la energía y las reformas fiscales verdes. Para ello combina una evaluación teórica y
empírica de la literatura con una descripción no exhaustiva de la práctica de estos instrumentos y pa-
quetes en el mundo real. Además de proporcionar una aproximación integral al uso específico y sis-
temático de los impuestos sobre la energía, el trabajo contribuye a la investigación en esta área re-
flexionando sobre el presente y el futuro de estos instrumentos en un mundo particularmente
cambiante.
Palabras clave: Impuestos, energía, medio ambiente, externalidades, recursos naturales.
Clasificación JEL: H21, H23, Q48, Q58.
190 ALBERTO GAGO, XAVIER LABANDEIRA Y XIRAL LÓPEZ-OTERO