Aiming for Carbon Neutrality: Which Environmental Taxes Does Spain Need by 2030?

The Green Deal is a new European strategic plan aiming to achieve carbon neutrality in 2050 with a 55%-reduction in emissions by 2030 as an intermediate target. In the next three decades European policymakers will use a wide set of policy levers to achieve these targets, including taxes on fossil fuels and carbon prices. In this context, this study uses a competitive general equilibrium model for a small open economy to identify the optimal tax-mix for oil, natural gas, and coal in Spain for a given target of carbon emissions from energy use. The ambitious environmental target for 2030 requires a tax increase of around 50 percentage points in the case of oil, 200 percentage points in the case of natural gas, and 700 percentage points in the case of coal. Alternatively, Spain could replace those taxes on fossil fuels by a carbon tax of 150 ¬/tCO2, being this level a reference on the carbon price needed to achieve the new European target. This study shows that an optimal mix of taxes or a carbon tax lead to approximately the same welfare loss in the long run, although welfare losses during the transition are slightly higher in the case of the carbon tax when the emissions target is very ambitious. A useful policy insight from this paper is that the current tax rates on fossil fuels are inconsistent with the new European target and, therefore, significant increases are needed, or a considerable higher carbon price is required.