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Is there a Role for Domestic Energy Taxes under Emission Trading?

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  • Honkatukia, Juha
  • Forsström, Juha
  • Tamminen, Eero

Abstract

Energy taxes do not necessarily improve the cost efficiency of emission trading, if they introduce price signals that differ from those caused by trading. This article studies the use of domestic energy taxes in the trading sectors in connection with EU-wide emissions trading in Finland. The study evaluates three distinct tax scenarios that progressively switch further away from current fuel taxes and compensate the initial loss of revenue by raising either income taxes or electricity taxes. Emission trading is studied for the period 2008-12. Currently, the initial allocation of permits for this period is yet to be determined; in the study, grandfathering is assumed to base on estimated domestic reductions that would result either from raising current energy taxes or from introducing a complete carbon dioxide tax. The results indicate that macroeconomic effects are highest if revenue neutrality is maintained with income tax increases. It makes less of a difference on the macroeconomic level if current energy taxes are retained in the trading sectors or if they are abolished and electricity taxes raised to compensate for lost revenue. At the sectoral level, however, the electricity tax alternative is less costly for the trading sectors. Grandfathering has a large impact on the effects of abatement, since it determines the required reductions for the non-trading sectors. If the goal for the non-trading sectors is too strict, macroeconomic costs are raised regardless of emission trading. Trading also has an effect on the use of renewable energy. High permit prices are required to encourage wind power, whereas the use of wood increases in all cases.

Suggested Citation

  • Honkatukia, Juha & Forsström, Juha & Tamminen, Eero, 2004. "Is there a Role for Domestic Energy Taxes under Emission Trading?," Conference papers 331206, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:331206
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