Keywords: abatement costs, carbon dioxide, greenhouse gases, GHG emissions, carbon tax, energy taxes, OECD, Rio, subsidies, targets, welfare costs, fuel prices, energy taxes
Energy taxes and subsidies: their implications for CO2 emissions and abatement costs
Energy markets are often distorted, with the result that price does not equal the marginal social cost of production. Subsidies encourage consumption of energy and impose welfare losses independent of those arising from global warming. Fossil fuels, especially oil, are already taxed in many countries. The superimposition of a carbon tax on existing taxes could greatly increase the welfare loss from taxation if such taxes do not reflect externalities or user costs. Moreover, existing taxes affect relative fuel prices and may raise emission levels. The removal of subsidies and the restructuring of taxes so that fuel prices are brought into line with marginal social costs could result in emission abatement and lower abatement costs.