The Potential Role for Carbon Pricing in Reducing European Deficits

By Hector Pollitt et al. - 18 September 2012

This paper considers the possibility of using carbon fiscal measures to help to reduce budget deficits in Europe while at the same time curbing greenhouse gas emissions. National reforms are assessed for three European countries and ETS reform is assessed at European level. A scenario-based analysis using the macroeconometric E3ME model suggests that the costs to society of raising revenues from energy or carbon taxation, in terms of lost production and jobs, are no worse, and in some cases better, than alternative tax-raising policies.

Policy Implications:

  • National governments should consider developing energy and carbon taxation as a means of broadening the tax base and reducing fiscal deficits, while simultaneously acting on carbon emissions.

  • The European ETS will provide governments with revenues from 2013 onwards; these revenues could be increased by setting a higher target for emissions reductions or auctioning a larger share of allowances.