Carbon/energy taxes and the energy market in Western Europe

Abstract

The paper analyzes carbon taxes as proposed by the EC in a multisector energy demand model of nine West-European countries. The simulations show that the taxes are insufficient to stabilize CO2 emissons. Furthermore the taxes have to rise along with the growth in fossil fuel demand. Inter fuel substitution is hampered by distortion of fuel prices by taxation at the outset (in the reference path) and by other priorities, particularly those imposed on the power generation sector. Thus, efficient carbon taxation superimposed on the existing price structure requires adjustments of interference in energy markets distorting prices and investments.