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Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

Energy taxes can produce substantial environmental and revenue benefits and are an important component of countries’ fiscal systems. Although the principle that these taxes should reflect global warming, air pollution, road congestion, and other adverse environmental impacts of energy use is well established, there has been little previous work providing guidance on how countries can put this principle into practice. This book develops a practical methodology, and associated tools, to show how the major environmental damages from energy can be quantified for different countries and used to design the efficient set of energy taxes.

Ian W.H. Parry, Mr. John Norregaard, and Mr. Dirk Heine
This paper recommends a system of upstream taxes on fossil fuels, combined with refunds for downstream emissions capture, to reduce carbon and local pollution emissions. Motor fuel taxes should also account for congestion and other externalities associated with vehicle use, at least until mileage-based taxes are widely introduced. An examination of existing energy/environmental tax systems in Germany, Sweden, Turkey, and Vietnam suggests that there is substantial scope for policy reform. This includes harmonizing taxes for pollution content across different fuels and end-users, better aligning tax rates with values for externalities, and scaling back taxes on vehicle ownership and electricity use that are redundant (on environmental grounds) in the presence of more targeted taxes.
Mr. Jon Strand and Mr. Michael Keen
This paper examines the case for internationally coordinated indirect taxes on aviation (as a source of general revenue-not (necessarily) as a source of development finance). The case for such taxes is strong: the tax burden on international aviation is currently limited, yet it contributes significantly to border-crossing environmental damage. A tax on aviation fuel would address the key border-crossing externalities most directly; a ticket tax could raise more revenue; departure taxes face the least legal obstacles. Optimal policy requires deploying both fuel and ticket taxes. A fuel tax of 20 U.S. cents per gallon (10 percent, at today's fuel prices, corresponding to assessed environmental damage), or alternatively ticket taxes of 2.5 percent, would raise about US$10 billion if imposed worldwide, and US$3 billion if applied only in Europe.
Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

Many energy prices in many countries are wrong. They are set at levels that do not reflect environmental damage, notably global warming, air pollution, and various side effects of motor vehicle use. In so doing, many countries raise too much revenue from direct taxes on work effort and capital accumulation and too little from taxes on energy use.

Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

Fossil fuels are used pervasively to generate electricity, power transportation vehicles, and provide heat for buildings and manufacturing processes. Fuel combustion produces carbon dioxide (CO2) emissions and various local air pollutants, and use of transportation vehicles also causes road congestion, accidents, and (less important) pavement damage.

Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

The first part of this chapter discusses why environmental taxes or the equivalent emissions trading systems (ETSs) should be front and center in getting energy prices right, though design details, such as targeting the right base, exploiting the fiscal dividend, and establishing stable prices aligned to environmental damage, are critical. The second part discusses a variety of further design issues, including specifics for power generation and transportation fuels, the role of other instruments, overcoming challenges to price reform, and issues for low-income countries.

Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

This chapter begins with a brief review of the literature on valuing climate change damage from carbon dioxide (CO2) emissions. The heart of the chapter is about measuring damage from the most important harm from local air pollution: human mortality risk.

Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

This chapter consists of three sections focused on the three major, non-pollution-related externalities from motor vehicles: traffic congestion, traffic accidents, and (to a much lesser extent) wear and tear on the road network (relevant for trucks). Other data and assumptions needed to implement the corrective motor fuel tax formulas from Chapter 3 are discussed in the annexes to this chapter.

Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

This chapter summarizes the corrective tax estimates for coal, natural gas, and motor fuels based on the assumptions discussed in previous chapters, both for selected countries and, using ranges of values in heat maps, for all countries, and then discusses the fiscal, health, and environmental impacts of tax reform. Various tables in Annex 6.2 provide full details of this information, country by country, including estimates of current fuel taxes or subsidies.

Ian W.H. Parry, Mr. Dirk Heine, Eliza Lis, and Shanjun Li

Abstract

Encouraging environmentally sustainable growth is a problem faced by all countries. The beauty of fiscal instruments such as environmental taxes or tax-like instruments is that (albeit with some important caveats about base targeting, exploiting fiscal opportunities, and use of complementary instruments) they can achieve an efficient balance between environmental and economic concerns—if they are set to reflect environmental damage.