Taxing Energy: Why, How, and How Much?

Abstract

In the last decades, mankind has increased its ability to use energy resources, introducing the term “energy-intensive economies”, thus offering a lot of luxuries that improve quality of life. Although the production and accumulation of wealth has always been a principal question of economics, energy, which is a key factor in the production of it, has not been given proper importance. Today, energy could not be more substantial in our lives; therefore, physically understanding it by selecting the most appropriate forms of energy and efficient ways of using it, as well as an economic interpretation of it by setting a fair and just price and applying an optimum tax are crucial. In energy taxation, there are different rationales and instruments to do so. Standard reasons for this are revenue collection, correction of market failures and monopolies, and the abatement of negative externalities. While there are separate available instruments for direct implementation, their interactions may be a complex task and potential negative spillovers could be produced. If considered, all of the different initial conditions and instruments, as well as tax exceptions and reductions, offer a wealth of tools and diverse paths for policymakers that still render their mission for optimum energy taxation a difficult task.