Carbon taxation and fiscal consolidation: the potential of carbon pricing to reduce Europe’s fiscal deficits

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May 2012
Vivid Economics, European Climate Foundation (ECF), Green Budget Europe (GBE)

The overriding challenge for many European governments today is to reduce major fiscal deficits with the least collateral damage to the economy. This report shows that carbon fiscal measures may raise significant revenues while having a less detrimental macro-economic impact than other tax options. This gives them an important potential role in fiscal policy; a role that is currently widely overlooked. This benefit arising from carbon fiscal measures goes beyond the usual arguments in their favour – namely that they are crucial, cost effective instruments to reduce Europe’s greenhouse gas emissions. The main focus of this report has been on the immediate opportunities for carbon pricing to assist with deficit reduction. In addition to this, the report explores whether there may also be longer term opportunities to raise greater revenue from carbon pricing while improving the efficiency and effectiveness of the EU ETS.