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Abstract
Imposing emission ceilings with freely tradable permits is an efficient way of meeting climate change objectives in an undistorted world. However, the efficiency of such a system is reduced because of the many distortions that are pre-existing. Of these we focus on existing energy taxes within EU-member states. These taxes differ widely, by energy carrier, by user and by member state. Making use of the global general equilibrium model WorldScan, we assess the efficiency gains associated with tax reforms that bring energy taxes more in line with the objective of abating global warming. Moreover, the overall efficiency of the EU system aiming at emissions reduction is also assessed vis-à-vis a cap-and-trade system that covers the complete economy. Finally, we show the additional benefits of specific forms of revenue recycling when permits are auctioned over and above recycling in a lump-sum fashion.