The Effects of Energy Tax : Evidence from Transport Sector in 26 European Countries

Abstract: Taxes are universally considered to be efficient economic instruments to address the problem of global warming. Energy tax is expected to mitigate the greenhouse gases (GHGs) through reducing energy consumption from energy related sectors. It measures the taxes on the use of energy, which contributes to foster the energy efficiency. In Europe, transport sector is one of the major sources of greenhouse gases emissions, accounting for 20% of the total. Since large amount of energy, including the non-renewable resources, are consumed in this sector. In this paper I would like to discuss the effect of energy tax on mitigating the greenhouse gases from transport sector in 26 European countries. I use the panel data of these countries over 14 years, from 1995 to 2008. Along the way two different mechanisms regarding how the energy tax takes effect on GHGs will be examined quantitatively. The empirical study result reveals that energy tax does make sense to hit the target. Specifically the total effect is expressed by the tax elasticity of GHGs, -0.119. And nearly 66 percent of the GHGs reduction is reached through a decrease of energy consumption from transport sector. Another around 34 percent comes from other mechanisms such as the application of new technologies. This paper also compares the result to previous studies, a difference in tax/price elasticity and income elasticity is found. Several possible explanations are displayed afterwards.