International Review of Environmental and Resource Economics > Vol 8 > Issue 1

Designing Fiscal Policy to Address the External Costs of Energy

Ian Parry, Fiscal Affairs Department, International Monetary Fund, USA,
Suggested Citation
Ian Parry (2015), "Designing Fiscal Policy to Address the External Costs of Energy", International Review of Environmental and Resource Economics: Vol. 8: No. 1, pp 1-56.

Published: 20 May 2015
© 2015 I. Parry
Environmental Economics,  Public Economics
Externalitiesenergy taxesgetting prices rightair pollutionglobal warming

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In this article:
1. Introduction
2. Energy Externalities and the Case for, and Design of, Fiscal Policies to Address Them
3. Quantifying Externalities
4. Corrective Energy Taxes in Different Countries and Their Impacts
5. Conclusion


This paper first reviews the conceptual case for, and appropriate design of, fiscal policies to address major externalities associated with energy use — global warming, local air pollution, and various side effects (e.g., congestion) from motor vehicles. Techniques for (roughly) estimating the magnitude of these externalities, and corrective energy taxes, on a country-by-country basis are then described. The implications for reforming energy taxes, and the potential environmental, health, and fiscal benefits from reform, are then illustrated for different countries. A key theme of the paper is the critical role of finance ministries in administering tax reforms and ensuring efficient use of revenues.