directive only mentions that taxation of energy products is one of the instruments for achieving the Kyoto Protocol
objectives (European Comission 2003, par. 7).
Can the fuel tax be realistically the primary policy addressing the costs related to CO2 emissions from driving?
One may worry that imposing additional fuel taxes would damage EU economies. This is a problematic argument
for three reasons: (i) should the same goals be achieved by different means, the effects on the economy would be
probably worse, since fuel tax is very close to first best policy (of taxing emissions directly); (ii) the policy we propose
would indeed require an international coordination (i.e. we do not want tax competition for CO2-related fuel
taxes), but so would alternatives—and we believe that, in the case of fuel tax, it is a comparatively less ambitious
requirement; (iii) it is not implied that a new tax should be imposed on top of the existing ones, since the existing
fuel taxes already are taxing CO2 emissions as well as other externalities; thus the implied fuel taxes may be higher
or lower than the existing ones.
What would the CO2-related fuel tax rates be? Table 3 summarizes the most often cited estimates of social costs
per ton of CO2, and translates them into today’s prices. The range of estimates is rather wide, starting at $20 per ton
(Nordhaus 2007), through $50, which is an upper bound in Tol’s (2005) meta-analysis of 103 estimates from 28
studies, up to $311 in Stern’s (2007) influential book (all estimates in 2005 USD). However, the main source of
variation in these estimates does not come from differences in methodologies; rather studies differ in their assumptions
(Pindyck 2013a; Stern 2013). Notably the choice of the discount rate on future consumption has (an exponential)
impact on the estimates (Nordhaus 2007; Pindyck 2013a; Stern 2008; Tol 2005). A more recent estimate in a
general equilibrium framework by Nordhaus (2011) puts the social costs of ton of CO2 at $12 (in 2005 USD).