Designing Fiscal Policy to Address the External Costs of Energy

53 Pages Posted: 15 Jan 2015

See all articles by Ian Parry

Ian Parry

International Monetary Fund (IMF)

Date Written: December 30, 2014


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 discussed. A theme of the paper is the critical role of finance ministries in administering tax reforms and ensuring efficient use of revenues.

Keywords: externalities, energy taxes, getting prices right, air pollution, global warming

JEL Classification: H230, Q480, Q540, Q580

Suggested Citation

Parry, Ian, Designing Fiscal Policy to Address the External Costs of Energy (December 30, 2014). CESifo Working Paper Series No. 5128. Available at SSRN:

Ian Parry (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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