1 CHAPTER 1

Many energy prices in many countries are wrong. They are set at levels that do not reflect environmental damage, notably global warming, air pollution, and various side effects of motor vehicle use. In so doing, many countries raise too much revenue from direct taxes on work effort and capital accumulation and too little from taxes on energy use. This book is about getting energy prices right. The principle that fiscal instru-ments must be center stage in “correcting ” the major environmental side effects of energy use is well established. This volume aims to help put this principle into practice by setting out a practicable methodology and associated tools for deter-mining the right price. The book provides estimates, data permitting, for 156 cou n-tries of the taxes on coal, natural gas, gasoline, and diesel needed to reflect envi-ronmental costs. Underpinning the policy recommendations is the notion that taxation (or tax-like instruments) can influence behavior; in much the same way that taxes on cigarettes discourage their overuse, appropriate taxes can discourage overuse of environmentally harmful energy sources. BACKGROUND Energy use is a critical ingredient in industrial and commercial production, and in final consumption, but it can also result in excessive environmental and other side effects, with potentially sizable costs to the economy. For example, • If left unchecked, atmospheric concentrations of carbon dioxide (CO 2) and other greenhouse gases (GHGs) are expected to raise global temperatures by about 3–4°C by the end of the century (IPCC, 2013). Temperature changes of this magnitude are large by historical standards and pose considerable risks. • Outdoor air pollution, primarily from fossil fuel combustion, causes more than 3 million premature deaths a year worldwide, costing about 1 percen