Designing an environmental tax on carbon emissions to meet EU targets: a proposal for the Spanish economy

Abstract

We examine the implementation of a carbon emissions tax in Spain as a strategy to help meet the European Union’s climate targets. The study highlights the controversial nature of environmental taxes, which, despite ongoing debate, can effectively reduce emissions and promote environmental sustainability. The objective is twofold: first, to analyse the economic implications of introducing a bespoke environmental tax in Spain, where such taxation is rarely used; and second, to evaluate two approaches to recycling tax revenues to maximise overall benefits, tailored to the economic context. A novel methodology is employed to capture market interactions and assess the potential environmental and economic outcomes of the proposed ecotax. In addition to offering an updated analysis for Spain, this study contributes to the literature by applying a methodology that incorporates feedback between prices and quantities. This approach overcomes the limitations of standard input-output models without relying on a computable general equilibrium model, which may involve untested assumptions. One key finding is the identification of the tax rate required to meet the 2030 emissions reduction targets. Another is that recycling revenues through labour tax reductions lead to a smaller economic contraction and greater emissions reductions. Additionally, maintaining the public deficit results in better emissions outcomes and has a positive effect on employment, despite a more pronounced decline in Gross Domestic Product. These findings underscore the importance of designing environmental policies that are carefully tailored to a country’s specific circumstances.

Es la versión preprint del artículo. Se puede consultar la versión final del artículo en https://doi.org/10.1016/j.jclepro.2025.146386