Taxing electricity consumption in Spain: evidence to design the post-Kyoto world

Abstract

Due to the relevance of fossil fuels in the electricity matrix in Spain, the electrical sector plays a crucial role in mitigation policies such as carbon taxes. Increased prices of electricity can act as an incentive to enhance energy efficiency contributing to CO2 abatement. This paper evaluates a tax on electricity consumption (ECT). Focusing on energy efficiency commitments for Spain as established by EU Authorities for Horizon 2020 (H2020), a pricing model was created to assess economic impacts and its effectiveness in meeting this commitment. The analysis was performed by considering two scenarios, without (Scenario 1) and with (Scenario 2) tax recycling between the new tax and employer-paid social security benefits or contributing to price stability. In Scenario 2, the tax reform is achieved with tax recycling, offsetting the introduction of the ECT by reducing employer-paid social security payments. Two alternative restrictions on the tax reform were considered for the simulation of Scenario 2. In the first case, a restriction was imposed to ensure revenue neutrality (2-I). In the second case, the restriction ought to maintain price stability (2-II). Results from different scenarios offer an important range of possibilities for policy decisions. The results show that with a tax rate equal to 1%, there is a remarkable reduction of CO2 emissions from the electricity sector, and the same happens with other sectors that the literature identifies as drivers of such emissions.