Taxing energy - why and how?

A range of motives underlie energy related taxes. Typical reasons are collection of the ground/scarcity rent in resource extraction, taxation of monopoly profit and to collect public revenues. Energy taxes may also serve as pricing of infrastructure use and to adjust for imperfections in markets exploiting non-renewable energy resources. Most energy production and energy use bring along negative externalities, and taxes, tradable permits, green and white certificates are used to internalise such effects. However, policy is not straightforward because of the influence on cost and competition and concerns for regional employment, economic activity within certain industries, and any distributional effects. Tax discrimination, subsidies and regulations then undermine the efficiency of energy instruments. Hence, the taxes may deviate from theory. This report illuminates to what extent the energy related taxes may vary between western countries, and whether this variation can be explained by economic theory. We find that taxation varies tremendously among countries, and this variation indicates divergence between theory on efficient means and energy related policy.