Optimising carbon taxation: tax energy sources, not sectors, and be consistent

Many governments consider carbon taxation an efficient tool to reduce carbon emissions, but it can negatively affect welfare in terms of emission reductions versus reductions in output. So, how can carbon taxes be best introduced? In a new study using evidence from Mexico, Mattis Bös, Negar Matoorian, and Kasper Vrolijk show that when governments cannot select the most optimal policy –simply taxing some energy sources but not others – this may have substantial implications on how emissions and output, and eventually welfare, are affected.