Up to now, environmental policy has been most often carried out on the basis of command-and-control measures. The governments settled the standards to be complied with and firms were obliged to achieve the same level of pollution abatment regardless of the fact that marginal abatement costs could differ among polluters. But a fresh interest is presently arising around the use of economic instruments, as it has been clearly stated in the Fifth Environmental Action Programme, where "Getting the prices right" is one of the main purposes. Economic instruments are generally superior compared to direct regulations, since they leave more freedom to firms to tailor abatement strategies to their individual situations. When the government imposes a uniform tax on the emission of a pollutant, firms will choose to abate pollution up to the point where the marginal cost of reducing pollution equals the uniform tax rate. This implies that firms with relatively high marginal abatement costs will prefer only a small reduct

ion of pollution and pay taxes on the residual emission level. Firms with low marginal costs will make high abatement efforts instead of paying taxes. Emissions reductions will differ among firms and total costs of abatement will be minimized. As a result environmental taxes allow to achieve certain environmental standards at lower costs than regulations. The Commission has for the first time look for a large use of economic instruments in the field of climate change policy. Here there is no clear-cut trade-off between regulations and taxation. A comprehensive strategy must give space both to command-and-control and to economic instruments, relying on a mutually reinforcing set of regulatory, voluntary and fiscal measures. But it is clear that strict regulations and existing fiscal measures are still inadequate to achieve the goal of stabilising CO2 emissions without the introduction of a new tax on the use of all non-renewable energies, providing a signal to the market that the trend of energy prices is on

the upward direction and influencing in this way the behaviours of firms and individuals. The tax will be consistent with the "polluter pays principle" and has been advocated in many resolutions by the European Parliament. Since CO2 emissions are related to very different uses of fossil fuels by millions of consumers and business, the use of policy instruments based on market mechanism to provide incentives for the reduction of CO2 emissions will certainly be more cost-effective than relying solely on regulatory measures. A key characteristic of the tax will be its revenue neutrality. This means that it should not result in any increase in total tax burden. The tax revenue needs to be offset by fiscal incentives and by tax reductions. This shift of the burden of taxation away from distortionary taxes on companies and individuals and towards taxes on exhaustibles resources, that in addition produce heavy damages to the environment when used for combustion, will represent a first step for shaping a taxation s

ystem more efficient and in the same time more friendly towards the environment and a sustainable development. This possibility to promote an ecological fiscal reform through eco-taxes, internalising external costs linked to the use of natural resources, while providing the revenue for reducing other taxes that have a distortionary impact on the economy, is the origin of the "double dividend" that is associated in the literature with the introduction of the eco-taxes. A second possible use of the revenue coming from the energy/carbon tax is to finance the Community budget. The Delors-II package has tried to quantify the financial needs of the Community for the five-years period 1993-1997. An overall increase of expenditures amounting to about 20 billions Ecu is estimated for the end of the period. The political reactions by many Member States have been rather negative, since they are already constrained by the need to fulfil the financial requirements in order to join the Economic and Monetary Union. A way

out of this dilemma could be to use, at least partially, the revenue of the energy/carbon tax to finance the increase in the size of the Community budget. This will represent effectively a real own resource for the Community, with a fair distribution among Member States since the revenue of the tax is very much linked with economic prosperity, and with good automatic stabilisation properties, since energy consumption varies without any significant time-lag with the change in economic activity. This proposal is also very important from a political point of view. Its implementation would strengthen the need to promote a further institutional reform of the EC, increasing the powers of democratic control by the European Parliament, since it is unthinkable to give powers to manage tax resources to the Commission without recognising at the same time the power of a democratically elected body to check -together with the Council where the Member States are represented- the behaviour of the Executive. The recog

nition of an autonomous taxation power on behalf of the EC would also comply with one basic rule of fiscal federalism, which requires that the institutions that share the power to decide on expenditures -the two branches of the budgetary authority within the EC, the Parliament and the Council, on the basis of a formal proposal by the Commission- should also be responsible for providing the financial means needed to cover the expenditure. The decision on the future of the energy/CO2 tax is now in the hands of the Ecofin Council. Both the European and the national Parliaments should play their role effectively to support this initiative that represents the first attempt of a large scale use of an economic instrument to protect the global environment.