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

In response to increased awareness of climate change, environmental sustainability has become a policy objective in Europe. Despite a decrease in greenhouse gas emissions, the European Commission deems current progress insufficient. Discussions on implementing environmental policies persist, with environmental taxation emerging as one of the most controversial yet potentially effective economic instruments for reducing emissions. However, the extent of its impact on the economy remains under debate, as improvements in welfare and environmental quality hinge on various economic, political, and public preference factors. Therefore, we analyse the economic impact of introducing an environmental tax to achieve emission reduction targets in Spain, while also testing two systems for recycling tax revenues. This allows us to assess the potential for a second dividend. We select Spain as the unit of analysis due to its minimal utilisation of environmental taxes, as it ranks among the European countries that are least active in combating climate change using taxation.