Environmental and Resource Economics 14: 243–268, 1999. © 1999 Kluwer Academic Publishers. Printed in the Netherlands. 243 Energy Taxes in the Netherlands: What are the Dividends? MARINUS H.C. KOMEN and JACK H.M. PEERLINGS Department of Economics and Management, Agricultural Economics and Policy Group, Wageningen Agricultural University, Hollandseweg 1, 6706 KN Wageningen, The Netherlands (e-mail: rien.komen@ALG.AAE.WAU.NL) Accepted 21 August 1998 Abstract. In this paper the environmental and economic effects of the introduction of a unilateral energy tax in the Netherlands are analysed using an applied general equilibrium (AGE) model. The effects of a small user energy tax and a general energy tax are compared, while taking into account different tax recycling mechanisms. The model contains a great level of detail with respect to emissions and environmental indicators (greenhouse effect, acidification, eutrophication and waste), which is helpful for assessing environmental quality. The results show that the introduction of a small environmental tax reform not only improves the environment but also raises non-environmental welfare, which is due to an improvement of the efficiency of the tax structure. Key words: applied general equilibrium model (AGE), environmental indicators, environmental tax reform, small open economy, unilateral energy tax JEL classification: D58, H21, J68, Q28 1. Introduction Like the other signatory countries of the Framework Convention on Climate Change (FCCC), the Netherlands has recognised the importance of its national contribution to the greenhouse effect. To reduce CO 2 emissions (the main green- house gas), the Dutch government decided to introduce a unilateral energy tax. A fundamental problem for a small open country is that foreign countries may choose not to use taxes and often pursue a less ambitious environmental policy. Industries which are particularly energy-intensive and which face international competition have to bear a high burden which could also harm the country as a whole (Bovenberg 1993). Moreover, there is the question whether global emis- sions of CO 2 will fall because of the energy tax since production of energy – intensive commodities may relocate to other countries (emission leakage effect). International reallocation of production is less of a threat if only households and small users are taxed (see Bovenberg 1993; Hoel 1996; Böhringer and Ruther- ford 1997 examine the costs of exemptions for Germany). The Dutch government implemented their policy by taxing fossil fuels (except fuels for vehicles) and elec-