Optimal Energy Taxation in Cities

This paper presents the first investigation of the effects of optimal energy taxation in an urban spatial setting, where emissions are produced both by residences and commuting. When levying an optimal direct tax on energy or carbon use is not feasible, the analysis shows that exactly the same adjustments in resource allocation can be generated by the combination of a land tax, a housing tax, and a commuting tax. We then analyze the effects of these taxes on urban spatial structure, showing that they reduce the extent of commuting and the level of housing consumption while increasing building heights, generating a more-compact city with a lower level of emissions per capita.