Taxing energy to improve the environment: Efficiency and distributional effects

We study the effects of environmental tax policy in a dynamic overlapping g enerations model of a small open economy with environmental quality incorpo rated as a durable consumption good. Raising the energy tax may yield an ef ficiency gain if agents care enough about the environment. The benefits are unevenly distributed across generations since capital ownership, and the c apital loss induced by a tax increase, rises with age. A suitable egalitari an bond policy can be employed in order to ensure everybody gains to the sa me extent. With this additional instrument the optimal energy tax can be co mputed.