– Governments throughout the European Union and around the world confronta seeming Catch-22: the millstone of national debt around their necks hasrequired them to reduce deficits through spendingcuts and tax increases. But these are impeding the consumer spendingneeded to boost economic activity and kick-start growth.As the debate shifts from austerity towards measures aimed at stimulatinggrowth, smarter taxation will be essential to getting the balance right.

When governments think about the difficult task of raising taxes, theyusually think about income tax, business taxes, and value-added tax (VAT). Butthere are other taxes that can raise significant amounts of revenue with a muchless negative impact on the economy. These are thetaxes that governments already levy on electricity and fossil fuels.

Such taxes play a crucial role in cutting the carbon emissions that causeclimate change. But recent research shows that they can also play a useful rolein raising government revenue at little cost in terms of economic growth.

Euro for euro, dollar for dollar, yen for yen: energy and carbon taxeshave a lower negative impact on a nation’s economy, consumption, and jobs thanincome tax and VAT. For example, an increase in direct taxes, such as incometax, can reduce consumption by twice as much as energy and carbon taxes thatraise the same amount of revenue.

Maintaining consumption at as high a level as possible is vital toreviving economic activity, which means that freeing money for consumers tospend is just as important. Energy and carbon taxes can raise revenue whileleaving the economy in a stronger state to sustain a recovery. Conventionaltaxes raise revenue, but pose a much greater risk of depressing growth in theprocess.

This is not the only reason why looking more closely at energy and carbontaxes makes sense. The current framework for energy taxation, particularly inEurope, is not sustainable. Tax rates on different fuels vary by more than 50%across the EU, causing major distortions in the single market. Creating a level playing field on energy taxation in the EUwould harmonize economic incentives, eliminate gas-tanktourism by drivers crossing borders for lower prices, and improve thebusiness climate in all of Europe’s economies.

Rising energy bills, driven by the cost of fossil fuels, are a massivepolitical issue in many countries in Europe and elsewhere, including the UnitedStates, where consumer energy prices have become a major issue in the run-up to this year’s presidential election. But,relative to other forms of taxation, energy taxation tends to benefit consumersoverall. The gains from avoiding the negative impact of conventional taxes workacross the economy, particularly as the leastwell-off maintain a higher level of disposable household income.

Most energy and carbon taxes are levied by national governments. But inEurope there is another option for raising revenues: the European UnionEmission Trading Scheme (ETS). In terms of the effect on GDP and jobs, the costof increasing revenue from this source would be asmuch as one-third less than that of raising the same amount via incometaxes or VAT.

Given Europe’s fiscal deficits and the economic impact of reducing them,that is a huge potential prize. But, first, the issues depressing the carbonprice must be addressed. Taking the massive over-allocation of carbon-emissionpermits out of the ETS will be vital.

Finance ministers everywhere need to think more imaginativelyabout their fiscal options. Energy and carbon taxes can produce less economicpain and more gain than conventional taxes can. Europe needs fiscal consolidation, reductions in carbonemissions, and a strategy for economic growth. Greater reliance should beplaced on energy taxes and an effective ETS to deliver all three.