This paper deals with the design and effects of a hypothetical environmental tax on the Spanish electricity generating industry. The tax intends to reduce the sizable Spanish SO2 (sulphur dioxide) emissions and responds to both internal and external pressures to control acidification. It applies a uniform tax rate, representing the damage from Spanish sulphur emissions, on a product tax base (fossil fuel use). Under an assumed full tax shift to residential electricity prices, we simulate the economic, environmental and distributional impacts of the tax with the use of Spanish microdata on household consumption. We find that there is a significant reaction to the tax, i.e. a high environmental potential and a positive excess burden, with a slightly regressive distribution of the tax burden.

Keywords: acid rain, environmental taxes, environmental valuation, demand systems.
JEL classification: C33, H31, Q28, Q41.