When taxes are introduced on carbon and energy, and the revenue is used to reduce other taxes, will a positive effect be achieved both for the environment and for the economy? In 1990, Finland was the first country that introduced a tax on CO2. Later, Sweden, Denmark, Netherlands, Slovenia, Germany, and the UK followed suit with tax reforms that shifted taxation from labour to carbon and energy. Over the years, CO2 and energy taxes have gradually been raised, so that in Europe taxes of more than 25 billion EUR a year have been shifted. In this book, these experiences with carbon‐energy taxation, along with tax‐shifting programmes lowering other taxes, are examined in detail. Availability of unique and original data, including sector‐specific energy prices and taxes, as well as the use of advanced statistical techniques, such as co‐integration analysis and panel‐regression techniques along with the time‐series‐estimated macro‐economic model – Energy–Environment–Economy model for Europe (E3ME), makes this analysis truly comprehensive. Results of the analysis show that even though the taxes implemented have been relatively modest, they have, in the countries examined, contributed to a reduction in the emissions of greenhouse gases of up to 7 per cent, while for five of the countries a small increase in economic activity is recorded as a result of the tax‐shifting, with other impacts separated out. Due to concerns for competitiveness, the largest industrial emitters of greenhouse gases within Europe continue to benefit from exemptions from the carbon‐energy taxation schemes, as outside Europe there are major emitters without any economic penalties attached to greenhouse gas emissions. On basis of the lessons from carbon‐energy taxation learned in Europe, the editors of the book indicate how carbon‐energy taxation could usefully be combined with emissions trading, and they discuss how the recommendations from IPCC for a gradually escalating carbon price could be accomplished while preventing carbon leakage.