There is growing empirical evidence and increasing scientific consensus that CO2 emissions play a significant role in the escalation of the greenhouse effect. Authorities have tried to respond to this concern by proposing different control mechanisms and policies, with the Kyoto Protocol high on the international political agenda. In the European Union (EU), as a whole, the stated target is an 8 per cent reduction in CO2 emissions from their 1990 levels by 2012. The preferred policy tool in the EU for achieving this target has been the creation of a market for emission permits whereby the permits can be traded among polluting firms. Another tool under consideration is the enactment of ‘green’ tax reforms by way of levying an eco-tax on CO2-polluting goods. There is, however, a considerable tax load already in existence in the EU. To prevent the overall tax load from rising, it is widely felt that any new tax category should satisfy some neutrality requirement regarding total government tax income. In addition, any new tax intended to reduce emissions is likely to increase production costs and possibly lower production levels. All things considered, a new eco-tax should, if enacted, be finely tuned to accommodate other tax instruments and overall tax and spending policies.