This paper reviews potential applications of environmental taxes in the energy sector. Theoretical and practical arguments for using environmental taxes are reviewed, and possible arrangements outlined for levying environmental taxes on energy. In contrast to most environmental taxes, taxes on energy have the potential to raise revenues sufficient to alter the constraints and opportunities in fiscal policy. A carbon tax levied at a rate of 200 pounds per tonne could raise revenues equivalent to about 11 per cent of total UK tax receipts, allowing income tax to be halved, or corporation tax abolished. Inappropriate use of the revenues, or their unnecessary dissipation, can greatly add to the costs of environmental policy. But, environmental taxes are unlikely reduce the overall excess burden from taxation below the current level, and the case for ecotaxes must thus primarily be made in terms of their environmental benefits. Copyright 1998 by Oxford University Press.