This paper overviews the use of environmentally related levies and other economic instruments in air quality and climate change policies in Central and Eastern European EU countries. It is shown that their overall effectiveness and efficiency is quite low and they help to secure revenues for dedicated environmental funds only. We pay a special attention to the implementation of 2003/96/EC Directive in the Czech Republic that presents the unique example of a revenue-neutral environmental tax reform actually introduced. By using a micro-simulation model we assess the distributional effects of this reform and found small effects both on households and environment.
Keywords: market-based instruments; air quality; distributional impacts; ETR; CEEC.