The objective of this paper is to evaluate the effect of an energy tax with tax reform on the price, output growth, energy demand and CO2 emission by sector and for the economy as a whole. The findings will be useful for policy making. The simulationmodel employed is a Dynamic General Equilibrium Model of Taiwan (DGEMT) or Liang and Jorgensen (2003) Model. The major findings of this paper are as follows: (1) To implement an energy tax with tax reform will result in a significant improvement in CO2 reduction and industrial restructuring, while it has a moderately negative impact on inflation and economic growth. (2) The benefit of imposing an energy tax in terms of the reduction of CO2 and air pollution is estimated at NT $151.71 billion in 2018. Compared with the loss of GDP (NT $115.56 billion), the net benefit of imposing an energy tax amounts to NT $36.15 billion in 2018. Consequently, we conclude that to implement an energy tax with tax reform is economically feasible, and hence it is worthy adoption by the government. It is also suggested that the energy tax should be levied according to energy carbon content (i.e. carbon tax) to enhance its effect on CO2 reduction and to moderate its negative impact on the economy.