Ambitious targets for renewable energy and CO 2 taxation both represent political instruments for decarbonisation of the energy system. We model a high number of coupled electricity and heating systems, where the primary sources of CO 2 neutral energy are from variable renewable energy sources (VRES), i.e., wind and solar generators. The model includes hourly dispatch of all technologies for a full year for every country in Europe. In each model run, the amount of renewable energy and the level of CO 2 tax are fixed exogenously, while the cost-optimal composition of energy generation, conversion, transmission and storage technologies and the corresponding CO 2 emissions are calculated. We show that even for high penetrations of VRES, a significant CO 2 tax of more than 100 e/tCO 2 is required to limit the combined CO 2 emissions from the sectors to less than 5% of 1990 levels, because curtailment of VRES, combustion of fossil fuels and inefficient conversion technologies are economically favoured despite the presence of abundant VRES. A sufficiently high CO 2 tax results in the more efficient use of VRES by means of heat pumps and hot water storage, in particular. We conclude that a renewable energy target on its own is not sufficient; in addition, a CO 2 tax is required to decarbonise the electricity and heating sectors and incentivise the least cost combination of flexible and efficient energy conversion and storage.heating sectors in Europe. The annual end use demands in both sectors are similar: electricity consumption in Europe in 2015 accounted for 2,854 TWh el (in terms of electricity), while the heating demand in the residential and services sectors represented 3,562 TWh th (in terms of thermal energy), [5]. Regarding greenhouse gas emissions, electricity and low-temperature heating accounted for 1066 Mt and 556 Mt of CO 2 emissions respectively [6]. Previous energy models applied to different regions [2,3,[7][8][9] have shown that imposing a strong CO 2 constraint leads to high Variable Renewable Energy Sources (VRES) penetrations combined with a high-efficiency sector-coupled energy system, referred to as 'Smart Energy System' by Lund and coauthors [4,8]. For instance, under a 95% CO 2 reduction constraint relative to 1990 in Europe [10], energy modelling approaches based on scenario comparison [8] or cost optimisation [2]