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Green Taxes as a Tool to Combat Climate Change – Discussion Paper

In 1991, the European Commission put forward the idea of introducing a carbon/energy tax, with the objective of reducing fossil fuel consumption and hence CO2 emissions, while generally improving energy efficiency. There was much opposition to such a tax, due to worries about its regressive nature and its potentially damaging effect on international competitiveness. In addition, many Member States believe they should be free to control their own tax levels. As a result, new proposals have recently been introduced which, instead of imposing a new tax on carbon/energy, aim to harmonise excise duties on energy within European countries.

Original proposal

The principal objective behind the EU’s carbon/energy tax proposal was to encourage shifts in activity to lower carbon/energy intensive activities without dictating what those shifts should be or how rapidly they should take place, and thus provide incentives for the development of more energy efficient/cleaner technologies. The original proposal had the following features:

  • It applied to all energy sources, excluding renewables. Its aim was to abate externalities related to energy.
  • It was based half on the energy content and half on the CO2 content of energy sources.
  • It was planned that it should be phased-in over time, to avoid a price-shock and provide some adaptation time.
  • It was designed to be fiscally neutral, i.e. all revenues raised by the tax ought to be recycled in the economy, with the options for recycling left to individual countries.
  • The tax was meant to support other policies and measures adopted in individual countries, and not to form the unique instrument to reduce emissions in member countries.

Impact

Had the tax been introduced, EC calculations indicated that it would have raised fuel costs by between 6 and 58%. These figures would have varied between countries, due to national differences in tax regimes and other variables. It was estimated that the tax would only moderately affect GDP, with the potential impact on average annual GDP growth varying from -1% to +0.2% after 5 years.

Reaction

The tax proved to be enormously unpopular with most Member States, including the UK. The principle objections were that the tax is regressive, with lower income families being hit hardest (because they spend a higher proportion of their income on fuel) and that the tax would threaten international competitiveness unless other OECD countries were to take similar steps. In addition, many Member States feel that tax levels should be determined by the individual country. EU taxation proposals require unanimous voting by Member States to be adopted (unlike most issues which require a ‘qualified majority’), and hence, with several countries opposed to the idea, there was little chance of the tax being adopted.

However, it should be noted that four Member States (Sweden, Finland, Denmark and The Netherlands) have introduced their own version of a carbon tax. In most cases, exemptions have been granted to energy-intensive industries or industries facing acute international competition.

New proposal – harmonisation

For this reason, the original proposals have been abandoned in favour of a new approach, which aims to ‘restructure the community framework for the taxation for energy products’. This proposal aims to harmonise excise duties on energy products across EU states by setting minimal levels for petrol, gas oil, kerosene, LPG, natural gas, solid energy products and electricity. (information obtained from Climate Network Europe).

Key points

The concept of revenue neutrality is central to this proposal. However, the EU cannot enforce this on Member States, but can only strongly recommend that Member States ‘endeavour in particular to reduce at the same time statutory charges on labour.’

The initial levels are generally very low and set for 1998, with the aim being to increase the amounts progressively in two year periods. The levels are however minimums and Member States are free to increase them if they so wish.

The tax applies to electricity and motor fuels plus all energy products used for heating.
There are exemptions and reductions built in to provide tax relief for energy intensive industry, based on energy costs as a proportion of total production costs. In addition, there is scope for tax rebates based on energy efficiency investments.

Exemptions are possible for renewables, aviation fuels, biofuels, rail and inland waterway travel.
Electricity is taxed at point of consumption, which means that it can be transferred freely between member states. Fuels for power generation are therefore not differentiated, as the tax is only applied to the electricity produced. There is a clause allowing member states to levy an additional tax on input fuels if they so wish.

The mechanism used to determine the levels of taxation are unclear but are not based on carbon content. Most notably coal and gas are taxed at the same rate (see addendum), although coal emits more CO2 per GJ.

Comments

By working within the existing taxation system, setting initially low minimum levels and emphasising the importance of the proposal in terms of market liberalisation and employment generation, the new proposals aim to avoid the kind of opposition that faced the carbon tax. However, many Member States appear to be opposed in principle to any interference with their tax regimes. Climate Network Europe has found that support for the proposal is patchy, with groups tending to back market-based measures and taxation in general rather than referring to this specific proposal. Generally, awareness of the proposal has been found to be poor, which is unsurprising given that the figures involved are comparatively weak. However, this is the only current EU proposal which has the potential to begin ‘greening the economy’ by shifting the EU’s tax burden away from ‘positive’ factors such as jobs onto ‘negative’ factors such as pollution.

Addendum

The proposal contains the following recommendations for minimum levels of excise duty:

Minimum level of taxation at (ECU)
1/1/1998 1/1/2000 1/1/2002
Motor fuels (general)
Petrol/l
417
450
500
Gasoil/l
310
343
393
Kerosene/l
310
343
393
LPG/kg
141
174
224
Motor fuels (spec. uses)
Gasoil/l
32
37
41
Kerosene/l
30
35
39
LPG/kg
41
48
53
Nat. gas/GJ
0.3
0.6
1.1
Heating fuels and electricity
Heating gasoil/l
21
23
26
Heavy fuel oil A/l
18
23
28
Heavy fuel oil B/l
22
28
34
Kerosene/l
7
16
25
LPG/kg
10
22
34
Nat. gas/GJ
0.2
0.45
0.7
Solid energy/GJ
0.2
0.45
0.7
Electricity/MWh
1
2
3

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