This article is part of our special report Transition to green economy.
Originally, the EU Emissions Trading Scheme (ETS) only came into place because the UK was opposed to using taxation as a policy instrument to reduce global warming. With Brexit, there is now an opportunity to look again at an EU-wide carbon tax, according to James Nix.
James Nix is the director of Green Budget Europe, a Brussels-based non-profit expert platform on environmental fiscal reform.
Nix spoke to EURACTIV Czech Republic’s publisher Jan Vitásek at the T2gE conference in Bratislava.
The idea of shifting the tax burden from labour to materials use and pollution is not new, but there are few countries really applying this principle. Are there any good examples at all?
All over Europe, more than 50% of taxes are collected in the form of tax on labour, while environmental taxation makes up around 6%.
But there are several member states recording very good progress. Belgium is shifting 7 or 8 billion euros from labour tax to taxes on pollution, non-renewables, property taxes and a range of other bases nowhere near as harmful to employment as labour taxes.
How exactly are they doing that?
Just to give you one example, there is a gap of 22 cents between diesel and petrol taxes and Belgium has decided to close this gap over three years. During this period, Belgium is increasing diesel tax by 14 cents and reducing petrol tax by about 8 cents.
What are the other examples of countries that are moving towards green taxation?
Slovenia is a good example of a country that has a higher share of environmental taxation. But indeed, no member state has prepared a well-elaborated plan on how to make a comprehensive tax shift happen.
Instead, we are seeing smaller initiatives, step by step, while we actually need a more holistic and coordinated approach. That would require a coalition of trade unions, employers and governments where everybody is willing to undertake the changes together. That did happen in Belgium, for example, but on a smaller scale than is now required.
You basically need agreement and cooperation by everyone. Getting into the detail of it, it is quite hard to estimate the revenue that will come from environmental taxes, and then figure out how safe it is to reduce labour taxes, and over what timescale.
Behaviour can change very quickly and so the environmental tax base can be reduced. However, careful planning and good cross-sector collaboration can ensure contingency is built in, and reforms can be speeded up if necessary.
Can you recommend sectors where green taxation can be applied and provide estimates of how much revenue it could bring?
The aviation sector is chronically undertaxed. There is no VAT on airline tickets, no kerosene tax, and airports receive subsidies. In short, aviation does not pay its real costs but gets huge transfers from governments. The estimates for revenue on a European scale are high.
Two detailed studies have been done, one by Thomas Piketty and Lucas Chancel at the Paris school of Economics, and the other one by an Austrian think-tank. The Piketty – Chancel study estimates EU revenues of €16–22 billion out of a total global revenue of around €150 billion. And that’s with most passengers just paying €5 per flight. There is also very significant scope to better recover the real environmental costs of shipping.
A lot of this has to do with growth. When you look at aviation, the number of flights has doubled in the past twenty years and projections say that it will double again in 15 years if no action is taken to recover the real costs that are imposed on society, particularly in terms of changing the climate, polluting the air and lost sleep due to noise disturbance.
Taxation, on the other hand, offers a chance of transferring many journeys back to high-speed trains. Also, there may be more use of video conferences. Maybe we do not always need to travel.
All over Europe, there is a push for a shift towards a circular economy. How could green taxation contribute to these efforts?
If you are looking for an example from everyday life, take a look at how much plastic is used. Each time you buy a bottle of water, each time you use disposable cutlery, it adds to a significant cumulative environmental burden.
The question is should a levy be put on single use items? Should we be charged 5 or 10 cents each time we take them? There is a huge scope for these type of measures, especially because there is now also a widespread public acceptance of the circular economy idea.
You need politicians to decide on such changes, which may not always be popular. People usually care less about the environment than about their wallet. Some of them simply do not want or cannot afford to pay more.
According to IMF data, fossil fuel subsidies in countries such as Luxembourg, Poland, Bulgaria and Czech Republic amounted to over €1,000 per capita in 2015. Some of this is money that goes directly to coal, oil and gas companies. Another part of it is through higher healthcare costs due to illnesses prompted by air pollution.
Environmental tax reform is really about applying the true price at the point of use, instead of burdening the cost on – usually weaker – citizens, or pushing the bill on to the next generation, trying to make them pay for our pollution.
This really is a form of enslavement. So it’s a simple question: at what point will we say “this is wrong and we’re going to stop doing it; now it’s time to pay our own way instead of engaging in slavery”.
Countries can also look to green tax reform as a way to secure employment gains.
In terms of unemployment, the Czech Republic is actually doing quite well, especially in comparison with other European countries…
True. But even if you do not face any unemployment challenge at the moment, you should still think about the future position of your economy. How do we maintain good unemployment figures? How do we ensure we have a high number of patents in the low-carbon sector? This is about the future economic situation. Every country, the Czech Republic included, has to ask itself a question: Do we want to be a technology leader when it comes to low-carbon development or not?
You already mentioned road transport which contributes about one-fifth of the EU’s total emissions of carbon dioxide. It is also the greatest polluter in cities. What can be done both at national and the EU levels in terms of taxation?
The overall challenge for Europe is how we can move to electromobility. In Norway, which is not an EU member state, 24% of new car sales are electric or hybrid. In the EU, the average is less than 2% and the best country is the Netherland with 10%.
Why are the EU figures not impressive? The answer is diesel taxation. We are undertaxing diesel and so about 50% of all new car sales in Europe are diesel vehicles. Europe is a diesel island. Nowhere else are so many new diesel cars being sold. Diesel accounts for less than 2% of new car sales in Japan and less than 5% in the US.
Looking at cities such as Paris, London, Milan, Madrid, Stuttgart etc., diesel is also a serious health problem as well as hindering electromobility.
What is your proposal? You already mentioned Belgium which is trying to close the gap between diesel and petrol taxation… Should other countries follow?
Yes, closing the diesel – petrol tax gap is the single most important measure. The United Kingdom has already done that and Belgium is moving in the right direction and will complete the work in 2018. France has also made significant changes since the Dieselgate scandal was revealed last September.
People don’t change cars overnight, so the positive effects will take time to be felt. On the other hand, the immediate negative effect will be felt immediately by businesses and families who will have higher costs.
We have looked at how Ireland could bridge its 11 cents tax gap. According to the Irish finance ministry, Ireland can take five years to do this with a 2.2 cents increase each year. For diesel car owners, the annual cost increase would be €67, assuming a full tank of diesel per week, which is a fair price to pay to take Ireland away from 70% of new car sales being diesel.
There are costs, but you have to weigh that against the benefits: you have to look at the health issues such as higher asthma levels, resulting from air pollution in the cities, and the implications they have on families and quality of life, putting these impacts within their true economic frame.
And this in not only about air pollution, we are also failing to adequately internalise the costs of climate inaction. Let us think about the storms and floods of the early and mid-2000s which the whole of Europe had to face, and the heatwaves of the later part of that decade where you had up to 100,000 premature deaths.
If we examine these issues and count the costs of inaction, climate action suddenly starts to be very cheap and cost-effective.
Let us look at CO2 emissions from the point of view of industrial production and power generation. A reform of the EU ETS is currently underway but so far the carbon market has not been delivering incentives for the shift towards a low-carbon economy. What role do you see for taxation here? Should it come as a complement to the ETS, or as a tool that could replace it in the long run?
The EU ETS is not sending a real price signal anymore. The price of an allowance is around €4 – 5 a tonne while it needs to be higher than €30 to send a signal to the market.
I have followed the reforms proposed, and the projections estimate that it will be in 2020, maybe even 2025, when the price really begins to rise significantly. This is too far away and I think there is a huge scope for carbon taxation. Some countries are taking specific measures. France has just come up with a proposal, which hopefully it will improve upon, and be followed by others, maybe in Italy or Spain.
Originally, the EU ETS only came into place because the UK was unwilling to use taxation as a policy tool. In 1990-91, the German finance minister went to London and pleaded with John Major and Norman Lamont, the Chancellor of the Exchequer at the time, to embrace carbon taxation.
The UK refused. So I think if Brexit proceeds, maybe there is an opportunity to look again at a European-wide carbon tax because I do acknowledge that countries fear acting on their own.
France does not seem to fear moving ahead with carbon taxation on its own…
It depends on what French measures eventually materialise. Originally it was supposed to be a carbon price floor; now it looks more just like a coal exit plan, with no real carbon pricing element, so it is significantly weaker.
One of the reasons for this was a report prepared by a three-person expert group in France. That report basically said: we are worried about electricity imports. There are different arguments around it, and I think that the carbon price floor could be applied to imported electricity as well as power generated within France, and so create a level playing field for electricity producers, at home and abroad
Getting back to the EU ETS, do you think it can be complemented or replaced by carbon taxation?
I think what could happen is that the ETS would be left in place and you would have a taxation system running in parallel.
How do you think this can work?
The fundamental problem with the EU ETS is that nobody expected the market to collapse, and nobody expected on faster-than-expected progress either.
In 2008, there was a huge downturn particularly affecting Spain, Ireland, Portugal and Greece with unwanted carbon credits washing back into the system and crashing the price of carbon. Also, with recent technological breakthroughs, we made some fast progress. We can be smart at times: suddenly, we develop new ways to produce things which are less carbon intensive, but the ETS does not account for this.
I think you could leave the ETS in place. You could have taxation alongside it and you could have a European-wide agreement to adjust the taxes based on reviews every two or three years. If the carbon price starts going up sharply, you could pause tax increases and so on.
So you think it does not make sense to throw away the whole ETS system?
Plans to replace the ETS can become quite complicated because of companies who bought ETS credits. What do you do with them? You would have to set up an extraordinarily complex system of compensating investors and that becomes challenging, and potentially messy. It is perhaps easier to simply leave it on its course.