Carbon taxation: An old-new idea whose time may soon come?


In the debate over the future of the EU’s Emissions Trading System (ETS), a diverse and increasing vocal array of figures cutting across party lines has spoken out for an old-new way of cutting CO2 emissions: a carbon tax.

Today (19 February), the European Parliament’s environment committee voted to back an amendment in favour of backloading – or withdrawing – 900 million allowances from auction to boost prices by creating a market scarcity.  

But the backloading measure will face a stern test in a plenary vote by the whole European Parliament in April, while a surprising pincer movement of energy giants, environmentalists and MEPs is gathering in the wings.

Gerben-Jan Gerbrandy, the Liberal vice chair of the parliament’s environment committee, said that a rethink of the EU’s whole carbon policy edifice would be necessary if the measure was rejected.

“We are talking about instruments and not objectives – which are clear – and if that one [the ETS], fails we have to switch to another one and that should be a CO2 tax,” he told EURACTIV. “Everyone should realise that doing nothing won’t meet our climate objectives.”

“Originally, I was in favour of a simple CO2 tax,” he added, “but it was impossible to implement and we ended up with an ETS scheme after huge lobbying from industry, but the current system is not working.”

Widely shared sentiments

Such sentiments are widely shared. Backloading is not expected to drive carbon prices much above €15 per tonne, 10 times below the €150 per tonne that the former UNFCCC Secretary-General Yvo de Boer has estimated as necessary to keep global warming below 2 degrees Celsius.

As Arctic Sea ice has melted to record lows and hurricanes and droughts have savaged North America, international paucity in tackling climate change has spurred calls for a new urgency.  

Last week, two US senators revealed a new plan for a $20 a tonne carbon tax for emissions above a set level, which they hope to bring to a senate vote this summer. And yesterday (18 February), more than 90 global environmental groups signed a joint declaration calling for the ETS to be scrapped.

Their objection is centred on the cap and trade scheme’s carbon offset mechanism which allows EU states to ‘offset’ their emissions by investing in sometimes questionable developing world projects, rather than reducing emissions at source.

'Fraud, theft, corruption and tax evasion'

“At a time when EU citizens are shouldering the cost of the economic crisis, they are also being forced to bear the cost of the legislation, regulation and much of the quantification of emissions that carbon markets require, as well as the costs of measures against fraud, theft, corruption, and tax evasion,” said Belen Balanyá, from the Corporate Europe Observatory, a pressure group campaigning for business transparency and accountability.

“Meanwhile big polluters such as Arcelor Mittal and Lafarge make millions of windfall profits with over allocated permits,” Balanyá added.

The idea of a carbon tariff levied at the EU's borders has been oft-mooted in France, which delayed implementing a domestic tax on CO2 emissions in 2010 until an agreement could be secured at European level. Finally the issue faded from debate, beneath a fug of European Commission inertia, despite effective implementation in non-EU Norway.

In the absence of an EU consensus, Paris introduced a one-off carbon levy on its industry in 2012, drawing some €250 million in government coffers.

The idea that wouldn’t die

But as the carbon price has sagged, the idea of a CO2 tax seems to have taken on a new lease of life. Johannes Teyssen, the CEO of the German utility E.ON last month called for a carbon tax if the ETS could not be fixed.

“If we don’t manage to repair this system of emissions trading, I think a carbon tax is probably recommendable,” Teyssen told the Handelsblatt energy conference in Berlin.

That prompted Hans ten Berge, the secretary-general of the power producers association Eurelectric and a keen supporter of backloading, to offer his own warning to conservative MEPs opposing the EU’s backloading plans.

“If there is nothing possible on an ETS, then I fully support Mr Teyssen in saying we should look at alternatives,” ten Berge said.

Carbon trading offered great advantages because it encourages ‘low-hanging fruit’ – the cheapest low carbon investments – and could provide market stability, ten Berge said.  Nonetheless, if this was rejected, “a pan-European tax would be preferable to national [tax] targets,” he added.

Strange bedfellows

Ten Berge, like other clean energy advocates, is wary of pushing an idea that has garnered kind words from corners that have traditionally blocked climate action.

Poland, for example, has vetoed moves towards the EU’s 2050 decarbonisation goals. But Krzysztof Bolesta, an advisor to Warsaw’s environment minister, Marcin Korolec, told EURACTIV last year that by comparison, "a global [CO2 reductions] deal or a carbon tax at the [EU] borders, both solutions are fine."

And it is not just Poland. “We do support mechanisms that would deliver on a level playing field and if that’s a carbon tax, fine,” Brian Ricketts, the head of Euracoal, the European coal manufacturers association, told a ‘Golden Age of Coal’ conference in Brussels last October. 

“But if Europe went that route, we would have to set up a carbon tax on our borders and that would cause a trade war, so a carbon tax on a global level would be the preference for everyone so how do you get to that?” he said.

As with the argument over including aviation in the carbon market, most environmental groups say that the ‘perfect’ of a global deal can be the enemy of the ‘good’ of a flawed carbon market.

“All policy instruments and measures we can muster to put an adequate price on carbon pollution should be explored,” Sam Van Den Plas, WWF’s EU policy officer told EURACTIV.

“But it depends on how and where you intend to implement it. A certain tax may not guarantee a certain environmental outcome so it is difficult to see how you could gainsay its effectiveness.”

Since the early 1990s, there have been several attempts to introduce a unitary carbon tax across all EU member states.

But an EU carbon tax has never materialised, as countries like the UK were unwilling to render national competencies on taxation to Brussels. Moreover, the member states affected worst by the current financial crisis, including Spain and Ireland, argued that they would be hit harder by the tax than more industrialised member states.

Consequently, the EU built its climate policy around an emissions trading scheme (EU ETS; see EURACTIV LinksDossier), which requires large industrial plants to buy and sell permits to release carbon dioxide into the atmosphere.

However, the shortcomings of the ETS have led to doubts about its emissions reduction potential. The initial over-allocation of pollution credits sent carbon prices plummeting and forced a rethink of the CO2 cap, leading to 10% fewer CO2 allowances than requested for the 2008-2012 period (EURACTIV 29/10/07).

Moreover, the ETS does not include two key polluting sectors, agriculture and transport, which could be easily covered by a carbon tax.

In an attempt to find more effective ways of regulating carbon emissions and filling the state coffers, countries previously averse to the idea - and most notably France - are now engaged in debating national carbon taxation schemes.

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