The European Union will collect an expected €150 billion through the EU Emissions Trading System (EU ETS) over the next decade. Alex Bowen looks at how best governments can spend this money.
Alex Bowen is a policy analyst at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science. He is the author of Carbon pricing: how best to use the revenue?
The European Union will collect an expected €150 billion through the EU Emissions Trading System (EU ETS) over the next decade. That’s no small amount. It equates to 0.1 per cent of GDP, and could eventually reach several percentage points of GDP.
So how will governments spend this new revenue? In a new paper, I look at some of their options. It is most clear that they shouldn’t jump to quick conclusions. Just because this new revenue stream has been raised through environmental taxes, that doesn’t mean it should be spent only on green policies. It could also be well used for broader public spending, reducing the national debt and improving the tax-benefit system as a whole. The possibilities are endless.
There is no doubt that more investment is needed in low-carbon infrastructure and energy efficiency projects. But it would be a mistake to spend green revenues on only green policies. The strict earmarking, or ‘hypothecation’, of revenues makes little economic sense in any case. The income from carbon pricing revenues is too uncertain and the spending needs of green policies are unlikely to match up with green revenue streams in the long-term.
Governments and the EU will need to think about how best to spend their new revenues, and their decisions will be dependent on their own country’s needs. What’s important is that they begin setting their priorities for spending now.
For instance, rich countries may consider using some of their revenue helping poorer countries adapt to the impacts of climate change. Those advanced industrial nations that have pledged to contribute to climate finance for developing countries could use carbon revenues to augment the public-sector contributions to the US$100 billion per year promised in the Copenhagen Accord.
The green tax regime will also leave individuals and businesses with new taxes to pay. This will incentivise emitters and polluters to change their actions for environmental benefit.
But there is a danger that the worst off will suffer disproportionately if measures are not taken to alleviate this, not least because poorer households tend to spend a larger share of their incomes on energy than do rich households. Some of the revenues collected from environmental taxes could therefore be used to deliver tax breaks or cash benefits for the households that are hit hardest by the cost of carbon pricing.
Some of the revenues could also be used to ease the transition from dirty to clean industries that will be necessary to avoid dangerous climate change. The growth of green taxes should therefore be seen as an opportunity fora broader reform to make tax-benefit systems around the world more efficient.
The potential revenues of carbon pricing give societies many attractive options for pursuing a range of goals – environmental and otherwise – in addition to the environmental benefits of carbon pricing. But choices have to be made and trade-offs must be assessed.
My research concludes that governments should start deciding now how best to spend these revenues. Income from carbon pricing will be considerable, and it is only going to increase.