Carbon Tax: A Fiscal Exit Strategy of the Crisis

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

An EU-wide carbon tax could provide a solution to “many of the main problems of today,” claims Žiga Turk, university professor and former Slovenian minister for growth, in a recent post on Blogactiv.

In his blog, Turk outlines the manifold “beauty of a properly constructed carbon tax”, which would help to tackle climate change and “save the budgets” of governments, the market economy and the welfare state. 

Whilst business and government budgets are suffering, a carbon tax could help stimulate the economy during the current recession, by allowing governments to lower taxes on work and capital, Turk says. This would make labour and capital cheaper, stemming the rise in unemployment and helping “to get the economy going again”. 

A carbon tax would be “a step in the right direction” in terms of combating climate change in a logical fashion, the former minister believes, particularly if the tax is “the same for all sources of CO2”. Such a development would “shift investment into cleaner industries and jobs” and increase energy efficiency. 

The professor stresses that the form a carbon tax takes is crucial to its effectiveness, making a clear distinction between different carbon taxes, with his preference being for a consumer tax. In his view, a carbon tax on imports and exports “would create trade wars” and “be seen as an excuse for protectionism”. 

A tax on consumer goods would be fair, since consumers who purchase energy-intensive goods would pay more, “regardless [of whether] the product [is] French or Chinese,” Turk argues. He believes such a tax would benefit environmentally-responsible companies and boost economic transparency, with markets picking “technological winners”. 

In this vein, the former minister supports French President Nicolas Sarkozy’s proposal to reduce VAT and excise duties on petrol if a carbon tax were introduced, arguing that it makes little sense to impose an additional tax on fuels that are already “heavily taxed”. The price of CO2 needs to be uniform, whether it is produced “by a car, a power plant or [the] production of a steak,” he says. 

Not only does a carbon tax need to be uniform across different goods and services, but also across the member states of the EU too, declares Turk. “Otherwise consumers would shop for products where they are not carbon-taxed,” and governments would have to work in a coordinated fashion to bring in such a tax to ensure there would be no “carbon tax havens”. 

As for the political realities of introducing a tax, Turk believes the necessary “sense of urgency” to make it acceptable to voters comes with “its contribution to fighting climate change”. He argues that, as an additional precautionary measure given the probable unpopularity of new taxes in a recession, it would make political sense if “Brussels would do the ugly job of directing it to member states”. 

The professor concludes that a carbon tax would be “fairer than just about any other tax,” and although he suspects it would face many opponents, he argues that with gaping holes left in governments’ finances from the recession and various fiscal stimulus packages, “the repayment of those deficits will have to come from somewhere”. 

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