Hedegaard: ‘Tax what you burn, not what you earn’

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This article is part of our special report European Business Summit.

'Don't tax what you earn, tax what you burn' should be the EU's response to safeguarding our welfare societies, EU Climate Action Commissioner Connie Hedegaard told EURACTIV in an interview, expressing support for an EU carbon tax. She spoke about progress in international climate negotiations and the EU's efforts to stay ahead of the game.

Connie Hedegaard is the EU's climate action commissioner and former Danish climate change and energy minister.

She was speaking to Daniela Vincenti-Mitchener and Susanna Ala-Kurikka.

To read a shortened version of this interview, please click here.

The Commission's 30% communication argued that increasing the goal for emissions cuts is both feasible and affordable. Why did you then not recommend the move?

The Commission's communication was not a recommendation- what we were asked to do back in March by the Environment Council and by the Spring Council was to try and analyse what the obstacles – the costs and co-benefits – were in setting the goal. I suggested that they do that because so far we had said that we could take the 30% goal without really knowing what it would be like.

It is only in the last eight to ten days up to the presentation that somebody deliberately said that we were already seeking a decision by June, but this was never our purpose nor that agreed upon by the Environment Council.

We have provided a first step in order to try and gauge some of the proportions involved – not only seeing its costs but also its co-benefits: improved air pollution, less costs incurred by importing fossil fuels, etc.

The next step that we need before we can go ahead is to cooperate with the member states to analyse what the consequences of setting the goal would be for them as the potential costs and benefits are not equally spread. This is why I proposed that we now take this next step at member state level at the Environment Council in June.

The Commission obviously cannot do this on its own and needs their cooperation. The Council conclusions supported this and it would be nice to take the steps to the next level.

When can we expect such an analysis to be made?

We are trying to push our newly-established DG very hard so that it can happen before Cancún. The member states are closing their ministries for most of July or August, so realistically this will be after summer so time is very limited, but we are trying to do as much as we can before Cancún and then have a very strong dialogue with the member states.

We are also trying to think of a methodology for what we are asking member states and be focused on how they can deliver. Remember, this has never been done before. Europe had actually said some years back that it could go to 30% without the consequences and potential for regions ever having been analysed. This discussion has never taken place.

In practice, the EU's conditional 30% offer has failed to leverage higher ambition from other countries, which have largely ignored it. Is this still the right approach for Cancún or do we need a different strategy?

That's also what our communication says, it is what the March Council conclusions and what the 2020 strategy said in late February: 30% when the conditions are right. It was never very clear exactly what that meant but is still part of the game.

I said back in January before I started this job that no, I think that as Copenhagen has passed without going to 30%, when we do it must be timed right and we must get something out of it. Nobody suggested that we would.

There are some business interests in Europe spinning it as if we wanted to do that, but it was never the intention. It would have been very easy for me to say 'yes, we can go to 30%', but our communication says that this must be seen in an international context.

It also tries to make an argument that it is in Europe's own interest to be ambitious. We should not be too complacent just because it has become easier as we have competitors out there and we will be playing a very different game over the next five to ten years from what we used to play before the rest of the world woke up and set domestic targets after Copenhagen.

In fact, a year ago prior to Copenhagen, Europe was alone in setting a target. Since last June, Russia came up with a target, Japan did in September with their new government, Mexico, Brazil, Korea, Singapore, China, India, Indonesia all have – very big economies – in the run-up to Copenhagen. 

Did Europe get anything out of being the front runner? Well, today we are in a very different situation than where we were before.

So we succeeded in getting those countries to agree to domestic cuts. It seems that internationally we didn't succeed with this 30% 'carrot', however. Do you think it is the right strategy to go to Cancún with the same discourse?

I'm not sure it is exactly the same discourse. Of course, regarding the 30% goal, we are sticking to our line. It would be strange not to when all these countries representing billions of people have come forward with targets.

Actually with the Copenhagen Accord, more than 120 countries were signatories and over 75 have now set targets. This is a transformation from what we had before.

I don't think we are going to Cancún with exactly the same discourse as Copenhagen, however, as we can make a one-time pressure like with Copenhagen but if that does not deliver everything we want then we should pursue what I call a 'step-wise' approach with regards to Cancún.

It would be tempting for Europe to say 'please deliver everything we didn't get in Copenhagen'. It would be easy for Europe because we are ready. But, if Cancún didn't deliver, there would be the risk that the whole process would be killed off. Is that in our interest? No, it is very much in Europe's interest that not only Europe contributes but that all major economies do.

Instead, we argue Cancún must build on the progress made at Copenhagen – the two degrees target, the fast-track financing, the MRV language. But we must also be able to conclude a new deal on forestry for instance, which is incredibly important to this whole equation. And maybe even on the adaptation framework, another area that has been overlooked by some but where quite substantial progress was made at Copenhagen.

There will be a set of decisions that could and should be ready by Cancún and that the EU can deliver. 

We can all hear the news coming out of Beijing, Washington or any non-European capital since Copenhagen – not much. So our thinking is, if we were to start talking about the legal form of the treaty, we would not get anywhere.

Maybe if we can agree on substantial issues like forestry, adaptation or fast-track financing, then maybe, after Cancún, a lot of developing countries will be able to see what is in it for them.

Wouldn't trying to achieve only little pieces of the puzzle risk losing momentum?

Yes, but it is probably an even bigger risk to try and get everything and then get nothing. I said, in my speech when we opened the high-level segment in Copenhagen, 'let's get it done now' – I was emphasising that we were in the balance between failure and success. If we fail now, it may take years until we get another chance to strike a deal. Maybe we would never be able to do it.

It is clear with the pressure of Copenhagen that if you do not succeed then it gets complicated. If 120 leaders couldn't find a compromise, what then? The European Union is trying to keep the momentum and get these things done by Cancún. Then hopefully in South Africa we can agree on the legal form.

Let's be frank, how many 'G2' meetings did the US and China have last year to discuss the legal form without agreeing? Wouldn't it take at least some new signals from them to think that we could solve things in Cancún? I would love to think that we can but the key to that lies with those two capitals and elsewhere.

You have been travelling around the world to meet with your international colleagues to invigorate the climate negotiations. What impression do you have of the level of ambition at the moment and what are the main sticking points?

They were just about reaching a compromise in the US Senate with their Climate Bill when the oil spill arrived. We would like to see an ETS system broadening. If we could see utilities – the power sector – involved then it would be a very strong signal as then they would have taken the first steps towards a cap-and-trade system, but this is a controversial issue for them.

Right now Japan is preparing their cap-and-trade, and New Zealand.

On the other hand, China is not making it easy around the negotiating table, let me put it that way.

When you visit China and hear about their plans, however, you see that they are doing a lot to live up to their target set before Copenhagen. What I was told late April and have seen quoted in the press last week is Chinese Minister Xie now publicly said 'we have to live up to our targets for this year, for later, and if necessary we will even close down production in order to meet them'.

When you set targets, then action must follow, particularly in Chinese culture. So yes, progress is slow around the negotiation table, but I see that, in real practical life, people, industries and sectors are moving.

Two weeks from now we will have some experts in China trying to discuss sectoral approaches with the Chinese. I suggested that to China's minister in late April and I thought he would just say 'no', but he said it might be a good idea.

They are right now looking into three sectors: cement, aluminium and steel. How can they live up to their domestic their targets unless they increase significantly energy efficiency in these very energy-consuming sectors? And what are the most most-exposed sectors in Europe? Cement, aluminium and steel.  

So it's a good example that if we could cooperate with the Chinese to develop sectoral approaches,  that would be rather interesting, not only for them but definitely also for us.

Many studies have shown that the EU ETS has been severely hit by the economic crisis and would require a tighter cap to deliver the emissions savings it set out to do. What plans do you have to safeguard the integrity of the scheme without increasing the emissions target?

What we have seen during the economic crisis is that the demand for allowances fell when production fell. This is pretty normal in a market. So we could also say that yes, despite carbon prices being low right now, we can say that the crisis has proven that the market-based system has worked.

You are right in saying that if we just run 'business as usual' and with the 20% target, then we could risk with the banking system of allowances that prices would be low. But we also have some suggestions as to how we could consider making cuts more attractive, such as rewarding some of the most innovation initiatives, putting aside some of the allowances for new companies: these are all things we could do to drive innovation in a more targeted way.

Is setting aside allowances an actual plan to put into action?

What companies have they've got. I am a Danish Conservative and I am against making legislation that goes back, undoing what people have already done in confidence with the regulation at that time. If there are unused allowances, for instance in the new entrants' reserve, these are some things we can work on.

Another mechanism currently under discussion in the EU is a carbon tax. Do you support this?

One of the main reasons why Denmark is one of the most energy-efficient countries of the EU-27 is that we already had a high price on energy. As we have a minimum tax on fuel, we could also have a minimum tax on energy. Of course we must be careful not to have double taxation after the ETS.

But if we, in the future, still want to protect our relatively expensive welfare societies in Europe, we will have to think of how it will be financed and be more sustainable than they are right now. I think most people would agree that we cannot increase taxes on labour, maybe we even have to decrease them if we are to be competitive. Maybe it would be a better idea to get some of your tax revenues from energy taxation, from resources- 'don't tax what you earn, tax what you burn'.

If we want people to work longer in Europe, maybe we should not have as high tax burdens on labour as we have today. If we want people to consume less energy, that's one of the tools we should be working with.

There are lots of details to be worked out. I would say if you do it intelligently, you can have a lot of results coming from energy taxation. But of course it should not be just for generating money but it should have a purpose that you want people to do things differently.  

I still think that in the agricultural sector, little contribution has yet been made to ETS and in order to fulfil our targets in the future, farming will have to be involved and best-practices used more. There are many co-benefits to be gained. Farmers don't have to be part of the problem, they can also be a part of the solution, with biogasification, for instance. So many new technologies exist to use resources better.

A tax could be an incentive for them but there are so many different possibilities and these should be up to the member states.

New member states are among the least interested in deepening the EU target to 30%, and yet many of the reductions are to be found there. The commissioner suggests cohesion policy might be an attractive means of achieving deeper reductions, but if the EU budget doesn't rise, any money allocated to climate and energy would be taken from other activities planned by member states. Why would the Commission view this as a way of winning new member states' support?

I think the potential exists to use cohesion funds in a more targeted way. You are right that this is not an easy discussion, concerning adaptation, for instance. But isn't it strange that today we can pay for infrastructure projects but we do not make it a criterion that you can only get funding if things are built with adaptation in mind. If a big institution is being built in the harbour of a European city, it would be good to ensure that it is climate-proof.

But I also realise that member states could be concerned that they have to live up to many different policies. Clearer criteria would be useful here. I have been to many new member states and I can say that the principle of getting more out of the cohesion funds is not controversial. Of course, its specific composition is now the next step.

We received feedback from the 11 June Environment Council and many member states' positions depend on how the funds are constructed. There are so many things we could do better when we are coordinated, like CCS [carbon capture and storage], for example, in order to develop new technologies. I think that this shows that there are ways to do this without harming any individual member state.

The Commission's climate action, energy and transport departments are all doing 2050 road maps. Will all three of them be compatible with the Council's 80-95% GHG reduction target commitment by 2050? How do you plan to achieve consistency?

The target of 80-95% reductions of GHG emissions is EU policy. The 2050 road maps being elaborated by the Commission in relevant policy areas are meant to implement this policy. I chair a group of commissioners, the purpose of which is exactly to provide consistency and coordination on the way forward. The target is challenging and to reach it, we need ambitious policies, not least in areas like transport and energy. I do not wish to comment on specific proposals in the pipeline, but rest assured that the Commission is determined in its efforts.

Every commissioner comes to Brussels with an idea of what their legacy will be. What do you see as yours in five years' time?

I said at my hearing that I wanted Europe to be the most climate-friendly region in the world. I think that's a huge ambition. We are being challenged as a world leader in this field and this position will not preserve itself. To continue being a driver for this and prove by example that it pays off to become more energy efficient – I would very much like to be part of this transition.

If we do not make progress on this during the next five years then I would be extremely worried, as our competitors are moving extremely fast and we would risk losing our position as one of the strongest regions in the world in this area.

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