Rhein on Energy and Climate

The Swedish Prime Minister, Fredrik Reinfeldt, wants to make the fight against climate change a top priority of the Swedish Presidency. To that end, he has proposed that member states introduce a C02 tax as a complement to the December 2008 EU- climate package.

He is fully aware that such a tax would not be popular among business and citizens during the present crisis but believes it to be the most efficient way to shift Europe into a low-carbon society.

Procedurally, the Swedish presidency can do no more than launch a debate among environment ministers and heads of government, who should then invite the Commission to undertake an assessment and make appropriate formal proposals. If adopted these might enter into force in 2013 in parallel to the climate package (automobile efficiency standards cap and trade system for the power sector and energy-intensive industries).

A carbon tax should be levied on those sectors that are not covered by the carbon cap and trade system. These are essentially transport, heating of buildings and agriculture, which jointly account for some 40 percent of European C02 emissions. An effective carbon tax would therefore matter.

De facto, an EU carbon tax would imply raising the existing EU minimum rates for excise taxes on gasoline, diesel and fuel.

Legislation would require unanimity in the Council, which will be hard to obtain.

To be effective the tax rates should rise substantially because of the inflexible demand structure. The EU may have to aim at gasoline price of € 2.0/litre.

Does our political class have the courage to make such an unpopular move and extend it also to fuel, diesel and even kerosene, which are presently heavily subsidised in order to “protect” farmers and house owners or not taxed at all? It will require a lot of political persuasion to make substantially higher gasoline, diesel and fuel prices palatable to voters.

The European Commission keeps a bad memory of a carbon tax initiative. It has failed in the early 1990s, when member states were suspicious of the Commission trying to turn it into a “community tax”. The Swedish Prime Minister has therefore left no doubt that the revenues from a carbon tax would accrue to the member state where it is levied. In order to appease political resistance it will be imperative to introduce the tax increase progressively and to fully offset its impact by lowering income taxes.

A carbon tax has two advantages.

· It is extremely flexible and simple to handle.

· It might help curbing the “monopoly rent” of oil producing countries; for a high tax, the revenue of which would remain domestic, put a lid on oil countries against raising their export prices.

A carbon tax would be an important step towards a more ecological a tax system. This is an old idea of the “Greens” which has fallen into political disgrace. Hopefully, the Swedish initiative will resuscitate it. But this will only succeed if the project becomes part of a long-term energy and taxation strategy. A short-term PR operation is not what Europe needs.

Brussels 07.07.09 Eberhard Rhein

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