Rhein on Energy and Climate

In June 2009, the Swedish prime minister had suggested member states to introduce C02 taxes as an additional instrument for tackling climate change. But neither the Swedish Presidency nor the Commission followed up on this suggestion.

So far only two member states seem have on their own decided to prepared to go ahead with C02 taxation.

Ireland has just decided to introduce a C02 tax covering gasoline, diesel, fuel and gas as of 2010. The initial rate would be fixed at € 15/ton, the equivalent of the present C02 market price for C02 (€ 14) under the European carbon trading system or some four cents/litre of gasoline.

The French government is also scheduled to introduce a C02 tax in the course of 2010, gowhich would cover introduce such a gasoline, diesel, gas, fuel, coal and electricity at an initial rate of € 17/ton.

Other member states – Finland, Slovenia and Denmark – boast of having introduced C02 taxation already years ago, but at even lower levels and covering only vehicles.

It is time to put some order into this confusing picture. To this end, the European Commission should once again, after its failed over-ambitious proposals in the early 1990s, seize the issue and prepare a green paper as the basis for legislative action by EU all governments.

It is out of question for the EU to impose an EU-wide C02 tax. All the Commission should do is to present the pros and cons of such tax, define the basic rules for its integrating into the EU climate policy tool box and make a recommendation for its introduction by member states.

The EU climate policy is composed of two separate components:

  • One EU-wide providing for a C02 cap and trade system, which covers big emitters like power, steel, metallurgy, heavy chemicals, cement etc, altogether some 40 percent of EU green house gas emissions.
  • The other, concerning 60 percent of emissions, requiring action by member states. These will have to define national strategies for reaching their assigned reduction targets and submit them before June 2010 to the Commission. C02 taxes should normally be expected to be a key instrument for reaching sectors like agriculture and buildings.

To be effective C02 taxes need to be high. France and Ireland will set their C02 taxes at the level of C02 prices. That should be the minimum for achieving some effectiveness.

More important, they need to reach out to fuel, gas and electricity and areas not inadequately taxed presently, like buildings, trucks and agricultural machinery.

The introduction of C02 taxation will not be popular. It is therefore essential to phase it in progressively and raise it over time.

Like any other excise tax this one is regressive, striking low-income households relatively more than well-to-do people. Compensation therefore seems politically necessary, e.g. taxes asreducing the level of VAT.

All these issues should be carefully discussed at the European level on the basis of a green paper to be submitted by the Commission in early 2010.

Brussels, 14.12.09
Eberhard Rhein

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