TED Case Studies
EC Carbon Tax
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CASE NUMBER: 226
CASE MNEMONIC: ECCarbon
CASE NAME: EC Carbon/Energy Tax
A. IDENTIFICATION
1. The Issue
Since 1991, the European Community has been debating the merits
and desired method of implementation of a plan to reduce the EC's
emission of greenhouse gases, in this case specifically CO2. The
impetus for this debate was the Rio Conference on Climate Change
in 1991; the EU jointly ratified the Rio Convention on Climate
Change in December 1993. The European Community (EC) proposed to
stabilize carbon dioxide (CO2) emissions to 1990 levels by the
year 2000. "Greenhouse gases", gases that consist largely of
CO2, are believed to be responsible for the global warming
trend. In order to reduce CO2 emissions, the European
Commission proposed a carbon tax -- a tax on non-renewable energy
sources, such as oil and coal, that release CO2 into the
atmosphere. The type of measure, which had been both
controversial and contentious, has finally been determined by the
European Parliament as a call for a 50/50 tax on both specific
CO2 emissions and general energy (coal, oil, natural gas and
nuclear). The member states, however, have failed to agree even
upon the need for such an EU-imposed tax, much less a full
strategy for implementation.
2. Description
In 1992, many nations of the world met to discuss global
environmental problems at the Rio Conference on Climate Change
(also called the "Earth Summit"). There, they determined that
one of the primary threats facing the human race based on its own
behavior is that of the global climate change caused by global
warming. One of the causes of global warming identified was the
emission of so-called greenhouse gasses (CO2, methane, and CFCs)
from industrial processes. The Rio Convention on Climate Change
included an agreement to reduce significantly the emission of
greenhouse gasses by all parties to the Convention, which the EU
has been since December 1993.
The method chosen by the EU was a discussion on a possible tax on
energy, and/or CO2 emissions directly. After spending nearly two
years discussing and/or ignoring the issue, several committees of
the European Parliament (ECOFIN, Environment) have agreed upon a
50% carbon content/50% energy cost tax, to be applied to all
member states. The tax would not be intended to increase overall
revenue, and member states would be allowed to choose what they
would want to do with the money raised: most would likely use it
to reduce the costs associated with social spending (see RIOTRADE
case).
While some members of the EU have come up with plans to reduce
their production of CO2, several of which involve such a CO2 tax
(Germany, Belgium, Italy, Luxembourg, Denmark, and the
Netherlands) others have opposed the tax on various different
grounds, including lesser industrialization/energy use and
infringement of national sovereignty. Spain, Portugal, Greece,
and Ireland object to implementing the tax based upon their lower
level of industrialization and energy use, and would rather have
the tax level moderated for their circumstances. Nonetheless,
all members but the UK have agreed upon the necessity of the tax
on an EU level. The UK objects to the tax based on the principal
of national sovereignty, and have proposed an internal increase
on VAT on domestic power and road fuel, rather than a tax on
emissions or energy.
The tax has gone through a number of different incarnations, but
was stabilized in its present form by the European Parliament's
Environment Committee. The Commission has given its approval of
the tax plan, but the European Council has yet to agree to EU-
wide implementation (member states have not agreed to it). Part
of the problem with the tax is that it is only intended to
stabilize EU carbon emissions at 1990 levels by the year 2000.
Even with the tax, levels will not fall, they simply will not
increase as high as they would without the tax. (EC Energy
Monthly, Sept 16, 1993).
The March 1990 proposal came nine months after the Council passed
a resolution urging member states to take measures in response to
global climatic problems and to focus attention on improving
energy efficiency. The Commission's proposal to freeze CO2
emissions at their 1990 levels was to be part of the EC's SAVE
program (part of the EC's work program, Special Action Program
for Vigorous Energy Efficiency).
The carbon tax is to be part of the EC's overall environmental
policy. In order to enact a common environmental policy, the EC
agreed to set up the European Environmental Agency (EEA) in 1990.
The stated purpose of the organization is to provide accurate
objective data on the environment in order to enforce EC
legislation and to ensure that correct information is provided
when new legislation is drafted. One interesting feature of the
EEA is that it is open to non-EC members. Eastern and Central
European nations have been encouraged to join as have members of
the European Free Trade Association (EFTA). A larger
organization, however, will make decision-making more difficult
and probably less effective. The lesser-developed states will
probably work to ensure that environmental decisions do not
constrain their development strategies. The interests of
European Community members have also hindered the EEA from
carrying out its mission. France has held up the decision of
where to locate the EEA until decisions could be made regarding
the location of other Community institutions.
Community environmental policy was further clarified when the
Council issued a resolution in February of 1993 outlining the
Community's policy on the environment and sustainable
development. The relationship between the environment and
European Community industry is to be built on three pillars. The
resolution specifies that the "three pillars on which the
environment/industry relationship will be based on:
- improved resource management with a view to both
rational use of resources and improvement of competitive
position;
- use of information for promotion of better consumer
choice and for improvement of public confidence in
industrial activity and controls in the quality of
production;
- Community standards for production processes and
products."
The Council resolution says that although there has been progress
in reducing atmospheric pollution, "serious problems continue to
exist." The resolution reiterates the EC goal of stabilizing CO2
emissions in the European Community at their 1990 levels in order
to reduce atmospheric pollution in Europe and reverse the global
warming trend.
The Proposed Carbon Tax
In March 1990 the Commission proposed to stabilize CO2 emissions at
their 1990 levels by the year 2000. The proposal was significant
not only for the environmental and energy action the Community was
proposing to take, but also because this was the first joint
communique presented to the Council. This would cut forecasted
emissions by roughly 12 percent.
EC ministers endorsed a three part strategy, outlined in a 1991
white paper, to meet their goal regarding CO2 emissions: Community
measures to promote energy saving; national measures to save
energy; and an EC energy tax. The tax, known as the carbon tax,
would begin at $3.00 (US) on a barrel of oil (or its equivalent)
and increase one dollar a year until it reaches $10.00 a year.
There has been heated debate over the effectiveness of such a tax
on CO2 emissions in Europe, and if a reduction of CO2 emissions in
Western Europe would have much impact globally. (In 1992, the
European Community was responsible for only 13 percent of the
world's CO2 emissions.) There has also been controversy as to
what impact the tax would have on the world oil market, the
development of renewable sources of energy and the energy
businesses within the EC.
There are as many opponents against an energy tax, both in the
public and private sector, as there are reasons to oppose it.
Britain and Luxembourg have been against the proposal and in
December 1993, Prime Minister John Major vowed to fight any further
efforts at introducing the carbon tax. Such a tax could be
expected to reduce consumption in Europe and thereby lower demand
on the world market. Oil prices could drop, including the price of
Britain's North Sea oil, and the British would obviously prefer not
to see oil prices drop any more than they have already over the
past decade. The official British government policy has been to
push for the principle of subsidiarity and to insist that each
country should reach the CO2 goal individually.
The poorer EC countries, Spain, Ireland, Portugal and Greece, have
maintained that the carbon tax would be a larger burden for them
than for the other countries that are already more
industrialized. In addition, the lesser-developed EC states have
contributed less to the overall CO2 levels that presently exist.
Higher energy prices would make further economic development much
more expensive thus making it more difficult for the poorer states
to close the economic gap that still exists within the EC.
The Commission, however, has attempted to come up with a compromise
plan to win over the four poorest EC countries. In October of
1993, Environment Commissioner Yannis Paleokrassas proposed a plan
that would relate the responsibility to impose the tax to a
country's CO2 output and its Gross Domestic Product (GDP). A cut-
off level would be established and those countries that were below
the level (and all four poor countries are below the level proposed
by Paleokrassas) would not have to implement the tax until their
country's level rose above 85 percent of the EC average. This
plan has not been implemented yet either, and still would probably
not be accepted by Britain.
The carbon tax has obviously caused considerable animosity between
members of the Community. In June of 1993, Germany threatened to
delay a joint EC ratification of the United Nations climate change
convention unless Britain agreed that the tax was essential.
Britain's position was to state that it agrees with the original
pledge to reduce CO2 emissions and the subsequent reaffirmation at
the Rio environmental summit, but does not see the need for the
tax. The climate change convention was eventually ratified in
December after a deal was reached that left out any language
linking the need for the carbon tax with the declaration to fight
global warming.
In September, the Danish utility company Elsam, along with another
state-owned power company Elkraft, alleged that the private British
electric utility company, PowerGen, tricked it into signing on to
a list of European power companies that are opposed to the carbon
tax. The official Danish policy is the same as the Commission's
regarding the carbon tax. Denmark has in fact already established
its own national CO2 tax. Norway, Sweden, Finland and Holland also
have their own versions of a CO2 tax in place.
Oil producing states have criticized the EC for proposing what they
believe is an unfair tax on oil. Dr. Abdullah I. Al-Quwaiz,
associate secretary-general for economic affairs in the Gulf
Cooperation Council (GCC), stated, "[I]f we go by the logic of the
"polluter pays", then oil has been paying more than its share in
environmental degradation, while coal which emits 30 percent more
carbon dioxide than oil, has been awarded subsidies." Al-Quwaiz
estimated that the GCC states would lose $17 billion in the year
2000 because of reduced oil exports if the EC energy tax would be
approved.
Proponents of the plan are still trying to find a way to implement
it. Jaques Delors, president of the European Commission, told
environmentalists in February 1994 that he would continue to fight
for the tax until the end of his term as president. Delors
appears ready to allow one or two countries exemptions of some type
in order to push the tax through this year, according to the same
news report. The Commission is looking at several other compromise
plans including allowing countries to include various existing
national energy taxes as part of any new energy tax and is also
entertaining the notion of levying a $3.00 per barrel tax instead
of the original tax that would eventually reach $10.00 a barrel.
The Commission hopes that a $3.00 tax would be enough of a
compromise to convince the British to end their opposition to the
tax. Delors wants to use the energy tax money to fund programs
such as the welfare program and thereby reduce the deductions from
workers' wages that are presently used to fund such programs.
This would hopefully create more jobs and alleviate some of the
unemployment problems in the Community. The $3.00 figure, however,
would generate far less revenue than the $63 billion estimated for
the year 2000 (using $10.00 a barrel) so it is unclear how
significant the reductions in worker deductions would actually
be.
Case Update:
Emissions of CFCs are steadily falling as a result of the
Montreal Protocol (although other gases which are potentially more
harmful due to their longer atmospheric lifetime, such as SF6 and
PFCs, are replacing them.) Also nitrous oxide (N20) is an important
greenhouse gas and will continue to be more so than CFCs. The IPCC
second assessment report (1995) states 'the direct radiative
forcing of the long-lived greenhouse gases (2.45 Wm-2) is due
primarily to increases in the concentrations of CO2 (1.56 Wm-2) CH4
(0.47 Wm-2) and N20 (0.14 Wm-2)'. It also goes on to say, 'The
direct radiative forcing due to CFCs and HCFCs combined is 0.25 Wm-
2. However, their net radiative forcing is reduced by about 0.1 Wm-
2 because they have caused stratospheric ozone depletion which
gives rise to a negative radiative forcing.' N.B. radiative forcing
is a measure of the importance of a potential climate change
mechanism: it is the perturbation to the energy balance of the
earth-atmosphere system in Wm-2.
Additionally the Framework Convention on Climate Change was
adopted in New York on May 9, 1992 and it was opened for signature
at the Rio Earth Summit. It did not enter into force until March
21, 1994.
For further information see the UNFCCC web site:
http://www.unfccc.de
Reference:
Lucie Whitford
Consultant, Information sub-programme
UN Climate Change Secretariat
3. Related Cases
MONTREAL case
SULFUR case
CHINCOAL case
JAPANAIR case
KORPOLL case
CHILEAIR case
CLEAN case
VENEZ case
RIOTRADE case
Keyword Clusters
(1): Trade Product = OILGAS
(2): Bio-geography = GLOBAL
(3): Environmental Problem = Global Warming [GWARM]
4. Draft Authors: James Bonnell and Nathan J. Martz
B. LEGAL CLUSTER
5. Discourse and Status: DISagreement and INPROGress
While the 50/50 CO2/energy tax has been approved by several EU
committees (ECOFIN, Environment) and the European Commission, it
has yet to gain approval from the Council of Europe. The member
states have strong differences about the tax, and have yet to reach
agreement among themselves on the details and on a timetable for
implementation.
6. Forum and Scope: EURCOM and REGION
7. Decision Breadth: 15 (EURCOM members)
The decision will have to be taken among the current EU members,
and will have to be implemented in some form (itself or a similar
measure with the same effects of reducing CO2 emissions) by every
country that wishes to join. Four countries have filed
applications to join the EU currently: Austria, Norway, Sweden, and
Finland. Only Norway's vote is still in question; the other three
countries will be members of the EU in January, 1995. Any other
countries that apply in the future would also have to implement
such a measure, so the potential breadth is wider than its current
breadth.
8. Legal Standing: TREATY
This decision was somewhat difficult. The Rio Convention which
sparked the carbon/energy tax debate is certainly a treaty. The EU
government only has the standing to discuss or require such a tax
on its members because of the treaties between members (Rome
Treaty, SEA, Maastricht). However, member states (especially the
UK) have disputed the grounds for an EU-wide, Commission-mandated
tax in that it would infringe on their national sovereignty (their
sole prerogative to tax). If the tax is implemented, it will be
solely because the members agree to its implementation; the EU
cannot force the tax on its members.
C. GEOGRAPHIC Clusters
9. Geographic Locations
a. Geographic Domain: EUROPE
b. Geographic Site: EUROPE
c. Geographic Impact: EUROPE
10. Substate: NO
11. Type of Habitat: TEMPerate
D. TRADE Clusters
Note that all economic information has been exerpted from "The
economic effects of the proposed CO2/energy tax" in European
Economy, March 1993, No. 3.
12. Type of measure: Tariffs and taxes [IMTAX]
The tax would be start out at the rate of $3/barrel of crude oil
energy equivalent (that is, the amount that an equivalent amount of
electricity generated from oil would cost, in the case of coal, gas
and nuclear energy), going up to $10/barrel in seven years.
Individual states, as stated, have yet to agree to the tax. The
energy tax would be used, not to raise revenues, but rather to
allow a transfer from energy to social expenditures. The tax is
only intended to go through if other OECD nations also implement
the tax.
13. Direct vs. Indirect Impacts: INDirect
While the energy tax has no prima facie effect upon trade per se,
indirectly it could affect the importation of energy, especially
oil from OPEC. At least, that is the fear behind the Gulf States
desire to prevent implementation of the tax; with higher prices,
they are afraid that the EU will import less oil. The
environmental impact of implementing the tax should be to reduce
CO2 emissions in the EC to 1990 or earlier levels; the
environmental impact of the tax should be positive. The problem to
be more concerned with is the environmental impact if the tax
should fail: what will such a failure mean for global environmental
efforts? If the European Community cannot agree on such an
important, possibly critical issue as what to do about global
warming, how can developed nations expect any other countries to
take this issue seriously? Japan and the U.S. have already
rejected similar measures.
14. Relation of Measure to Environmental Impact
a. Directly Related: NOS
b. Indirectly Related: YES [GASOIL][COAL]
c. Not Related: NO
d. Process Related: YES POLA
15. Trade Product Identification: GASOIL and COAL
16. Economic Data
The tax would be phased in from a rate of ECU 17.75 ($3) per ton of
oil equivalent to ECU 59.17 ($10) by 2000. Renewable energy
sources are not taxed (biomass, hydro, wind). The tax is split
50/50 between energy content and carbon content; therefore, high-
carbon sources like coal are the hardest hit by the tax, and
countries which make higher use of coal will also be most affected
by the tax (if they prove unwilling to switch from coal to cleaner
fuels). In US equivalence, the total value of the tax in all EU
nations would be about $10 billion/year (if implemented) by 2000.
OPEC countries have claimed that such taxes will result in serious
revenue problems, but numbers are not yet convincing.
17. Degree of Competitive Impact: LOW
The measure is likely to strongly increase the price of energy-
intensive industries; moderately increase or decrease the prices
for other manufacturing industries; moderately decrease prices for
services. However, the degree to which these increases/decreases
will affect European industrial competitiveness is unknown at this
time. To some degree, this appears to be a trade-off between
potential competitive impact and potential environmental benefits,
both of which may be projected, but are not even reletively known.
A carbon energy tax would make CO2 emitting fuels more expensive in
the European Community and decrease imports of such types of fuels.
There has been an extensive lobbying campaign undertaken by oil
producing states in the Persian Gulf area to protest any such
carbon tax. A carbon tax also would increase use of alternative
forms of energy in the EC. Solar, wind and nuclear power would
become more feasible from an economic standpoint. A positive
benefit is the development of new and better technologies for
producing electricity and transportation.
In 1992, the Organization of Economic Co-operation and Economic
Development (OECD) published an economic/environmental study that
simulated the effects of the EC energy tax using a model called the
"GREEN" model. According to the OECD model, implementing the
carbon tax in 1992 would put CO2 emissions in the year 2000 at or
below 1990 levels. Community CO2 emissions would steadily decrease
as the Community begins to rely on alternative carbon-free electric
energy source. Economically, the coal and oil industries of the EC
would suffer substantial financial losses, but real GDP would
decrease only 1/2 percent by the year 2010. The global
environmental effects of the EC tax, however, would be fairly
insignificant. As time goes on, EC emissions of CO2 as a
percentage of the world CO2 emissions decreases until the year 2050
when it becomes less than one percent. The OECD believes the tax
would depress the world oil and coal prices thereby making oil and
coal more attractive to lesser-developed nations.
Lower energy prices create less incentives for lesser-developed
(LDCs) countries to search for alternative forms of energy because
lower energy prices mean these nations could afford to burn more
oil and coal. So even though the EC would be reducing its CO2
emissions, the predicted lower coal and oil prices would result in
an increase in overall global emissions of CO2. The carbon tax, as
it was proposed, is an unilateral plan that sets an example for the
rest of the international community rather than a comprehensive
global plan for reducing CO2 emissions. It is not too surprising
then that according to the OECD study, the EC energy tax would have
little effect on world CO2 emissions or the global warming
problem.
The effect of such a tax on the oil producers, however, would be
significant. Independent studies estimate that it would cost the
oil producing countries of the Middle East around 14 billion
dollars a year. Community oil and coal producers would also
suffer financially. One possible side-effect of a carbon tax would
be to make nuclear power more attractive even though nuclear power
is potentially more of a long-term environmental problem.
A more positive outcome of a tax on non-renewable energy sources
would result in the development and commercial application of
alternative sources of renewable energy. Solar and wind power
would become more cost effective and an attractive alternative.
Research and development of other sources would most likely
accelerate. Oil and coal supplies will not last indefinitely and
the EC would have a head start on the rest of the world in the
development of new sources of energy.
18. Industry Sector: UTILity
19. Exporter and Importer: MANY and EURCOM
E. ENVIRONMENT Clusters
20. Environmental Problem Type: Global Warming [GWARM]
21. Species Information
22. Impact and Effect: LOW and PRODuct
23. Urgency and Lifetime: MEDium and 100s of years
24. Substitute: LIKE
Some conservation effects, some substitution effects hoped for.
Primary substitute being switching from 'dirtier' coal to somewhat
'cleaner' oil. Otherwise, conservation would be likely to be
encouraged, although it might just as well encourage greater use of
hydro, wind, biomass, nuclear, etc.
F. OTHER Factors
25. Culture: NO
26. Human Rights: NO
27. Trans-Boundary Issues: YES
This might be considered to involve trans-boundary issues in
that some states (like the UK) consider EU directives such as the
goal of the CO2/energy tax to be impositions upon their national
sovereignty. The effects of the environmental problems are
certainly cross-border in scope, i.e. CO2 emissions causing air
pollution respect no borders. The issue of global warming
(although scientists have by no means agreed upon the reality of
dangers from global warming due to industrial processes) could also
be considered a trans-boundary.
3. Relevant Literature
Agence France Presse. "Delors is Still Battling for Energy Tax."
Agence France Presse, Financial pages, Feb. 2, 1994.
Axelrod, Regina S. "Reconciling Energy Use with Environmental
Protection in the European Community." International
Environmental Affairs, V.4 (Summer 1992): 185-202.
Commission of the European Communities. Environmental Policy in
the European Community. Luxembourg: Office for Official
Publications of the European Communities, 1990.
Commission of the European Communities. Working for a Better
Environment: The Role of Social Partners. Luxembourg: Office
for Official Publications of the European Communities, 1989.
Commission of the European Communities. Proposal for a Council
Directive Introducing a Tax on Carbon Dioxide Emissions
and Energy. June 30, 1992.
The Economist: "Sootbusters" Oct 12, 1991 p19-20.
European Economy. Supplement A: Recent Economic Trends. "The
economic effects of the proposed CO2/energy tax."
The Economist. "Europe's Industries Play Dirty." The Economist,
May 9, 1992: 91.
Europe Information Service. "CO2/Energy Tax: Danish Electricity
Utilities 'Tricked' by UK's Powergen." Europe Energy, Sep.
17, 1993.
Financial Times. "Valuing the Environment." The Financial Times,
Aug.19, 1993.
Information Access Company. "US and EC Grapple with Energy Taxes."
Petroleum Economist Ltd, July 1993.
Nicoletti, Giuseppe and Joaquim Oliveira-Martins. "Global Effects
of the European Carbon Tax." Economics Working Paper No. 125.
Paris: Organisation for Economic Co-operation and Development,
1992.
Reuters. "EC to Ratify Climate Change Convention This Month." The
Reuter Library Report, Business section, Dec. 16, 1993.
Reuters. "U.S. Climate Plan not as Good as CO2 Tax." The Reuter
European Community Report, Oct. 20, 1993.
Reuters. "Bid to Win Poor Countries' Vote on Energy Tax." The
Reuter European Community Report, Oct.5, 1993.
The following items were all culled from Lexis/Nexis, specifically
the European library, keywords carbon and energy and tax were used.
Specific files accessed included EC Energy Monthly, Europe
Environment, European Energy Report, and Power Europe.
EC Energy Monthly copyright The Financial Times Limited
Date Title
July 6, 1993 "'Calamitous blow' of CO2 tax - OPEC"
Aug 4, 1993 "EC/GCC to study global energy/environmental
impact"
Sept 26, 1993 "CO2-Energy tax splits views of MEPs"
Oct 21, 1993 "Environment Committee votes for 50/50 CO2/energy
tax"
Oct 21, 1993 "Burden sharing carrot offered to cohesion
countries"
Oct 21, 1993 "DGXI waits for Member States to update CO2
programmes"
Nov 19, 1993 "Japan shies from CO2 tax"
Nov 19, 1993 "CO2 Tax re-packaged? MEP's react angrily"
Dec 16, 1993 "12 jointly ratify Rio"
Jan 21, 1994 "UK VAT on fuel plan matches EU's CO2 tax"
Jan 21, 1994 "CO2 tax falls off agenda"
Feb 14, 1994 "Next EC/Gulf states meeting"
April 11, 1994 "Still no movement on carbon/energy tax"
April 11, 1994 "EC will not meet CO2 targets says first
monitoring report..."
May 11, 1994 "UK remains aloof while 11 sign up to principle of
CO2/Energy Tax"
June, 1994 "Franco-German push planned on stalled CO2/energy
tax"
July 19, 1994 "Germany to Broaden CO2 cuts"
European Energy Report, copyright The Financial Times Limited
Date Title
July 9, 1993 "IEA's praises Belgiums coal wind-down policy"
March 18, 1994 "Call for switch to oil-firing"
July 8, 1994 "Minister calls for Euro CO2 Tax"
July 22, 1994 "German study suggests solo CO2/energy tax would
be feasible and desirable"
Europe Environment copyright Europe Information Service
Date Title
Sept 28, 1993 "Energy/CO2 Tax: Change of Tack Becoming Clearer"
Nov 9, 1993 "Environment/Competitiveness: Eco-Taxes
Championed as Growth Promoters"
Nov 30, 1993 "Energy/CO2 Tax: Changes to Accomodate UK and
rekindle growth"
May 17, 1994 "Germany and France Agree to Introduce Carbon Tax"
Sept 13, 1994 "CO2/Energy Tax: Council Decides to use expedient
of excise duties"
Sept 27, 1994 "Climate Strategy: Germany Forges Ahead on CO2 Tax
and Climate Change"
Power Europe
Date Title
Oct 8, 1993 "EC proposal for taxing energy and CO2"
July 15, 1994 "EU proposal for a tax on energy and CO2"
References
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