CASE NUMBER: 362
CASE MNEMONIC: ECO2
CASE NAME: EC Carbon and 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 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 1991, 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.
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). Industry's reaction to the
proposed tax has been predictably mixed; indifference from sectors
that would not be strongly affected by the tax, and strong
opposition from energy-intensive and energy-producing sectors.
Vocal opposition from the energy-producing sector is very similar
to the opposition generated last year by President Clinton's
proposed (and denied) BTU tax; fortunately, while member
governments may be as influenced as the US was by power generating
concerns, the EU government structure is relatively insulated from
such pressures.
3. Related Cases:
SULFUR case
CO2TRADE case
MONTREAL case
USBTUTAX case
CLEAN case
VENEZ case
Keyword Clusters
(1): Trade Product = [OILGAS]
(2): Bio-geography = [TEMP]
(3): Environmental Problem = [POLA]
4. Draft Author: James Bonnell
B. Legal Clusters
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
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 : Western Europe [WEUR]
c. Geographic Impact : EUROPE
10. Sub-National Factors: NO
11. Type of Habitat: TEMPerate
D. TRADE Clusters
12. Type of Measure: Import Tax [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; whether EC CO2 emissions
actually have a direct, measurable, clear-cut effect on global
warming or not, encouraging more pollution would be an
unfortunate, and likely, result of the tax failing.
14. Relation of Measure to Environmental Impact
a. Directly Related : YES [OILGAS]
b. Indirectly Related : NO
c. Not Related: : NO
d. Process Related : NO
15. Trade Product Identification: Oil 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. Impact of Measure on Trade Competitiveness: MEDium
18. Industry Sector: [OILGAS] and COAL
19. Exporter and Importer: MANY and EUROPE
E. ENVIRONMENT Clusters
20. Environmental Problem Type: Air Pollution [POLA]
21. Name, Type, and Diversity of Species
22. Resource Impact and Effect: MEDium and SCALE
23. Urgency and Lifetime: MEDium and 100s of years
24. Substitutes: Conservation [CONSV]
F. OTHER Factors
25. Culture: YES
26. Trans-Border: 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 ... (global, so to speak) ...
issue.
27. Rights: NO
28. Relevant Literature
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 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.
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"