Pricing carbon: The role of the Energy Tax Directive

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Pricing carbonThe role of the Energy Tax
Directive
By Paul Ekins Professor of Energy and
Environmental Policy UCL Energy Institute,
University College London Presentation to the
Stakeholder Meeting on the Revision of the
Energy Tax Directive Monday 28th September,
2009 Albert Borschette Conference Centre,
Brussels
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Relevant projects on environmental taxation

• COMETR Competitiveness effects of environmental
  tax reforms. http//www2.dmu.dk/cometr/
• petrE Resource productivity, environmental tax
  reform (ETR) and sustainable growth in Europe.
  One of four final projects of the Anglo-German
  Foundation under the collective title Creating
  Sustainable Growth in Europe. Final report to be
  published October 29, Berlin. www.petre.org.uk
• UK Green Fiscal Commission. Final report to be
  published October 26, London. www.greenfiscalcommi
  ssion.org.uk

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The rationale (1)

• For environmental taxation
• Market failure leading to excessive pollution and
  environmental destruction
• More efficient than regulation more effective
  than voluntary agreements and information
• For energy taxation
• Energy demand increases with income (income
  elasticity 0.5)
• Energy demand decreases with price (industry
  elasticity -0.6)
• Market failures for some energy efficiency
  technologies
• Improvements in energy efficiency lead to a
  rebound effect, and therefore save less energy
  than anticipated (up to 70)
• Humans are extremely ingenious at finding new
  ways to use energy (heating drives, gardens,
  making artificial snow etc.)

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The rationale (2)

• For carbon taxation
• Rich countries must achieve a minimum of 80
  decarbonisation by 2050
• Only carbon pricing (taxing or trading) will
  stimulate the uptake and development of existing
  low-carbon and efficiency technologies, and
  reduction in the demand for carbon-based fuels
• Conclusions from the literature
• Without environmental taxation, the
  (macro-economic) cost of environmental
  improvement will be higher than it needs to be
• Without significant increases in energy prices,
  energy consumption will go on rising
• Where the energy is carbon-based this will lead
  to increased carbon emissions and a failure to
  stabilise the climate

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The challenge
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COMETR objectives

• To outline and clarify the competitiveness debate
  
• To analyse world-market conditions for a set of
  energy-intensive sectors or subsectors, as a
  framework for considering competitiveness effects
  
• To undertake bottom-up modelling and
  macro-economic analysis of the effects of
  implemented environmental tax reforms on
  sector-specific energy usage and carbon emissions
  
• To provide ex-post figures for environmental
  decoupling and assess carbon leakage on basis of
  a comprehensive analysis, taking changes in
  import-export ratios into account
• To review mitigation experiences and provide
  policy advice on possible strategies to improve
  efficient mitigation measures

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Factors that reduce impacts on competitiveness

• Not energy intensive
• Ability of relatively untraded sectors to pass on
  price increases
• Increased energy efficiency
• Increased innovation Porter hypothesis
  low-carbon industrial transition
• GFR and revenue-recycling

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Price taker or price setter ?
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ETR burden net of recycling and tax induced
energy savings

• ETR costs are 1-2 per cent of gross operating
  surplus for some energy-intensive industries

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• net ETR burden up to 2 of gross surplus
• value of spitzensteuer-ausgleich (peak tax
  adjustment) not included

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• higher burden up to 4 gross operating surplus
• no SSC revenue recycling via reduced income
  taxes
• cement and steel increase energy use per value
  added

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(No Transcript)
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Mikael Skou Andersen and Paul Ekins,
eds.Carbon-energy taxation lessons from
Europe,Oxford University Press 2009 (in press)
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Policy conclusions from PETRE case studies

• Case studies construction, renewable energy,
  waste management, fuel-efficient cars
• The German eco tax of 1999 seems to have played
  an important role in the reduction of
  traffic-related CO2 and the reduction of heat
  energy for households.
• More generally, the change in relative prices
  whether through taxes, subsidies (feed-in
  tariffs) or market price movements seems to
  have been the dominant influence across the case
  studies
• Subsidies (including FITs) have proven important
  as specific market support for certain
  technologies
• ETR, complemented by regulation, seems the best
  general mechanism to stimulate a broader range of
  innovations

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PETREScenario modelling with E3ME

• Baseline with low energy prices (BL)
• Baseline with high energy prices (BH)
• S1L ETR with revenue recycling designed to meet
  unilateral EU 2020 20 GHG reduction target (low
  energy prices)
• S1H ETR with revenue recycling designed to meet
  unilateral EU 2020 20 GHG reduction target (high
  energy prices)
• S2H ETR with revenue recycling designed to meet
  unilateral EU 2020 20 GHG reduction target (high
  energy prices)
• proportion of revenues spent on eco-innovation
  measures (efficient vehicles, buildings,
  renewable energy)
• S3H ETR with revenue recycling designed to meet
  cooperation EU 2020 30 GHG reduction target
  (high energy prices)

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Simulation results for central macroeconomic
variables of E3ME for EU27 in 2020 - percentage
deviations from the respective baselines (CO2
targets met by design)
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Conclusions on an ETR for Europe

• The price mechanism is a crucial instrument for
  reducing GHG emissions (Stern)
• ETR is an effective and efficient policy means of
  using that instrument
• It also seems that ETR, especially when
  complemented by other policy instruments, can
  stimulate eco-innovation
• It is not clear that any other policy instrument
  to reduce GHGs has the same net benefits. However
  
• It will be a political challenge to implement ETR
  at a European level
• At national level ETR needs sensitive
  implementation to fit in the country policy
  context
• Major issues that require consideration are
  competitiveness and household distribution

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Mitigation of competitiveness effects on
vulnerable sectors

• Insights from COMETR
• Nordic model (SE FI) reduced income taxes
• cap on tax liability (above 0,8 per cent of
  total)
• cap exchanged by threshold because of minimum
  rates required by Energy Taxation Directive
• Fiscal conventionalists (UK DK) reduced SSC
• agreements as condition for reduced tax rates in
  energy-intensive industries
• recycling of revenue for energy efficiency
  measures, e.g. Carbon Trust
• Pragmatic model (DE NL) mix
• DE spitzensteuer-ausgleich (peak tax adjustment)
  conditional on self-commitment
• NL Long-Term Agreements and adjustments in
  corporate taxation

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Mitigation of competitiveness effects on
vulnerable sectors (2)

• Cement and steel are the key challenges to
  address under ETR other sectors not so
  important
• Transparent ETR with revenue recycling and
  targeted subsidies for technology upgrade in
  cement and steel the recommended mitigation
  approach, cf. Danish experience
• Voluntary agreements require substantial
  incentives to be successful reduction in tax
  rates can provide an incentive that is compatible
  with the polluter pays principle, and may not
  reduce environmental effectiveness (cf. UK
  experience with Climate Change Agreements)
• For large scale ETR/carbon reduction, border tax
  adjustments or international sectoral agreements

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Thank you for your attention!

• UCL Energy Institute
• University College London
• www.ucl.ac.uk/energy
• p.ekins_at_ucl.ac.uk