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Kovacs Explores EU Carbon Tax Options

by Ulrika Lomas,, Brussels

03 December 2009

European Tax Commissioner Laszlo Kovacs has said that tax will play a vital part in helping the European Union and other regions to reduce their carbon emissions and slow the pace of climate change in the coming decades.

Speaking ahead of the Copenhagen Summit at a Brussels conference entitled 'What taxation for a low carbon economy?' Kovacs argued that taxation is "potentially a very powerful tool that can influence the behaviour of all economic actors in the right direction".

"Thus taxation systems and their overall set-up have an important role to play to help addressing climate change," he added.

Kovacs told the conference that he favours the use of incentives built directly into taxation systems that are "technology neutral" and would thus automatically reward less carbon intensive behaviour.

However, he also argued that taxes on CO2 emissions would provide EU member states with a "cost effective" means to reduce carbon emissions not currently covered by the EU Emissions Trading Scheme.

This, according to the Commissioner, would be a "classical example of market-based instruments that can price an externality and thus help to correct a market failure."

"Such taxation would also ensure that we have an economy-wide CO2 price signal," he observed.

"We have started to see a growing interest in CO2 taxation, exactly for the reasons I have mentioned," Kovacs noted, continuing:

"Two months ago we had a very first informal exchange of views with the EU Finance Ministers concerning prospects for more CO2 taxation in Europe and the possible barriers to its introduction. The discussion was rather constructive and promising; several Ministers, indeed, positively welcomed the idea of CO2 taxation. But they also called for appropriate EU-wide framework rules."

Kovacs suggested that the EU Energy Taxation Directive be revised to construct a framework for CO2 taxation.

"We could split the energy tax base which now depends exclusively on the quantity of energy consumed into two parts," he explained. "One would depend on the energy content while the other would depend on the CO2 emissions. It would give a tax and price advantage to the renewables over the fossil energies."

Under this system, revenues collected from a CO2 tax could then be redistributed to tackle other problems, such as social injustice or carbon leakage, Kovacs posited.

"In this context I would like to stress the precious advantage that taxation as [a] market-based instrument has. Advancing on environmental goals will inevitably have a distributional impact, i.e. a new re-distribution of winners and losers, both among business or private consumers," he stated.

At the same time, Kovacs suggested that efforts would have to be made in member states to abolish tax breaks which have the unintended consequence of encouraging more carbon-intensive activities (such as company car schemes), or of discouraging household energy efficiency.

The EU has proposed that a levy of EUR30 (USD45) per tonne of CO2 emitted be imposed on fuel, while also suggesting that a reduced levy of EUR10 per tonne is levied on heating fuel, gas oil, kerosene and natural gas.

However, a recent study by Deutsche Bank concluded that the introduction of new taxes is “problematic” given the current economic climate, as they invariably increase the burden on both individuals and businesses.

The study also argued that as soon as carbon dioxide and other harmful emissions decrease, so too does tax revenue for the state. In order to avoid this phenomenon, the study argues that the tax rate must be fixed at such a low rate as to have very little impact on emissions.

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