The European Carbon Tax: An Economic Assessment PDF
Preview The European Carbon Tax: An Economic Assessment
THEEUROPEANCARBONTAX: ANECONOMICASSESSMENT FONDAZIONEEN!ENRICOMATIEI(FEEM)SERIES ONECONOMICS, ENERGYANDENVIRONMENT This series servesas an outletfor the main results ofFEEM's researchprogrammes in theareasofeconomics, energyandenvironment. TheScientificAdvisory Boardoftheseriesiscomposedasfollows: KennethJ. Arrow DepartmentofEconomics, StanfordUniversity, Stanford,California,USA William1.Baumol C.V. StarrCenterfor AppliedEconomics, New YorkUniversity, New YorkCity,USA ParthaDasgupta CambridgeUniversity, Cambridge, United Kingdom SiroLombardini UniversityofTurin, Turin,Italy Karl-Goran Maler TheBeijerInstitute, Stockholm,Sweden IgnazioMusu UniversityofVenice, Venice,Italy James M. Poterba DepartmentofEconomics, MassachusettsInstituteofTechnology, Cambridge,Massachusetts,USA DomenicoSiniscalco(SeriesEditor) Director,FondazioneEniEnricoMattei, Milan,Italy and UniversityofTurin, Turin,Italy The European Carbon Tax: An Economic Assessment edited by Carlo Carraro University of Udine, Greta and Fondazione Eni Enrico Mattei, Milan, ltaly and Domenico Siniscalco Fondazione Eni Enrico Mattei, Milan, Italy and University of Turin, Turin, Italy SPRINGER-SCIENCE+BUSINESS MEDIA, B.V. A C.I.P. Catalogue record for this book is available from the Library of Congress. ISBN 978-94-010-4841-5 ISBN 978-94-011-1904-7 (eBook) DOI 10.1007/978-94-011-1904-7 Printed on acid-free paper AII Rights Reserved © 1993 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 1993 No part of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without written permission from the copyright owner. Table of Contents 1. INTRODUCfION CarloCarraro andDomenicoSiniscalco 2. GENERALISSUES ANDEVIDENCE 2.1 GlobalEffectsoftheEuropean CarbonTax IS GiuseppeNicolettiandJoaquimOliveira-Martins 2.2 DistributionalEffectsofaEuropeanCarbonTax 49 StephenSmith 2.3 Carbon Taxes and Energy Markets 67 AlanIngham, AlistairUlph andDavidUlph 3. COUNTRY STUDIES 3.1 Carbon Taxation in Germany: Approaches and Prospective 103 Effects HeinzWelsch 3.2 The Use ofEconomic Models for Analysing Environmental 113 Problems: the CaseoftheGreenhouseEffectforFrance OlivierBeaumaisandPaulZagame 3.3 TheEC CarbonTax and EnergyDemand inthe United King- 135 dam DerekHodgson vi 3.4 The WelfareEffectofaCarbonTax forChina 153 RosemaryClarke 3.5 Environmental and Economic Effects of the European Car- 171 bonTax: the ItalianCase AlessandroLanzaandGiuseppeSammarco 3.6 Airborne Toxic ("Big 5") and GHG (C02) Emissions: Italy 197 1991-1995 PeterL. Fano 4. THEPOLICY DEBATE 4.1 Stabilizing C02 Emissions in Europe: Individual Stabiliza- 221 tion versus HarmonizationofCarbonTaxes MichaelHoel 4.2 The CarbonTax: EconomicandPolicyIssues 239 Terry Barker 4.3 IstheEuropeanCarbonTaxReallyEffective? 255 MicheleBotteonandCarlo Carraro 1. Introduction CARLO CARRARO* AND DOMENICO SINISCALCO** *University ofUdine, Greta andFondazione Mattei; ** University ofTurin andFondazione Mattei 1.THEGLOBAL WARMING DEBATE The 1980s have seen an unprecedented growth in awareness ofthe problem of (man-induced) climate change. Scientific studies to assess the extent to which emissions resulting from human activities are increasing the atmos pheric concentration ofgreenhouse gases (GHGs: carbon dioxide, methane, man-made chloro-fluorocarbons, nitrous oxide), thus contributing to raise the global mean temperature, have been carried out since the beginning of thedecade. In 1990, a comprehensive report assessing the nature and the effects of global wanning was presented by the Inter-Governmental Panel on Climate Change (IPCC), jointly established by the World Meteorological Organisa tion and the United Nations Environmental Programme. According to the Report, emissions resulting from human activities are substantially increas ing the atmospheric concentration of GHGs. This is true, in particular, for carbon dioxide emissions, which result mainly from the burning of fossil fuels. The IPCC estimates that, in thelastthirty years, the increase inthe at mospheric concentration of C02 has been substantially higher than in the last two centuries and the actual level is the highest among those registered in 160,000 years. The increasing atmospheric concentration of GHGs will enhance the greenhouse effect, resulting on average in an additional wann ing ofthe earth's surface. The main greenhouse gas, water vapour, will in crease in response to global wanning, and will further enhance it. Underthe IPCC"Business-as-Usual Scenario", the rate ofincrease ofthe global mean temperatureduring the nextcentury will be0.20to 0.50Cperdecade: asub stantialgrowth, equal to theoneoccurred inthelastone hundred years. I C. CarraroandD. Siniscalco(eds.), TheEuropeanCarbonTax:AnEconomicAssessment, I-II. © 1993KluwerAcademicPublishers. 2 CARLOCARRARaANDDOMENICOSINISCALCO Accordingto the IPCCReport, anincrease intheglobalmeantemperatureis likely to have significant physical, biological and socio-economic conse quences. As a result ofthe increased temperature, for example, agricultural productivity could be substantially reduced in highly vulnerable regions such as Brazil, the Sahel region ofAfrica, south-east Asia and alarge por tion ofChina and the former USSR. On the otherhand, agricultural produc tion may increase in high and middle latitudes, because of a prolonged growing season. Desertification ofmarginal regions could occur as a result of reduced water supply. Sea level rise, due to thermal expansion of the oceans and melting of some land ice, could cause coastal flooding in low lands suchas India,Bangladesh,Egyptand China. The Report stresses that there are many uncertainties in its projections, particularlywith regard to thetiming,magnitudeand regional patternsofcli matic changes. Nevertheless, given the significantrisk thatasubstantial cli mate change may be brought about by the exploitation ofnatural resources, the Report suggests analysing what actions should be considered and in itiated "in order to prevent and mitigate the effects, or to begin with, slow downtheirdevelopment". The issue ofman-induced climate change was further discussed at the UN General Assembly in the autumn of 1990. It was decided that international negotiations should begin as soon as possible, with the aim of reaching an agreementon aClimate Change Convention at the UN ConferenceonEnvi ronmentand Development(UNCED) inJune 1992. Atthe sametime several countries, or groups of countries, such as Europe, have considered the op portunity to introduce measures to control greenhouse emissions unilat erally. 2. THEEUROPEAN CARBON TAX The discussion on possible man-induced climate change has stimulated an intensedebate;atthe scientific, academic and politicallevel, regarding alter native policy interventions to reduceGHG emissions. Anumberofdifferent measures - regulatory, fiscal and voluntary - have been proposed. In par ticular, the discussion has focused on the role of energy taxation as a possiblemeasure tocurbcarbondioxideemissions. At the European Community level, the debate has resulted in a proposal for apackage ofmeasures to limit C02 emissions and improve energy effi- INTRODUCTION 3 ciency.l More precisely, the package is designed to meet the policy target adopted at the joint Council of Energy/Environment Ministers held in Du blin in October 1990: to stabilise C02 emissions, from Community coun tries, at their 1990 levels by the year 2000. At present, the Community 2 represents 13% ofglobal C02 emissions. According to EC estimates , C02 emissions bymembercountrieswould increaseby 11.3%between 1990and 2000, and by 15.5%between 1990and 2005 inthe absenceofany policy in tervention(the so-called"referencescenario"). The EC package consists offiscal, regulatory and voluntary measures to encourage energy conservation and fuel switching, and to exploitthe poten tial for energy efficiency improvements. Acornerstone ofthe Community's strategy tocurb C02emissions is acommunity-wide combined energy/carb on tax. The tax would be linked 50% to the energy content and 50% to the carbon contentoffuels. Theenergy component would be applied to all non renewable energy sources, and would include large scale hydroelectric pro jects. According to the proposal, the tax would be increased gradually between 1993 and 2000; it will start at $3 per barrel of oil equivalent to reach alevel of$l0/bbl ofoil in 2000 (at 1990 prices). Akey feature ofthe proposed tax would be its fiscal neutrality: this means that the overall tax burden would have to remain unchanged, with revenues from the carbontax reducing taxes elsewhere in the economy. In addition, exemptions for en ergy-intensive sectors (iron and steel, non-ferrous metals, paper, glass, chemicalsandcement)would beconsidered. According to a study prepared for the Commission,3 the implementation of the package of EC measures would result in a 9.3% reduction in C02 emissions in 2000, compared to the level ofemissions in the reference sce nario; this means thatthe stabilisation targetwould benearly achieved, with carbon dioxide emissions increasing by less than 1% between 1990 and 2000. The study shows that about two-thirds ofthe C02 emission reduction is induced by the introductionofthe new taxes(the combined energy/carbon tax and annual vehicles taxes). The remainderofthe reduction is due to the estimated effects on energy demand of other measures, in particular the SAVEprogrammeto improveenergyefficiency. With the proposed package ofmeasures to curb C02emissions, the Com munity aimed atprovidingbothleadershipandexampleto industrialisedand developing countries - and the US above all - in relation to an effective strategy to tackle the global warming problem. The greenhouse problem is global both in nature and in its impact. The climate system as awhole is in- 4 CARLOCARRAROANDDOMENICOSINISCALCO fluenced by C02 emissions, regardless of their place of origin, and the ef fects of climatic changes cross the border of nation states. As previously said, the European Community is responsible for 13% ofglobal C02 emis sions, compared to 23% ofthe US, 6% ofJapan and 25% ofEastern Europe and the fonner USSR. To control carbon dioxide emissions would probably have alimited impact; with the proposed strategy, however, the Community aimed at assuming a catalytic role with regard to the Global Oimate Con ventionexpectedto besigned attheUNCEDSummitinJune 1992. 3. THE DEBATE The EC Proposal stimulated further debate on the issue ofglobal wanning, C02emissions and energy taxation, both ininternationalfora and within the European Communityitself. WithintheCommunity, thediscussionhasbeen bothofatechnical and apoliticalnature. Anumber ofstudies have been carried out by national and European re search institutions to assess the effectiveness, the efficiency, the macro- and micro-economic impactofthe proposed carbon/energy tax, both locally and globally. Opinions on the tax have been put forward by the major subjects involved: industry, green movements, non-governmental organisations, trade unions, etc. In particular, the tax has beengreatly criticised by energy intensive industries, concerned with the potential negative impact on their international competitiveness of a unilateral European carbon tax. In addi tion, majorenergy users- together with coal, oil and electricity producers have sounded dire warnings of a flight of investment out ofthe EC, a col lapse in its coal industry and a growing dependence on gas suppliers from politically unstable regions. At the same time, it has been claimed that the tax would be too low to promote any significant reductions in C02 emis sions within the EC and - ifimposed unilaterally- would reduce global en ergy prices and hence promote higher C02 emissions outside the Community. From a political point ofview, extensive discussions have been going on among the Community's memberstatesonthefinal fonn, structure and field of application ofthe tax. Different characteristics ofmember countries' in dustrial structure and energy supply have resulted in different positions on the tax. Forexample, countries such as France, with astrongcommitmentto
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