Ort, DatumAutor

Energy taxation and emissions trading as instruments of European climate policy

by Michael Kohlhaas

Workshop on Climate Policy and Energy Modeling

Taipei, Taiwan11-12 October 2004

German Institute for Economic Research (DIW), Berlin• Independent policy think tank

• Basic research in the field of economics• Observation of national and international economic

developments• Counseling of the German public, ministries,

governments (national and local), European Commission, other organizations

• Established in 1925• Largest economic research institute in

Germany: > 100 Economists

7 Research Departments

• Macro Analysis and Forecasting• International Economics• Public Economics• Energy, Transportation, Environment

• Information Society and Competition

• Innovation, Manufacturing, Service

• German Socio-Economic Panel Study

For more information see

www.diw.de

Outline

• Background on European Climate Change Programme

• Harmonization of Energy Taxation

• Emissions trading

• Summary and Perspectives

European Climate Change Policy

• EU considers climate change as “one of the greatest environmental, social and economic threats facing the planet”

• Leading role in the international negotiations• Obligation under Kyoto Protocol:

8% reduction of greenhouse gases• Emissions reduction does not come easy

GHG emissions in the EU: 1990 to 2001

European Climate Change Policy

• Climate policy is common responsibility of EU and Member States• both EU and Member States are parties of

Kyoto Protocol• significant differences between Member States

Distance-to-target (DTI) for EU Member States in 2001

European Climate Change Policy

• Climate policy is common responsibility of EU and Member States• both EU and Member States are parties of

Kyoto Protocol• significant differences between Member States

• Mix of policies on EU level and by individual Member States necessary• here: only policies on EU level• similar policies may exist on national level (e.g. ETR in

Germany)

European Climate Change Program

• EU launched ECCP in 2000• continuous multi-stakeholder process

• identify cost-effective ways to meet Kyoto commitments

• to set priorities for action • implement concrete measures

• climate policy needs bundle of measures• cost-effectiveness is a main priority

Identified areas of action

• emissions trading system

• energy performance of buildings

• energy efficiency standards

• energy demand management

• development of renewable energy sources

• combined heat and power (CHP) generation

• modal shift in transport infrastructure

• taxation of energy products.....

Outline

• Background on European Climate Change Programme

• Harmonization of Energy Taxation

• Emissions trading

• Summary and Perspectives

Directive on the taxation of energy products and electricity

– Entered into force on 1 January 2004– reforms previous EU taxation of mineral oils

• widens the scope of energy products covered to mineral oils, coal, natural gas, electricity

• sets higher minimum tax rates for energy products

– includes general and country specific transitional exemptions and reduced minimum rates

Motives for Directive

• Reduce distortions of competition that currently exist between Member States Strengthen the proper functioning of the Internal Market

• Reduce distortions of competition between mineral oils and the other energy products

• Increase incentives to use energy more efficiently reduce dependency on imported energy cut carbon dioxide emissions

Comparison of minimum and actual taxation (EU-15) 

Minimum taxation

Energy Carriersin euro per ...

1997 Proposal

Directive 2004/10 AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK

Unleaded Petrol 1000 l 500 359 414 507 548 559 581 624 296 401 542 372 628 470 396 504 729Diesel (Transp.) 1000 l 393 302/330 290 304 370 304 383 440 245 304 403 253 344 269 294 341 729LFO 1000 l 39 21 76 13 279 68 49 61 166 47 403 5 198 33 85 279 50Heavy fuel oil 1000 kg 34 15 36 6 52 57 19 18 19 14 31 6 32 27 14 .. 44Nat. Gas GJ gcv 0.7 0,3 a) 1.0 0.3 7.2 0.5 0 1.0 0 0 4.3 0 2.5 0 0 4.5 0Coal, coke GJ gcv 0.7 0,3 a) 0 0 7.3 2.1 0 0 0 0 0 0 0.6 0 0 10 0Electricity MWh 3 1 b) 20 1.4 89 7.0 7.3 17.9 0 0 40 2.4 45 0 5.1 22 0

a) 0,15 euro for business use; b) 0,5 euro for business use; all taxes without sulphur tax and VAT; .. - data not availableWhite fields indicate that actual taxes are less than minimum taxes.Sources: IEA 2003, BMU Umwelt 2003, EC 2003

Actual taxation in member states (2002)

Comparison of minimum and actual taxation (EU-accession countries)

 

Energy Carriersin euro per ...

1997 Proposal

Directive 2004/10 CZ HU PL SI

Unleaded Petrol 1000 l 500 359 351 409 381 276Diesel (Transp.) 1000 l 393 302/330 264 336 255 276LFO 1000 l 39 21 0 0 42 0Heavy fuel oil 1000 kg 34 15 0 0 0 0Nat. Gas GJ gcv 0.7 0,3 a) 0 0 0 0Coal, coke GJ gcv 0.7 0,3 a) 0 0 0 0Electricity MWh 3 1 b) 0 0 0 0.3a) 0,15 euro for business use; b) 0,5 euro for business use; all taxes without sulphur tax and VAT; .. - data not availableWhite fields indicate that actual taxes are less than minimum taxes.Sources: IEA 2003, BMU Umwelt 2003, EC 2003

Minimum taxationActual taxation in member

states (2002)

The effects of tax harmonisation

– Quantitative analysis (Kohlhaas et al. 2004)– CGE model: GTAP-E (Burniaux, Truong 2002)

• static version

• nested CES production functions

• perfect competition, constant returns to scale

• Armington assumption

• ‚regional household‘

– GTAP 5.4 data set (incl. CEE countries) • aggregation: 12 regions, 13 sectors

Policy Scenarios

– Ambiguity of Directive: sets minimum rates at a level below actual rates in some countries

– Minimum Tax Harmonization (MTH): Member States fulfill minimum tax as set by Directive for 2010, but will not reduce existing taxes (partial harmonization)

– Full Tax Harmonization (FTH): As MTH, but Member States with higher tax rates lower their taxes to the minimum level

– Min. Tax Harmonization 1997 levels (MTH97): As MTH, but Member States fulfill minimum taxation according to the Commission’s tax proposal in 1997

Price changes (%) - Scenario FTH

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35

FR

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GE

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ITA

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Coal

Industry

Households

-35

-30

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-20

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5

10

15

FR

A

GE

R

UK

ITA

CZ

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C

EU

S

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U

Gas

-30

-25

-20

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0

5

FR

A

GE

R

UK

ITA

CZ

E

HU

N

PO

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XA

C

EU

S

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U

Electricity

-35

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-25

-20

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5

10

15

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GE

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ITA

CZ

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S

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Petroleum Products

Change of demand for energy MTH scenario

EU-15: Small changes in demand (< 1%) except for gas demand in FRA, GBR and EUS due to an increase in gas taxes

-6

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-2

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1[%]

FR

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col

oil

gas

p_c

ely

Change of demand for energy MTH scenario

Accession countries:- Effects are most pronounced for p_c and gas - Increase in electricity demand due to higher tax rates on fossil fuels than on electricity (subst. effect)

-6

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0

1[%]

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col

oil

gas

p_c

ely

Change of demand for energy FTH scenario

EU-15:-Four largest countries reduce tax rates-High increase in energy demand-Only minor effects in Southern Europe

-10

-5

0

5

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35

[%]

FR

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col

oil

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p_c

ely

Change of demand for energy FTH scenario

Accession countries-Effects similar to MTH scenario-Higher decrease in demand for p_c due to higher world market prices

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5

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[%]

FR

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col

oil

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Change of CO2 emissions by region (%)

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[%]

FR

A

DE

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FTH

MTH

MTH97

Macroeconomic Effects: Real GDP

-0,6

-0,4

-0,2

0,0

0,2

0,4

0,6

0,8

1,0[%]

FR

A

DE

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Change of real GDP

FTH

MTH

MTH97

MTH/MTH97:– Small positive effects for EU-15– GDP decrease for accession

countries

FTH:- GDP-increase between 0.5-1%

for countries with tax reduction- GDP decrease for countries with

tax increases is higher than in MTH scenario

Summary

Partial harmonization

• reduces energy demand and CO2 emissions only slightly

• implies GDP losses for new Member Countries, positive effects for old Member Countries

Higher tax rates (e.g. as in MTH97) needed in order to contribute to EU‘s energy efficiency and environmental

goal in a non-negligible way but this is not likely: unanimity of tax decisions in EU

Summary (2)

Full Harmonization

• leads to increasing energy demand and CO2 emissions

• old Member Countries increase their GDP at the expense of new member countries

Higher minimum tax rates needed if full harmonization is to pursue double objective of reducing distortions and reducing energy use and related emissions

Conclusions

• Environmental taxes are a difficult instrument at the EU level, because tax decisions require unanimity

• Energy taxes currently contribute to climate protection because several Member States apply them (for fiscal and environmental reasons)

Outline

• Background on European Climate Change Programme

• Harmonization of Energy Taxation

• Emissions trading

• Summary and Perspectives

What is emissions trading about?

• Main motive: fight climate change

• Scarcity of allowances should reflect scarcity of environmental absorption capacity

• Market price of allowances will internalize external costs

Experiences with emissions trading

• Innovative instrument

• Some applications mainly in USA

• EU ETS substantially larger and more complex

• First application in climate policy

• EU ETS: “New Grand Policy Experiment”

Timetable of EU ETS

• March 2000: Green Paper on “Greenhouse gas emissions trading within the European Union”

• June 2000: Multi-stakeholder working group in the European Climate Change Programme

• October 2000:Draft Directive

• October 2003: Directive adopted

• March/June 2003: NAPs due

• June 2003: “Linking Directive”

• January 2005: Start of ETS

What will happen in the EU ?

• Cap-and-trade system for CO2 emissions • Learning period 2005 to 2007 (3 years)• Kyoto period 2008 to 2012 (5 years)• National caps, but EU-wide trading• Partial system: only CO2• Partial downstream system: only large installations

from selected sectors- Energy activities (threshold rated thermal input > 20 MW)

- Production and processing of ferrous metals (iron and steel)

- Mineral industry (such as cement, glass, or ceramic production)

- pulp and paper

What will happen in the EU? (2)

• Initial allocation mostly free• maximum of 5% (10%) may be auctioned in first (second) period

• Grand-fathering based on historical emissions

• Benchmarking based on sector averages or best available technolgies

• Penalties: 40 €/ton CO2 in 2005/07

100 €/ton CO2 in 2008/12• Linking to JI and CDM

Role of Member States

• Translate Directive into national law• Draw up National Allocation Plans (NAPs)

• total quantity of emissions

• allocation to installations

• Administrate registries, monitoring and enforcement

Criteria for NAPs

• NAPs must be compatible with • Kyoto targets / EU burden sharing

• assessments of actual and projected progress (policies and measures!)

• potential, including the technological potential

• The NAPs may not unduly favour certain activities• Access for new entrants must be guaranteed• Subject to “State Aid” considerations, i.e. allocation

may not give unfair competitive advantage• etc. ...

Some critical issues

• Lax targets for fear of competition in many NAPs• Partial system

• only CO2

• only selected sectors and large installations

• Allocation procedures highly complicated due to special interests

• Lack of data• Institutional framework needs to be developed

Uncertainties

– Will Russia ratify the Kyoto Protocol?

– Total amount of emissions allowances in EU

– Avoidance costs

– Liquidity of emissions market

– Availability of CDM credits

– Post-Kyoto policies

Conclusions

– EU emissions trading is courageous experiment!

– Great potential!

– Needs political courage in implementation

– National competition may not to a “race to the bottom”

– Currently critical stage of implementation

Final remarks: energy taxes

• Environmental taxes are a difficult instrument at the EU level, because tax decisions require unanimity

• Nevertheless, energy taxes currently contribute to climate protection because several Member States apply them (for fiscal and environmental reasons)

Final remarks: ETS

• ETS could be decided by qualified majority in the EU

• EU ETS has great potential, but is still in danger of failing

Final remarks: general

• There is not a single “best” instrument - economic, political and cultural framework must be taken into account

• A lot remains to do for the EU• loophole CDM ?

Thank you for your attention!

Extra Slides

Gross price changes in scenario MTH97* (1)

 FRA GER UK ITA CZE HUN POL XAC EUS XEU

1 col Industry 19.6 13.7 24.1 45.4 63.3 25.6 42.6 72.7 61.9 10.4Households 12.5 7.9 9.8 8.8 40.9 20.4 21.6 71.3 -6.9 -6.9

3 gas Industry 16.1 2.0 12.3 9.3 15.9 14.0 16.0 20.8 13.7 13.7Households 7.6 -3.2 9.1 -30.2 12.3 13.9 10.0 24.2 6.7 -5.4

4 p_c Industry 0 -6.1 -24.5 -8.9 20.7 7.5 15.5 23.1 6.3 8.2Households -4.8 -10.4 -22.4 -15.9 22.4 14.5 15.9 35.3 8.0 0.9

5 ely Industry 7.7 -0.2 -1.8 -22.5 5.7 4.4 5.8 5.5 4.0 1.4Households -4.5 -10.9 2.8 -24.7 4.5 3.7 4.1 4.3 1.4 -14.9

*Scenario MTH97 can be derived by replacing all negative numbers with zeros,

MTH97

Gross price changes in scenario FTH (full tax harmonization)* (1)

FTH FRA GER UK ITA CZE HUN POL XAC EUS XEU1 col Industry 4.2 2.9 -3.4 9.7 13.6 5.5 9.1 15.6 13.3 -16.9

Households 5.3 3.4 4.2 3.8 17.5 8.7 9.3 30.6 -11.2 -11.23 gas Industry 3.4 -9.3 -3.0 -5.7 3.4 3.0 3.4 4.5 2.9 -1.1

Households 3.3 -8.0 3.9 -33.6 5.3 6.0 4.3 10.4 2.9 -10.64 p_c Industry -11.8 -17.3 -31.8 -19.5 6.7 -5.5 3.4 8.8 -4.9 -3.6

Households -17.1 -21.9 -35.0 -28.1 2.7 -3.2 -1.9 12.7 -7.2 -12.75 ely Industry 1.3 -5.0 -6.3 -24.6 1.0 0.7 1.0 0.5 -0.7 -3.7

Households -6.6 -12.3 0.9 -26.0 1.5 1.2 1.4 1.2 -0.6 -16.8

*Scenario MTH can be derived by replacing all negative numbers with zeros,

Change of total demand of energy goods in volume (%)

FRA DEU GBR ITA CZE HUN POL XAC EUS XEU XOECD ROW

FTH

col 0.39 1.97 0.05 12.48 -0.39 -0.83 -1.59 -2.03 -0.48 6.43 -0.13 -0.22oil 8,09 14,71 25,09 14,27 -4,06 1,41 -2,21 -2,00 2,15 6,59 -1,33 -0,88gas -3.76 5.51 -3.02 14.61 -1.89 -2.11 -2.28 -1.91 -2.25 3.35 0.24 0.24p_c 12.88 17.78 32.85 20.27 -4.99 1.84 -2.31 -6.93 2.61 4.38 -1.4 -1.2ely 0.65 4.05 -0.94 19.8 0.66 -0.83 0.06 0.44 0.1 6.35 0.09 -0.09

MTH

col -0.98 -0.15 -0.28 -1.22 -1.62 -0.45 -1.25 -2.1 -0.53 0.14 0.04 0.05oil 0,08 0 0 -0,01 -3,28 -0,23 -1,46 -3,32 0,01 -0,08 0,02 0gas -2.64 0 -1.23 -0.01 -2.27 -1.95 -2.24 -2.1 -1.91 0.03 0 0.02p_c 0.08 0.02 0.02 0.02 -3.45 0.04 -1.36 -5.63 0.01 0.02 0.02 0.01ely -0.43 0.03 -0.24 0.03 0.22 -0.38 0.19 0.39 0.05 0.02 0 0.01

FTH97

col -4.56 -0.54 -1.66 -5.14 -6.54 -2.32 -5.04 -8.41 -3.63 -0.76 0.19 0.25oil 0,42 0,06 -0,27 0,09 -10,38 -3,94 -7,88 -8,84 -3,50 -1,91 0,17 0,05gas -9.01 -0.53 -5.79 -3.12 -8.94 -6.59 -8.08 -8.91 -7.3 -4.2 0.01 0.09p_c 0.53 0.25 0.23 0.27 -11.89 -5.23 -8.4 -13.36 -4.37 -3.57 0.19 0.15ely -2.63 0.15 -0.34 0.51 -0.36 -1.59 -0.11 -0.85 -1.32 0.51 0 0.08

Change of emissions by region (%)FRA DEU GBR ITA CZE HUN POL XAC EUS XEU XOECD ROW

FTH 4.87 9.43 16.66 15.65 -2.87 -0.41 -1.69 -3.11 1.04 4.31 -0.70 -0.46

MTH -1.11 -0.04 -0.14 -0.11 -3.23 -0.81 -1.38 -2.99 -0.72 0.04 0.02 0.00

MTH97 -4.12 -0.32 -0.72 -1.53 -11.17 -4.42 -5.30 -8.78 -6.12 -3.26 0.15 0.04

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FTH

MTH

MTH97