Download Economic, Environmental and International Trade Effects of the EU

Energy taxation and emissions
trading as instruments of
European climate policy
by Michael Kohlhaas
Workshop on Climate Policy
Ort, Datum
and Energy Modeling
Autor
Taipei, Taiwan
11-12 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)
Energy Carriers
Minimum taxation
in euro
1997
Directive
per ... Proposal 2004/10
Actual taxation in member states (2002)
AT BE DK
FI FR DE GR
IE
IT LU NL PT
ES
SE UK
Unleaded Petrol 1000 l
500
359
414 507 548 559 581 624 296 401 542 372 628 470 396 504 729
Diesel (Transp.) 1000 l
393
302/330
290 304 370 304 383 440 245 304 403 253 344 269 294 341 729
LFO
1000 l
39
21
76 13 279 68 49 61 166 47 403
5 198 33 85 279 50
Heavy fuel oil
1000 kg
34
15
36
6 52 57 19 18 19 14 31
6 32 27 14
.. 44
Nat. 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
0
Coal, 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
0
Electricity
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 available
White fields indicate that actual taxes are less than minimum taxes.
Sources: IEA 2003, BMU Umwelt 2003, EC 2003
Comparison of minimum and actual
taxation (EU-accession countries)
Minimum taxation
Energy Carriers
Directive
in euro per 1997
Proposal 2004/10
...
Actual taxation in member
states (2002)
CZ
HU
PL
SI
Unleaded Petrol
1000 l
500
359
351 409 381 276
Diesel (Transp.) 1000 l
393
302/330
264 336 255 276
LFO
1000 l
39
21
0
0
42
0
Heavy fuel oil
1000 kg
34
15
0
0
0
0
Nat. Gas
GJ gcv
0.7
0,3 a)
0
0
0
0
Coal, coke
GJ gcv
0.7
0,3 a)
0
0
0
0
Electricity
MWh
3
1 b)
0
0
0
0.3
a) 0,15 euro for business use; b) 0,5 euro for business use; all taxes without sulphur tax and VAT; .. - data not available
White fields indicate that actual taxes are less than minimum taxes.
Sources: IEA 2003, BMU Umwelt 2003, EC 2003
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
Coal
Gas
35
15
Industry
30
25
20
15
10
5
0
-5
-10
-15
10
5
0
-5
-10
-15
-20
-25
POL
XAC
EUS
XEU
POL
XAC
EUS
XEU
HUN
CZE
ITA
UK
GER
FRA
XEU
EUS
XAC
-35
POL
HUN
CZE
ITA
UK
GER
-30
FRA
-20
Households
Electricity
Petroleum Products
5
15
10
0
5
-5
0
-5
-10
-10
-15
-15
-20
-20
-25
HUN
CZE
ITA
UK
-30
GER
XEU
EUS
XAC
POL
HUN
CZE
ITA
UK
GER
FRA
-35
FRA
-25
-30
Change of demand for energy
MTH scenario
[%]
1
0
-1
-4
XEU
EUS
XAC
POL
HUN
CZE
ITA
GBR
DEU
-6
FRA
-5
ROW
-3
XOECD
col
oil
gas
p_c
ely
-2
EU-15: Small changes in demand (< 1%) except for gas
demand in FRA, GBR and EUS due to an increase in gas
taxes
Change of demand for energy
MTH scenario
[%]
1
0
-1
-4
XEU
EUS
XAC
POL
HUN
CZE
ITA
GBR
DEU
-6
FRA
-5
ROW
-3
XOECD
col
oil
gas
p_c
ely
-2
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)
Change of demand for energy
FTH scenario
[%]
35
30
col
oil
gas
p_c
ely
25
20
15
10
5
0
ROW
XOECD
XEU
EUS
XAC
POL
HUN
CZE
ITA
GBR
DEU
-10
FRA
-5
EU-15:
-Four largest countries reduce tax rates
-High increase in energy demand
-Only minor effects in Southern Europe
Change of demand for energy
FTH scenario
[%]
35
30
col
oil
gas
p_c
ely
25
20
15
10
5
0
ROW
XOECD
XEU
EUS
XAC
POL
HUN
CZE
ITA
GBR
DEU
-10
FRA
-5
Accession countries
-Effects similar to MTH scenario
-Higher decrease in demand for p_c due to higher
world market prices
Change of CO2 emissions by region (%)
20
15
10
5
[%]
FTH
0
MTH
MTH97
-5
ROW
XOECD
XEU
EUS
XAC
POL
HUN
CZE
ITA
GBR
DEU
-15
FRA
-10
Macroeconomic Effects: Real GDP
MTH/MTH97:
0,6
0,4
0,2
0,0
-0,2
ROW
XOECD
XEU
EUS
XAC
POL
HUN
CZE
-0,6
ITA
-0,4
GBR
- GDP-increase between 0.5-1%
for countries with tax reduction
- GDP decrease for countries with
tax increases is higher than in
MTH scenario
FTH
MTH
MTH97
0,8
DEU
FTH:
[%]
1,0
FRA
– Small positive effects for EU-15
– GDP decrease for accession
countries
Change of real GDP
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)
MTH97
1 col
Industry
Households
3 gas Industry
Households
4 p_c Industry
Households
5 ely Industry
Households
*
FRA
19.6
12.5
16.1
7.6
0
-4.8
7.7
-4.5
GER
13.7
7.9
2.0
-3.2
-6.1
-10.4
-0.2
-10.9
UK
24.1
9.8
12.3
9.1
-24.5
-22.4
-1.8
2.8
ITA
45.4
8.8
9.3
-30.2
-8.9
-15.9
-22.5
-24.7
CZE
63.3
40.9
15.9
12.3
20.7
22.4
5.7
4.5
HUN
25.6
20.4
14.0
13.9
7.5
14.5
4.4
3.7
POL
42.6
21.6
16.0
10.0
15.5
15.9
5.8
4.1
XAC
72.7
71.3
20.8
24.2
23.1
35.3
5.5
4.3
EUS
61.9
-6.9
13.7
6.7
6.3
8.0
4.0
1.4
XEU
10.4
-6.9
13.7
-5.4
8.2
0.9
1.4
-14.9
Scenario MTH97 can be derived by replacing all negative numbers with zeros,
Gross price changes in scenario FTH
(full tax harmonization)* (1)
FTH
1 col
3 gas
4 p_c
5 ely
*
Industry
Households
Industry
Households
Industry
Households
Industry
Households
FRA
4.2
5.3
3.4
3.3
-11.8
-17.1
1.3
-6.6
GER
2.9
3.4
-9.3
-8.0
-17.3
-21.9
-5.0
-12.3
UK
-3.4
4.2
-3.0
3.9
-31.8
-35.0
-6.3
0.9
ITA CZE
9.7 13.6
3.8 17.5
-5.7
3.4
-33.6 5.3
-19.5 6.7
-28.1 2.7
-24.6 1.0
-26.0 1.5
HUN
5.5
8.7
3.0
6.0
-5.5
-3.2
0.7
1.2
POL
9.1
9.3
3.4
4.3
3.4
-1.9
1.0
1.4
Scenario MTH can be derived by replacing all negative numbers with zeros,
XAC
15.6
30.6
4.5
10.4
8.8
12.7
0.5
1.2
EUS
13.3
-11.2
2.9
2.9
-4.9
-7.2
-0.7
-0.6
XEU
-16.9
-11.2
-1.1
-10.6
-3.6
-12.7
-3.7
-16.8
Change of total demand of energy
goods in volume (%)
FTH
col
oil
gas
p_c
ely
MTH
col
oil
gas
p_c
ely
FTH97
col
oil
gas
p_c
ely
FRA
DEU GBR
ITA
CZE
HUN
POL
XAC
0.39
8,09
-3.76
12.88
0.65
1.97 0.05
14,71 25,09
5.51 -3.02
17.78 32.85
4.05 -0.94
12.48
14,27
14.61
20.27
19.8
-0.39
-4,06
-1.89
-4.99
0.66
-0.83
1,41
-2.11
1.84
-0.83
-1.59
-2,21
-2.28
-2.31
0.06
-2.03 -0.48
-2,00 2,15
-1.91 -2.25
-6.93 2.61
0.44
0.1
6.43
6,59
3.35
4.38
6.35
-0.13
-1,33
0.24
-1.4
0.09
-0.22
-0,88
0.24
-1.2
-0.09
-0.98
0,08
-2.64
0.08
-0.43
-0.15
0
0
0.02
0.03
-0.28
0
-1.23
0.02
-0.24
-1.22
-0,01
-0.01
0.02
0.03
-1.62
-3,28
-2.27
-3.45
0.22
-0.45
-0,23
-1.95
0.04
-0.38
-1.25
-1,46
-2.24
-1.36
0.19
-2.1 -0.53
-3,32 0,01
-2.1 -1.91
-5.63 0.01
0.39 0.05
0.14
-0,08
0.03
0.02
0.02
0.04
0,02
0
0.02
0
0.05
0
0.02
0.01
0.01
-4.56
0,42
-9.01
0.53
-2.63
-0.54
0,06
-0.53
0.25
0.15
-1.66
-0,27
-5.79
0.23
-0.34
-5.14
0,09
-3.12
0.27
0.51
-6.54
-10,38
-8.94
-11.89
-0.36
-2.32
-3,94
-6.59
-5.23
-1.59
-5.04
-7,88
-8.08
-8.4
-0.11
-0.76
-1,91
-4.2
-3.57
0.51
0.19
0,17
0.01
0.19
0
0.25
0,05
0.09
0.15
0.08
-8.41
-8,84
-8.91
-13.36
-0.85
EUS
-3.63
-3,50
-7.3
-4.37
-1.32
XEU XOECD
ROW
Change of emissions by region (%)
FRA DEU GBR
FTH
MTH
MTH97
4.87
ITA
CZE HUN POL XAC EUS XEU XOECD ROW
9.43 16.66 15.65
-2.87 -0.41 -1.69 -3.11
1.04
4.31
-0.70
-0.46
-3.23 -0.81 -1.38 -2.99 -0.72
0.04
0.02
0.00
-4.12 -0.32 -0.72 -1.53 -11.17 -4.42 -5.30 -8.78 -6.12 -3.26
0.15
0.04
-1.11 -0.04 -0.14 -0.11
20
15
10
5
[%]
FTH
0
MTH
MTH97
-5
ROW
XOECD
XEU
EUS
XAC
POL
HUN
CZE
ITA
GBR
DEU
-15
FRA
-10