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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