What does it mean to put a price on the emission of carbon dioxide? Should that be done by means of a carbon tax? And what other political and economic approaches are there around the world?
Whether with heating, traveling or eating, many options will become more expensive if a price is put on CO2. At the same time, precisely that approach is regarded as an efficient and fast means of environmental protection. In the Paris Climate Agreement, the international community agreed to limit the global rise in temperature to under two degrees Celsius – ideally just 1.5 degrees. Experts regard a global carbon price as a good instrument through which to achieve this goal.
The principle is simple: a ton of CO2 receives a price, for example 30 euros. Whether it’s in a power plant, factory or apartment, in traffic or out in the fields – wherever CO2 is produced, the amount is due. Fossil fuels such as gas, heating oil and coal would thus become more expensive. In Europe, the emissions of the energy industry have been regulated by the EU Emissions Trading System (EU ETS) since 2005. Companies and electricity producers here have to have a certificate for every metric ton of CO2 they emit. The price is currently 25.84 euros. But the EU ETS only covers the energy sector and parts of the industrial sector.
Proposals concerning how pricing might work in Germany are many and varied. Federal Environment Minister Svenja Schulze (SPD) advocates the incremental introduction of a carbon price for transport and heating. Her coalition partners in the CDU/CSU parties are considering a pricing scheme covering all sectors, e.g. through expansion of the existing EU ETS. Other countries have already implemented various versions of carbon pricing. We would like to present a few of the different models.
Environmental policy in Switzerland
In Switzerland, in addition to a domestic emissions trading system, since 2008 there has also been a so-called incentive tax on heating oil, natural gas and coal. The Swiss started at around eight euros per metric ton of CO2; meanwhile they pay roughly 86 euros. Two-thirds of the additional revenues flow back to citizens through the health insurance system. The same amount is attributed to each insured person. And because people with lower incomes pay proportionally more on heating, the benefit to them is greater than for higher-earners. With the remaining third of the additional revenue, the country subsidizes energy efficiency-boosting building renovations. Incidentally, the decision to piggyback on the health insurance system was entirely pragmatic: the system is mandatory for all citizens of Switzerland and thus has all the personal information required for settlement purposes.
Sweden: Pioneering work in environmental protection
The story has parallels in the Scandinavian kingdom, where a price for CO2 doesn’t necessarily have to impose a cost. The country introduced its carbon tax in 1991 as part of a comprehensive tax reform. It thereby became the first country to apply a tax to fossil fuels as well as energy and industrial production. Subsequent years saw diminishing emissions in spite of economic growth. In contrast to France, there were no public protests as the government had simultaneously eliminated or lowered other taxes. When it was introduced, the carbon tax was the equivalent of 24 euros per metric ton; today the figure is 114 euros – the highest price in the world. Scarcely any Swedes still heat with fossil fuels today. Most residents get the lion’s share of their energy from hydropower and nuclear sources. The country is well on its way to achieving its environmental objective: CO2-neutrality by 2045.
France’s “energy-climate contribution”
Based on revenues, France has the most comprehensive carbon tax worldwide according to the World Bank. The tax has risen incrementally since its introduction in 2014. While the so-called “energy-climate contribution” was just seven euros per metric ton of CO2 when introduced, by last year the figure was 44.60 euros. As the energy mix in France contains considerably more nuclear power than coal power, power from the nearly CO2-neutral energy source is barely more expensive. The tax does severely impact the pocketbooks of frequent drivers, however. French president Emmanuel Macron scrapped the latest planned increase after violent protests by the gilets jaunes, or yellow vests.
With the supplemental revenues, the government supports the expansion of renewable energy sources. Since 2018, low-income households have received energy checks to the tune of up to 200 euros. They can use the funds to pay energy bills or finance energy efficiency-boosting renovation measures. To avoid double-taxing the industrial facilities subject to the European emissions trading scheme, they are exempted from the climate contribution.
Last week France also announced plans for an environmental tax on airplane tickets. Starting next year, an economy-class ticket for a European domestic flight will be subject to a 1.50 euro fee, rising to up to 18 euros for non-European international flights in business class. The expected additional revenue of some 180 million euros will go to “financing the everyday transport” of French residents.
United Kingdom: A minimum price with a big impact
The UK introduced a so-called Carbon Price Floor (CPF) in 2013. With the CPF, the British government supplements the European Emissions Trading System (EU ETS) with a CO2 surcharge pegged at a minimum price, which so far has been above the CO2 certificate price set by the EU ETS. In view of concerns about the competitiveness of energy-intensive industries, in 2015 the CPF was frozen at the equivalent of roughly 20 euros through the year 2020. Although the price is relatively low compared to other countries, some coal-fired power plants went offline in favor of more environmentally friendly gas power plants.
USA: Pioneering efforts in California
California became the first US state to implement a cap-and-trade program in 2013, launching the second-largest emissions trading system (ETS) in the world after the EU. And like the EU, the state caps emissions with certificates rather than a CO2 tax. California’s original target of reducing CO2 emissions by 17% by 2020 and thereby scaling back to 1990 levels was achieved four years ahead of schedule in 2016. The initial minimum price for a metric ton of CO2 was the equivalent of roughly eight euros. In 2018, the price was approximately 13 euros. Revenues generated by emissions rights amounted to some 2.7 billion euros last year.
California’s ETS program covers approximately 80% of greenhouse gas emissions in the state. For the sake of comparison: In the EU ETS the figure is about 45%. This includes CO2 producers such as cement factories, steel plants and refineries, which are obliged to keep their emissions below an individually defined level (“cap”) and buy CO2 certificates for each additional metric ton (“trade”).
A carbon tax offers ...
... “the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary,” stated an open letter signed by over 3,500 US economists. The signatories include 27 Nobel laureates and all four living former chairs of the US Federal Reserve Bank. The Climate Leadership Council calls for a CO2 tax starting at the equivalent of roughly 36 euros per metric ton of CO2, with the level gradually rising over time. The revenue would be channeled back to the citizenry in the form of a dividend. A four-person family would receive roughly 1,800 euros in the first year. Exports to countries without comparable CO2 pricing would be eligible for rebates for paid CO2 taxes, while imports from such countries would be subject to taxes on the CO2 contents of their products. The organizers included companies such as Allianz, Shell, Microsoft, Unilever and the WWF.
China learning from pilot projects
China produces more than a quarter of CO2 emissions worldwide. The country officially launched its emissions trading system (ETS) in late 2017. The actual start is expected in 2020. Initially the carbon market will only include power plants that produce more than 26,000 metric tons of CO2 annually – a category encompassing 1,700 plants accounting for approximately 30% of China’s total emissions. In a simulated trading period for the ETS, the companies initially receive free emissions certificates. The auctions for the permissions could begin in the coming year.
Originally the emissions trading scheme was slated to cover eight sectors: chemicals, petrochemicals, aviation, iron and steel, non-ferrous metals, paper and construction. Data concerning emissions in these sectors is difficult to collect, however, according to statements. Although the Chinese emissions trading system only affects the energy sector, it will be the biggest in the world.
To establish best practices for the domestic market, China has been experimenting with seven ETS pilot projects since 2013: in the cities of Beijing, Shanghai, Tianjin, Chongqing, the Shenzhen Special Economic Zone and the provinces of Guangdong and Hubei. Though the pilot projects, the government has been able to test trading systems with different profiles. The cities, for instance, generally have high emissions in the areas of buildings and transport, while in Hubei province the biggest source of emissions is the segment iron and steel. The pilot projects will initially run in parallel with the national market in order to cover the sectors missing from the national emissions trading system. As soon as the Chinese ETS is fully functional, they are to be integrated.
Germany has to pay – even without a CO₂ tax
In Germany, the annual per capita CO2 emissions of 9.6 metric tons are twice the international average. In the EU climate package, the biggest emitter in Europe committed to its fellow EU member states to reduce greenhouse gas emissions by at least 40% compared to 1990 by the year 2020. It will not meet this target. Reducing CO2 emissions with the existing EU ETS has failed.
Experts are therefore calling for the system to be stabilized, extended to include transport, buildings, farming and the entire industrial sector, and for uniform pricing for CO2 to be introduced. To date, both energy carriers such as coal and gasoline and sectors such as households and industry are still taxed differently. With an overarching model, prices for the different energy carriers could be made uniform, allowing them to compete against each other on a level playing field. A national CO2 price could supplement the EU ETS system with a national minimum price, similarly to how it is done in the UK.
Germany: Environmental targets for 2030 only achievable with a CO₂ price
According to the 2050 environmental protection plan, CO₂ emissions in Germany should be reduced by 55% compared to 1990 figures by 2030. In order to meet this objective, the federal government’s Council of Economic Experts is calling for a uniform CO₂ price on the national level across all sectors, i.e. also transport and buildings. While the expansion of the EU ETS would be the most effective measure, it is not feasible in the short term due to the need for coordination within Europe. But the system could well replace taxes by 2030 at the latest.
In their report released Friday, the so-called “five sages of the economy” also made clear that the CO₂ tax on gasoline and heating oil would have to be adjusted regularly and revenues used exclusively for environmental protection. The revenues could be passed on to the public in the form of an environment bonus or energy tax reductions.
The experts recommend a price between 25 and 50 euros per metric ton of CO₂. A CO₂ tax of 35 euros would increase the price of gasoline by roughly ten cents per liter. A precise number is not specified in the report.
Earlier, the Environment Ministry had commissioned a study of a model that would start at 35 euros per metric ton of CO₂ and gradually increased to 180 euros per metric ton of CO₂ by the year 2030. Reports from the German Institute for Economic Research (DIW), the Macroeconomic Policy Institute of the Hans Böckler Foundation and the Green Budget Germany found similar results.
The experts favor a CO₂ tax. To counteract the greater outlays, they feel an environmental bonus could be considered, one that would be between 75 and 100 euros a year per person. A reduction in the energy tax or a combination of both models would also be possible. It would have to be assessed, however, according to the experts at the Hans Böckler Foundation, whether the bonus should be counted as a social benefit. And the DIW points out that a CO₂ tax would be only one of many measures aimed at achieving the environmental targets and would not suffice on its own.
Environment minister Svenja Schulze would consider a price surcharge of 35 euros per metric ton of CO₂ on gasoline, diesel and heating oil from 2020. In return the energy tax could be reduced or an environmental bonus to the tune of 80 euros a person could be paid out. Companies could be compensated through subsidy and support programs.
Federal Economics Minister Peter Altmaier recently came out against a CO₂ tax on gasoline, heating oil and natural gas. The scientific advisory board of the Ministry of Economic Affairs recommends far-reaching reforms of energy and environmental policy. The existing levies on energy sources could be replaced by a price on CO₂ emissions.
In concrete terms, this would mean, for example, abolishing the levy on electricity from renewable energies and the eco-tax on petrol and diesel. It would also abolish the promotion of renewable energies, premiums for electric cars - and even the politically fixed date for the phasing out of coal in Germany. According to the scientific advisory board, all this would not be necessary if CO₂ emissions were to receive a full price.
For the design, the experts recommend a price corridor similar to that of the Council of Economic Experts: a minimum price should make climate-friendly investments attractive, a maximum price should protect private households and companies from excessive demands. In the medium term, there should be a CO₂ price for all sectors. A redistribution to the citizens is feasible via a climate dividend or lower electricity prices.
This coming Thursday the environment cabinet will discuss concrete proposals to reduce greenhouse gas emissions. Their findings are due to be released in September. By the end of the year the coalition aims to agree an environmental protection law. Without a globally coordinated approach, however, say the experts, climate change cannot be effectively mitigated.
How the Volkswagen Group views the debate
The models currently under discussion all have advantages and drawbacks. The decision in favor of one or the other ultimately rests with the political institutions of Germany and Europe. In the view of the Volkswagen Group, the decision should, however, be grounded in fundamental criteria that link effective CO₂ reduction with societal acceptance:
- An alliance with other states is highly advisable.
- A cross-sector concept is efficient: it ensures that CO₂ will be saved where the costs of avoiding it are the lowest. Every ton of CO₂ – in all sectors – has the same price.
- Innovations must be promoted and CO₂-minimizing behavior incentivized in all areas of life.
- Individual mobility must remain affordable.
- There must be an overall concept with higher costs for all fossil fuels, but also financial breaks for the public, ideally in the context of a consistent environmental tax and fee reform. Social equity must be assured.
- A CO₂ price should fundamentally be based on the price within the emissions trading system. In addition to a minimum price that secures fulfillment of the environmental target, a maximum price should be defined to ensure planning security for private households and companies.
These requirements are demanding and their implementation complex. But if, in the coming years, the goal of establishing a Europe-wide emissions trading system across all sectors were achieved, models that could be implemented more quickly could be brought to bear in the meantime – for instance a CO₂ tax on gasoline and diesel.