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   THE PROBLEM
   Given  the scale of the potential risks of the greenhouse effect for  the
   whole of the human race and the very long period of time it will take  to
   reverse  the  trends  in the emissions in question  or  neutralize  their
   effect,  effective rapid action must be taken urgently.  We must  at  all
   costs   avoid  an  irresponsible  attitude  to  the  management  of   the
   environment  and  the use of natural resources which  would  irreversibly
   jeopardize  the environment that we have inherited, to the  detriment  of
   our children and our children's children.
   At  present  the  industrialized  world is  mainly  responsible  for  CO2
   emissions.  The Community accounts for 13% of total emissions  worldwide,
   the  per capita  emission  level  being  twice  the  world  average.  The
   developing  countries'  contribution has remained modest so far,  but  in
   years to come their output is likely to increase more rapidly than in the
   rest  of  the  world.  It is therefore  imperative  that  all  countries,
   developed or otherwise, should help to control C02 emissions.
   THE OBJECTIVE
   The  Community is already committed to stabilizing CO2 emissions  in  the
   year  2000 at their 1990 levels.1  All the developed countries  now  seem
   ready to follow the Community along this path.
   To  stabilize  CO2 emissions in the time available, the  only  course  of
   action is to reduce energy demand by increasing energy efficiency and  by
   promoting  fuel-switching.  The objective in question therefore  involves
   every household and every company and can only effectively be achieved by
   developing energy and transportation technologies and infrastructures and
   by  changing behavioural patterns.  The measures which go to make up  the
   Community strategy sketched out in the Commission's December 1990 working
   paper  and then elaborated on in its 14 October 1991  communication2  fit
   the bill.
   1   Joint Energy/Environment Council of 29 October 1990.
   2   SEC(91)1744 final of 14 October 1991.
                                     - 2 -
   THE MEANS
   Energy aspects
   Where  technology  and infrastructures are concerned, a  whole  range  of
   initiatives (research and development, in particular the JOULE programme;
   THERMIE,  SAVE  and  ALTENER programmes;  Green Paper on  the  impact  of
   transport  on the environment)1 are intended to promote  the  development
   of non-polluting alternative energy sources, improve energy efficiency in
   households  and  in  industry,  promote  environment-friendly   transport
   infrastructures and optimize energy conservation techniques.
   SAVE programme:  improving energy efficiency
   Since energy consumption is the main source of greenhouse gas  emissions,
   energy  efficiency  is  a priority.  The SAVE programme  adopted  by  the
   Council on 29 October 1991 for a five-year period is intended to increase
   energy efficiency in the Community and is in line with the objectives  of
   the CO2 emissions strategy.
   The  proposal  for  a Directive under the SAVE  programme  establishes  a
   framework  for  the  measures  to be taken  by  the  Member  States.  The
   Commission   considers  that  the  measures  in  question  should   cover
   buildings, transport and industry, and should be designed:
   -   to provide consumers with information
    *  through  the energy certification of buildings to inform  prospective
       buyers,  and  subsequently  prospective  tenants,  about  the  energy
       efficiency of the buildings in question
    *  through energy audits in businesses to identify the improvements that
       can be made to energy installations and energy management
   -   to encourage consumers to behave more responsibly
    *  through the billing of heating, air-conditioning and hot-water  costs
       on  the basis of actual consumption rather than on a flat-rate  basis
       (according to surface area or a share of the property)
    *  through  regular  inspections of equipment which,  because  of  their
       large  numbers,  have  a significant effect on  the  energy  balance:
       boilers and vehicles
   -   to take the life expectancy of new buildings into account in relation
       to their thermal insulation
   -   streamline  public-sector  authorization procedures  for  investments
       which  can  be  financed by the energy savings  they  generate,  i.e.
       third-party financing.
   1   COM(92)46 final of 20 February 1992.
                                     - 3 -
   If correctly applied, these measures can encourage behaviour and generate
   investments   in  such  a  way  as  to  reduce  CO2  emissions  by   some
   80 million tonnes a year.
   ALTENER programme:  greater penetration for renewable energy sources
   Since energy consumption is the main source of greenhouse gas  emissions,
   greater  use  of  renewables is a priority in the fight  to  control  CO2
   emissions.
   By adopting the decision proposed by the Commission, the Council would be
   adopting,  for  the  first time ever,  quantitative  objectives  for  the
   Community for the year 2005 in the field of renewable energy sources:
   -   an increase in renewable energy sources' contribution to the coverage
       of total energy demand from 4% in 1991 to 8% in 2005,
   -   a  trebling of electricity production from renewable  energy  sources
       (excluding large hydroelectric power stations),
   -   a market share for biofuels of 5% of total fuel consumption by  motor
       vehicles.
   Achieving these objectives would result in a 180 million tonnes reduction
   in carbon dioxide emissions in 2005.
   The programme approved by the Commission and submitted to the Council  is
   aimed  at  the commercial exploitation of the research,  development  and
   demonstration work carried out by the Member States and the Community  in
   the  field  of renewable energy sources.  The growth prospects  on  world
   markets  favour  Community companies which are the forefront  in  several
   sectors of the renewable energy industry.
   The ALTENER programme is based on four types of Community measures:
   -   measures to promote the market for renewable energy sources and their
       integration into the internal energy market,
   -   financial and economic measures,
   -   training and information activities, and
   -   cooperation with third countries.
   In  the case of the first type of measure, the Community's  efforts  will
   focus on the harmonization of legislation and on  standardization.  Under
   the  heading  of  financial and economic measures,  the  Community  would
   earmark budgetary resources primarily for the development of the  biomass
   market, followed by the financing of feasibility studies and local  plans
   for the development of renewable energy sources.
   The  ALTENER programme would last five years and would have a  budget  of
   ECU 40 million.
                                     - 4 -
   Tax aspects:
   When  it  comes  to  changing  behaviour,  instruments  based  on  market
   mechanisms are the most productive and cost-effective.  In view of  this,
   the  Commission is proposing a Community energy/CO2 tax.  A proposal  for
   a directive will shortly be submitted to the Council on this subject.  As
   a  result  of its impact on prices, the energy component of  the  tax  is
   intended to encourage households and companies to use the energy  sources
   available  more  efficiently.  The CO2 component, on the other  hand,  is
   intended to enhance the competitiveness of energy sources, in  particular
   renewables, which will make the biggest contribution to the stabilization
   objective,  and  hence  to  promote their  development  in  domestic  and
   industrial applications.
   The  Commission  is  proposing  tax arrangements  based  on  a  Community
   energy/CO2   tax   and   tax  incentives  for   investments   in   energy
   conservation or CO2 abatement.
   It  should  be  noted  that  although  the  energy/CO2  tax  would  be  a
   Community tax it would be levied by the Member States.
   (a) Energy sources to be taxed
       The  tax  would  apply to all energy  sources,  excluding  renewables
       (solar  and wind power, biomass, biofuels, etc.) and  energy  sources
       used  as  feedstocks  in  industry (e.g.  hydrocarbons  used  in  the
       petrochemical industry).
       Fossil  fuels (gas, oil and coal), hydroelectricity (above 5 MW)  and
       nuclear energy would therefore be taxed.
       The  tax  would  be based (50/50) on the CO2 content  of  the  energy
       source in question and on its energy (calorific) value.
       The new tax would be akin to an excise duty, since the idea is to tax
       primary  energy  at the consumption stage, thus making it  easier  to
       incorporate into the national tax systems.
   (b) Rates
       The  tax  would  be  introduced gradually, starting  at  a  level  of
       3 dollars  a  barrel  of oil equivalent on  1 January 1993,  with  an
       additional dollar per barrel in each successive year, giving a figure
       of  10 dollars per barrel of oil equivalent in the  year  2000.  This
       corresponds to a rate of ECU 17.70 per tonne of oil in 1993.
       This  rate  would be a maximum, the Member States  being  allowed  to
       adopt more stringent measures if they so wish.
                                     - 5 -
   (c) Details of the tax arrangements
       -  tax neutrality:
       The  introduction  at  Community  level  of  an  energy/CO2  tax   is
       envisaged only if the principle of tax neutrality is  observed.  This
       means that the tax must not result in any increase in the overall tax
       burden in the Member States.  They would therefore have to take steps
       to  offset the introduction of the tax by means of tax incentives  or
       reductions in taxes or other charges, for companies and individuals.
       -  competitiveness of businesses
       It  is  necessary to safeguard the ability of Community  industry  to
       compete in the international arena and to take account of the  impact
       of the tax on companies located in the Community.
       It  would be necessary to safeguard the competitiveness of  companies
       with  particularly energy-intensive production processes (e.g.  firms
       in  the aluminium, glass and paper industries) and to  encourage  all
       businesses to invest in energy conservation and CO2 abatement.
       * competitiveness of energy-intensive enterprises:
       The  plan  is  to grant tax relief  (conditional  exemptions  or  tax
       reductions  according to procedures to be determined) for  businesses
       which are particularly exposed to international competition, provided
       that the businesses in question give the national public  authorities
       firm  commitments  to  reduce their CO2  emissions  or  their  energy
       consumption.
       * tax incentives for investments by all businesses
       The   idea  is  to  make  the  energy/CO2  tax  more   effective   by
       encouraging all firms to invest in energy conservation or in reducing
       CO2  emissions.  Each  firm would be able to deduct from  the  amount
       of  tax  payable its expenditure and investments  over  a  three-year
       period in the Community and third countries.
   The Member States will take the necessary steps to implement and  monitor
   the  tax incentives.  These measures are all mutually  complementary  and
   are  intended  to create a snowball effect that will ensure a  major  and
   effective contribution to the attainment of the objective set.
   The  proposed  measures,  which  are primarily  intended  to  reduce  CO2
   emissions,  have  been designed in such a way as to  have,  in  addition,
   other  favourable  consequences for the Community economy  ("no  regrets"
   benefits),  since  they can help to improve the Community's  security  of
   energy  supplies,  reduce  emissions of pollutants  other  than  CO2  and
   encourage  more effective utilization of  environment-friendly  transport
   infrastructures.
                                     - 6 -
   They can also help increase the competitiveness of European industry  and
   provide  it with environment-friendly products and production  techniques
   for which there is a growing demand.
   The  Commission  is  proposing a Council Decision on  the  monitoring  of
   national programmes based on strategies and objectives to limit emissions
   of  CO2  and other greenhouse gases so that the  Community  objective  of
   stabilizing  CO2 emissions in the Community at their 1990 levels  by  the
   year 2000 can be achieved.
   The proposal is based on four key aspects:  the national programmes to be
   drawn up by the Member States;  their assessment by the Commission in the
   light  of the Community stabilization agreement;  review of the  progress
   of  national  programmes  on  the  basis  of  a  data-reporting   system;
   inventory   of   emissions  of  greenhouse  gases;  principle   of   fair
   burden-sharing.
   These  proposals will make it possible to implement the strategy set  out
   in  the  Commission's October 1991  communication.  They  constitute  the
   Commission's  response  to the request by  the  joint  Energy/Environment
   Council  of  13 December 1991 which called upon the Commission  to  table
   formal  proposals  for  concrete  measures  to  implement  the  Community
   strategy, including proposals for the tax measures necessary at Community
   level.
   IMPACT OF THE MEASURES
   *   Environmental impact
   According  to the latest estimates, if no new stabilization measures  are
   taken,  CO2  emissions  in  the Community could  increase  by  about  12%
   between  1990  and  2000.  On the basis of  simulations  carried  out  by
   Commission  staff,  the non-fiscal measures proposed  by  the  Commission
   could  help  reduce  this increase by 5.5%, giving  a  6.5%  increase  in
   emissions,  if the measures are implemented under optimum conditions  and
   taking  into  account  their knock-on effect on  national  and  corporate
   initiatives  (in  particular  the  speedier  introduction  of  the   best
   available technologies).  This contribution would result from:
   -   the  new measures proposed under the THERMIE programme,  which  could
       reduce CO2 emissions by about 50 million tonnes, representing 1.5%)
   -   the  proposals  concerning  SAVE,  which could  help  bring  about  a
       reduction of about 3%;
   -   the  ALTENER  programme, which would reduce emissions  by  one  extra
       percentage point.
   The  fiscal  measures  would make a contribution of  about  6.5%  to  the
   stabilization objective.
                                     - 7 -
   *   Energy impact
   As  already stressed in the Commission's October 1991 communication,  the
   bulk  of  the  reduction  in  CO2 emissions by  the  year  2000  will  be
   achieved  by reducing energy demand and improving energy  efficiency.  It
   is estimated that achievements in this area could make a contribution  of
   about 85% to the overall stabilization effort.
   *   Economic impact
   By  encouraging  more efficient energy use, the  measures  proposed  will
   entail  major benefits for the Community economy.  However, in the  short
   term,  the  rationalization process entails macroeconomic  and  corporate
   costs.  The  macroeconomic  impact,  with regard  to  economic  activity,
   employment  and  inflation, will in all probability be  modest,  provided
   that  a  number  of factors are taken into account,  beginning  with  the
   fiscal  neutrality  of the tax, since compensatory  allowances  can  help
   offset the adverse impact on economic activity.
   *   Impact on households
   Household purchasing power will be directly affected by the burden of the
   tax  on  private  purchases  of household  fuels  and  motor  fuels,  and
   indirectly affected by the impact of the tax on the prices of  industrial
   products.  Available  data  indicate that low-income households  tend  to
   spend  a  comparatively  higher proportion of  their  budgets  on  direct
   purchases of household fuels than better-off households.  The reverse  is
   true,  however,  for motor fuels.  Given these  conflicting  trends,  and
   assuming  that expenditure patterns will not be altered,  the  regressive
   effect of the energy/CO2 tax will be very slight.
   The  immediate  impact  of the introduction of  an  energy/CO2  tax  will
   therefore  mainly  be determined by present spending  patterns.  In  this
   context, it should be noted that the impact of a tax of $10 per barrel of
   oil  equivalent would represent 0.5 to 1.3% of total  household  spending
   without tax neutralization.  However, it should be stressed that the real
   impact of the tax on the various categories of households will depend  on
   the tax neutralization arrangements adopted by the Member States and  the
   gains  resulting  from energy efficiency and the favourable  impact  this
   will have on the environment.
   BURDEN-SHARING
   The economic impact of the adjustment process involved in introducing all
   the measures proposed should be shared in a fairly balanced fashion among
   the  Member States.  In  any  given  country  low  per  capita  emissions
   generally reflect a fairly low level of economic development.  This often
   goes hand in hand with very high emissions per unit of energy or  product
   unit  (GDP).  Consequently, greater energy efficiency and  the  resulting
   rationalization process will have a big positive effect in the  countries
   in question.
                                     - 8 -
   Problems  would occur only in cases where the economies of the  countries
   in  question  did not have the necessary resources  for  the  investments
   called for by the adjustment process.
   The balance between countries will also depend on the efforts to be made,
   independently,  at  national  level.  In this connection,  it  should  be
   stressed  that  most of the Member States whose per capita  CO2  emission
   levels  are above the Community average have undertaken to take  national
   steps  going  beyond  what  is needed to  achieve  the  stabilization  of
   emissions   in  the  year  2000.  The  proposed  arrangements   for   the
   energy/CO2  tax will enable those countries to apply a rate  higher  than
   the minimum rate set at Community level.
   However, it is difficult at this stage to say exactly what the real costs
   of the adjustment process will be in each individual country.  The  costs
   in  question would be regularly evaluated by the Commission on the  basis
   of a general monitoring mechanism and a specific monitoring mechanism for
   the  energy/CO2  tax.  If these evaluations were to indicate  costs  that
   were too high given the economic situation of a Member State, it would be
   possible to intervene by allowing the tax to be suspended or altering the
   rate  of  the tax, or, at the request of the Member State  concerned,  by
   providing financial support from the various Community funds or financial
   instruments (structural funds, cohesion fund).
   THE COMMUNITY AND ITS MAIN COMPETITORS:  THE CONDITIONALITY OF THE TAX
   Since the measures proposed by the Commission will be beneficial not only
   in  terms  of  the stabilization objective but also  in  terms  of  their
   favourable  impact  on  the  economy,  they  are  bound  to  improve  the
   Community's  performance in terms of  sustainable  development.  However,
   given  the  need to combat global warming, the action  by  the  Community
   should  also  be  seen as part of an international effort  to  which  all
   countries,  especially the industrialized countries, should make  a  fair
   contribution.  All  the  industrialized  countries  now  seem  ready   to
   stabilize  their  CO2 emissions at their 1990 levels by  the  year  2000.
   Most  of  the  EFTA countries are already  applying  or  are  considering
   applying  fiscal measures to achieve this objective.  The Community  will
   continue  to  make  every  effort to  ensure  that  other  industrialized
   countries follow the same path.
   Given  the need to safeguard the competitiveness of European  firms,  the
   Commission considers that the Community should not embark on a course  of
   action the effects of which would be rendered null and void because of  a
   lack  of international cooperation from its main industrial  competitors,
   especially  if this entailed a deterioration in the competitive  position
   of   its  particularly  energy-intensive  industries  vis-à-vis   trading
   partners  which  make  a bigger contribution than the  Community  to  the
   greenhouse effect but are not making comparable efforts.
                                     - 9 -
   At  this stage the entry into force of the tax would be made  subject  to
   the  adoption  of  similar measures, entailing  an  equivalent  financial
   burden, by our main trading partners.
   THE COMMUNITY AND THE DEVELOPING ECONOMIES AND ECONOMIES IN TRANSITION
   Although  their CO2 emissions have been limited so far, there  is  likely
   to  be  a rapid increase in the contribution of developing  countries  to
   global  emissions  in the years ahead.  It is essential that,  by  taking
   effective   practical   steps  to  reduce  their   own   emissions,   the
   industrialized  countries set an example for the developing countries  if
   they want them to take part in the formulation of a global strategy.  The
   industrialized  countries  should also make a  contribution  towards  the
   stabilization efforts of the economically weaker countries, especially as
   the reduction of CO2 emissions in those countries is often effective  and
   inexpensive.
   In  this  connection,  the Commission notes with  interest  the  proposal
   submitted  to  the UNCED by Argentina and Brazil to introduce  a  tax  of
   1 dollar per barrel of oil in the OECD countries, the proceeds from which
   would  help  the less developed countries.  An initiative  of  this  kind
   could encourage all industrialized countries to adopt measures comparable
   to those proposed by the Community.
* * *

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