Commissioner for Taxation and Customs Union
"What taxation for a low carbon economy?"
Conference on "What taxation for a low carbon economy?"
Brussels, 30 November 2009
Ladies and Gentlemen,
Let me, please, welcome you to Brussels. I see from the full audience that the subject and its timing fit very well with the overall "climate" in society now, a few days before the start of the Copenhagen Conference.
The threat to the climate is, in the long-term, one of the most serious challenges facing the world today. Substantial efforts will therefore be needed worldwide in order to achieve the necessary reductions in greenhouse gas emissions that we all seek. The EU has already fixed its own emission reduction objectives for the medium term: that is up until 2020. These are : 20% increase in energy efficiency, 20% reduction in green house gas emissions and 20% share of renewables in the energy mix. However, such commitments are only the first step and other, more ambitious undertakings will need to follow. Addressing climate change will require a radical change in our way of thinking and in our behaviour, both in the way we live and in the way we run our economies.
A "low carbon economy" will represent a new development for society, a new revolution and will bring about new economic opportunities. To achieve all these, we need a set of instruments that will engage society as a whole. Politicians are certainly not able to prescribe what each single sector and economic actor must do and how they must behave in order to contribute to the effort needed to mitigate the effects of climate change. But what they can and should do is to agree on a range of appropriate, technology-neutral and economy-wide incentives to be introduced as soon as possible.
The EU has opted for the EU emission trading system (ETS) as a major instrument to address climate change. All big industrial and energy plants are or will be covered by the system and by capping their emissions, a CO2 price will emerge on the carbon market. To address the remaining emissions coming from smaller sources, such as transport, households, and the rest of the business sector, in particular smaller industrial installations and services. Member States will either have to introduce new instruments or to exploit more the existing ones. Such instruments must also be cost-effective. There is an urgent need to come up with such instruments, to provide legal certainty for economic actors and to enhance our credibility in the international context.
Europe has been leading the way on climate change and we have been trying to convince other countries to join our efforts by committing to significant emission reductions.
What is the role that taxation can play in this context ?
Taxation is potentially a very powerful tool that can influence the behaviour of all economic actors in the right direction. Thus taxation systems and their overall set-up have an important role to play to help addressing climate change.
In the Commission we are often confronted with requests to provide for targeted incentives, like taxation, to encourage the use of certain goods and technologies. You might recall the recent discussions about reduced VAT rates on environmental-friendly products, goods and appliances proposed by some Member States. I discussed this option with a group of stakeholders who claimed that direct subsidies or tax-returns would be more efficient. Furthermore, the costs of any such incentives must also be taken into account, particularly now with the constraints on the public purse, the budget, that all Member States are facing. Finally the discussion was closed by the Finance Ministers in March this year and the ECOFIN Council decided not to continue it any more.
I would thus rather plead in favour of incentives being built-in directly into the overall taxation system and, in particular, I would suggest that such differentiation should be technology neutral and would automatically reward less carbon intensive behaviour as such.
Moreover, taxation can be a classical example of market-based instruments that can price an externality and thus help to correct a market failure. Taxing CO2 would be a cost-effective way for Member States to reduce CO2 emissions not covered by the EU emission trading system. Such taxation would also ensure that we have an economy-wide CO2 price signal.
We have started to see a growing interest in CO2 taxation, exactly for the reasons I have mentioned. Two months ago we had a very first informal exchange of views with the EU Finance Ministers concerning prospects for more CO2 taxation in Europe and the possible barriers to its introduction. The discussion was rather constructive and promising; several Ministers, indeed, positively welcomed the idea of CO2 taxation. But they also called for appropriate EU-wide framework rules.
I am personally in favour of a revised and amended Energy Taxation Directive as a framework for CO2 taxation. We could split the energy tax base which now depends exclusively on the quantity of energy consumed into two parts. One would depend on the energy content while the other would depend on the CO2 emissions. It would give a tax and price advantage to the renewables over the fossil energies.
In this context I would like to stress the precious advantage that taxation as market-based instrument has. Advancing on environmental goals will inevitably have a distributional impact, i.e. a new re-distribution of winners and losers, both among business or private consumers. The revenue coming from taxation can be used for compensating such distributional impacts, taking into account other considerations, such as social justice or the frequently mentioned problem of carbon leakage.
Such a broad-based CO2 price signal can then be further supported by other elements in the tax system:
(1) Taxation can provide for additional complementary incentives that further reinforce that role of the CO2-price signal. You will remember that already back in 2005 the European Commission proposed that passenger car taxation should take into account CO2 emission of individual vehicles. It was not approved unanimously by the ECOFIN Council but since the majority of Member States voluntarily have introduced such differentiation within the vehicle taxes they apply. Such one-off or periodic taxation, would not, of course, replace a broad-based CO2 price signal linked to fuel use. Instead, it would provide for an additional incentive, the environmental effects of which might not be negligible.
(2) Moreover, Member States must also make sure that the existing taxation systems do not discourage a shift towards a low carbon society. Some elements in existing taxes might prove particularly unhelpful in this context. I would like to mention two examples:
higher property taxation as a consequence of increased value of a property due to energy efficiency improvements, and
income tax incentives to favour the (often excessive) use of company cars.
(3) Finally, I would like to add that one of the ways that taxation can facilitate the necessary shift towards low carbon society should not interfere negatively with other climate change instruments:
Interaction between CO2 taxation and the EU emission trading system is one common example that has been extensively discussed in the last couple of years and the European Commission has tried to gather sufficient feedback on this topic from all interested parties as part of our public consultation on the green paper on market-based instruments in 2007.
I think that the emission trading system and CO2 taxation should precisely fit together, without any overlapping or loopholes.
Other issues have also emerged in the meantime and they will need to be resolved. I am referring to the need to coordinate some aspects of the treatment of emission allowances for direct tax purposes and also to the recent proposal of the Commission to address the urgent issue of VAT fraud in the area of emission allowances by introducing the reverse charge system on an optional, experimental basis. It should be the cost-efficiency and not tax planning or tax evasion which drives the emission reductions under the trading schemes.
I would like to conclude by saying that taxation has, will have and will need to have an important role in facilitating and encouraging the move towards low carbon society. I hope therefore that today's conference will provide us with useful feedback and input for making progress in that direction both at national and at EU level.