CO2 tax - fit for the future

Climate change is also the result of a massive market failure: Social and ecological costs to third parties are not sufficiently reflected in market prices. To correct this discrepancy, the cornerstone of Volt’s climate policy is a comprehensive, ambitious, predictable and credible carbon pricing scheme enforced by a strong EU. We aim to cover 100% of emissions with two efficient, effective, market-based and technology-neutral instruments: an expanded EU Emissions Trading System (ETS) which shall cover the vast majority of sectors under one universal cap and one uniform price, complemented by a carbon tax for such emissions where that is the more effective or efficient instrument. 

To prevent carbon leakage to other countries and ensure a level playing field for all companies, border carbon adjustments shall be implemented to level carbon prices for imports and exports to and from the EU. 

Further, Volt understands the social hardship that a high carbon price can cause and hence proposes the transparent redistribution of revenues combined with economically sound investments in green research and development (R&D) and infrastructure to fund the economic transition as fast as possible. The EU is working on the revision of its climate, energy and transport-related legislation under the so-called 'Fit for 55’ package [1]. Volt believes that some of these new measures, e.g., the Emission Trading System (ETS) and the new Carbon Border Adjustment Mechanism (CBAM), are a step in the right direction. However, significant improvements are still necessary. 

Our carbon pricing policy is outlined below.

Pricing Greenhouse Emissions

• Extend the ETS to further sectors to cover at least 90% (2019 ca. 45%) of all EU carbon emissions under a single cap as soon as possible to reduce emissions efficiently and predictably. All forms of fossil fuels shall be included, independent of their usage, covering the sectors of energy supply, industry [2], transport, residential and commercial [3]. As a principle, apply regulation as much “upstream” as possible, i.e., where fossil fuels (gas, oil, coal, etc) enter the system (ports, pipelines, mines, etc) to simplify the administrative effort for both companies and authorities.

• Reduce the number of allowances (scope-adjusted) by 8 ppts each year (current EU plan: 2.2 ppts each year) from 2020–2030 to net cut carbon emissions by 80% until 2030 compared to 2020 [4] and aim for a 100% reduction by 2040.

• Introduce an EU-wide price corridor for EU ETS auctions and trade to create predictability for investments (price floor) and prevent excessive prices above the social cost of carbon (price ceiling). Volt suggests using the newly introduced CO2e tax [5] (see below) as a reference point and allowing the ETS price to vary within a +/-50% corridor of the CO2e tax.

• Require the retirement (deletion) of certificates when national policies directly reduce emissions in ETS sectors (e.g. feed-in-tariffs) to ensure the additionality of such policies and to prevent the “waterbed effect” [6]

• Introduce a carbon tax for any sectors where an expanded ETS would cause disproportionate administrative effort (e.g., highly fragmented industries that can hardly be captured upstream).

• Volt suggests a tax level in line with France’s originally planned CO2 price, which is also in line with suggestions by the High-Level Commission on Carbon Prices and the German Umweltbundesamt [7] That is 65.40 euros per tonne in 2021, gradually rising to 205 euros in 2030 [8,9,10]. CO2e pricing will be reviewed regularly, with the potential for further increases if necessary, but not exceeding the range of scientific consensus on the global social cost of carbon.

• Volt supports national CO2e pricing until there is a European solution. Although Volt favours an ETS over a carbon tax, Volt would support a strong carbon tax at the European level as an intermediate solution/Plan B.

• Prevent double taxation of emissions and respect the tax sovereignty of the Member States by crediting national or regional CO2 taxes and levies against the applicable EU CO2 price where they overlap.

• End-to-end CO2e accounting standards shall be implemented until 2025 as a basis for more precise border carbon adjustments (BCA), carbon footprint declarations on products or the implementation of a carbon added tax (CAT) [11] Similarly, measurement and monitoring of emissions by geography, sector and (large) company should be strengthened where needed to ensure a transparent, reliable and trustworthy basis for carbon pricing.

• Removed, captured or avoided greenhouse gas equivalents shall be included in the ETS System where feasible, or lead to a refund equivalent to the CO2e tax to create an incentive for greenhouse gas removal. This should include both technological as well as natural forms of carbon sequestration as long as the permanence of the removal can be ensured [12].

Sector-Specific Regulation

• The ETS must include land use, land-use change, and forestry (LULUCF), with each member state treated as a single emitter. While accounting will take place at the EU level, each Member State will be free to respect their circumstances and pursue their strategy.

• The aviation industry should be included in the ETS without any exemptions, incorporating all climate effects as CO2e to the best of our scientific knowledg3 [13,14,15, 16]. Direct off-setting by the industry will not lead to a reduced number of ETS certificates needed. In 2022, the number of free allowances will be reduced from 83% to 0%. In the long term, the EU should push for the alignment of CORSIA to the ETS [17].

• Ships operating in or entering European waters must pay a carbon price (ETS or tax) [18, 19]. The price shall apply to all vessels with a gross tonnage of more than 5,000 on a per-voyage berthing fee paid to the port authorities.

• Agricultural emissions from livestock and soil should be taxed at the source because they are local and fragmented. Other non-sector-specific emissions in the agricultural sector (such as electricity and tractor fuels) will be covered by the ETS mid- or upstream.

Carbon tariffs to create a level competitive playing field and prevent carbon leakage

A strong carbon pricing system is the best mechanism to curb emissions. Yet, in our interconnected world, the transition to a global sustainable economic system will succeed only if industries with high emissions do not move to less regulated countries, thereby both causing higher emissions elsewhere and weakening the European economy. We, therefore, propose to

• Implement comprehensive Border Carbon Adjustments (BCAs) at the EU’s external borders to prevent carbon leakage and create a level competitive playing field between European and non-European companies [20,21,22]
  That means applying import adjustment taxes to products subject to lower carbon prices in their countries of origin. Reimburse carbon price differences for exports to such countries. End the practice of free allowance allotment (‘grandfathering’) to entire companies or industries.

• Border tax adjustments must be implemented not only on selected domestic, CO2-intensive industries in global competition but also on a wide range of imported goods, to shift consumption to more sustainable products through the price mechanism [23, 24]

• Use any net gains from import and export adjustments to fund the global climate change adaptation fund and the green climate fund [25] both of which were established under the Paris Agreement but are currently underfunded.

Sources

1. For more information on the EU's plan for a green transition and the new initiatives adopted, consult:
   https://www.consilium.europa.eu/en/policies/green-deal/eu-plan-for-a-green-transition/.

2. Van Ruijven, B. J., Van Vuuren, D. P., Boskaljon, W., Neelis, M. L., Saygin, D., & Patel, M. K. (2016). Long-term model-based projections of energy use and CO2 emissions from the global steel and cement industries. Resources, Conservation and Recycling, 112, 15-36.

3. European Environmental Agency (2018) “GHG emissions by sector in the EU-28, 1990-2016”. Available at: https://www.eea.europa.eu/data-and-maps/daviz/ghg-emissions-by-sector-in#tab-chart_1.

4. European Commission (2021). “EU Emissions Trading Scheme (EU ETS)”. Available at: https://ec.europa.eu/clima/policies/ets_en.

5. CO 2e = CO 2 equivalents.

6. ^ German Council of Economic Experts (2019). “Setting Out for a New Climate Policy”. Available at: https://www.sachverstaendigenrat-wirtschaft.de/en/special-report-2019.html.

7. Best practice: British Columbia, Canada, has put a price on burning fuels and introduced successfully a Carbon Tax. Available at: https://www2.gov.bc.ca/gov.

8. Carbon price variations in 2°C scenarios explored.

9. Edenhofer, O. (2017). Carbon Pricing Leadership Coalition: Report of the High-Level Commission on Carbon Prices, Potsdam Institute for Climate Impact Research.

10. Matthey, A. & Bünger, B. (2019). “Methodological Convention 3.0 for the Assessment of Environmental Costs”, German Environment Agency. Available at: https://www.umweltbundesamt.de/sites/default/files/medien/1410/publikationen/2019-02-11_methodenkonvention-3-0_en_kostensaetze_korr.pdf.

11. At the time of writing, there are no mandatory carbon accounting standards so that said use cases rely on approximations, averages and estimates; that is not sufficient for nuanced carbon footprint calculations as needed to compare competing products of the same category, and can lead to legal disputes, especially in case of high CO2 prices

12. Note: solar geoengineering does not qualify as greenhouse gas removal.

13. Faber, J., Greenwood, D., Lee, D., Mann, M., De Leon, P. M., Nelissen, D., ... & van de Vreede, G. (2008). Lower NOx at higher altitudes policies to reduce the climate impact of aviation NOx emission. CE-Delft, 8, 32.

14. Fahey W. D. (2008). “The use of non- CO 2 multipliers for the climate impact of aviation: The scientific basis”, U.S. National Oceanic and Atmospheric Administration. Available at: https://www.icao.int/Meetings/EnvironmentalWorkshops/Documents/WACM-2008/2_Fahey.pdf.

15. Jungbluth, N. (2013). Aviation and Climate Change: Best practice for calculation of the global warming potential. Retrieved from: www. esu-services. ch/our-services/pcf.

16. Edwards, H. A., Dixon-Hardy, D., & Wadud, Z. (2016). Aircraft cost index and the future of carbon emissions from air travel. Applied energy, 164, 553-562.

17. Scheelhaase, J. D. (2019). How to regulate aviation's full climate impact as intended by the EU council from 2020 onwards. Journal of Air Transport Management, 75, 68-74.

18. Kachi, A., Mooldijk, S., Warnecke, C., & BMU, N. S. (2019). Carbon pricing options for international maritime emissions. New Climate-Institute for Climate Policy and Global Sustainability gGmbH: Berlin, Germany.

19. Parry, I., Heine, M. D., Kizzier, K., & Smith, T. (2018). Carbon taxation for international maritime fuels: Assessing the options. International Monetary Fund.

20. At the time of writing, carbon border adjustments are among the most universally proposed policies as a complement to any domestic carbon price to prevent carbon leakage.

21. German Council of Economic Experts (2019). Setting out for a new climate policy”, point 17. Available at: https://www.sachverstaendigenrat-wirtschaft.de/en/special-report-2019.html.

22. R. C. (2017). “Are carbon tariffs a good idea?”. The Economist. Available at: https://www.economist.com/the-economist-explains/2017/02/17/are-carbon-tariffs-a-good-idea

23. Mehling, M., van Asselt, H., Das, K., Droege, S. and Verkuijl, C. (2017). “Designing Border Carbon Adjustments for Enhanced Climate Action”. Climate Strategies. Available at: ttps://climatestrategies.org/wp-content/uploads/2017/12/CS_report-Dec-2017-4.pdf.

24. Böhringer, C., Carbone, J. C., & Rutherford, T. F. (2012). Unilateral climate policy design: Efficiency and equity implications of alternative instruments to reduce carbon leakage. Energy Economics, 34, S208-S217.

25. European Commission’s International climate finance strategy available at: https://ec.europa.eu/clima/policies/international/finance_en