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Carbon Pricing

Carbon Pricing Could Help Reduce European Deficits

A new study published by the Grantham Research Institute on Climate Change and the Environment and the Centre for Climate Change Economics and Policy shows that carbon pricing has the capacity to raise revenue in European countries and reduce their fiscal deficits more effectively than other taxes.

The new policy paper, entitled “Less pain, more gain: the potential of carbon pricing reduce Europe’s fiscal deficits” and authored by Professor Michael Jacobs and several co-authors looked at a new analysis conducted by Vivid Economics of the potential impact of energy and carbon taxes, as well as the changes to the European Union Emissions Trading System. The paper outlines how energy and carbon taxes raise as much revenue as other forms of taxation while having the added benefit of enacting reductions of greenhouse gas emissions and causing less damage to economic growth.

The paper concludes: “Many European countries are running high annual fiscal deficits and have high debt liabilities, and are looking at options for raising tax revenues. While energy-carbon taxes have generally been considered to be instruments of environmental rather than fiscal policy, it is time to reconsider that view.”

Professor Jacobs’ analysis suggests that energy and carbon taxes are capable of having a smaller impact than other taxes, such as labour taxes, on gross domestic product (GDP) and employment.

For example, an energy tax package introduced in Spain which included an increase in duties on transport fuels has the capacity to raise more than 10 billion euros each year by 2020, while similar packages implemented in Poland and Hungary could generate approximately 5 million euros and 1 billion euros a year, respectively.

The paper points out that the evidence shows that energy and carbon taxes “currently play too small a role in the tax portfolio of many European countries.” It adds: “This evidence is not widely known, which perhaps is why energy-carbon taxes do not fulfil their potential role in fiscal strategy.”

It states: “Unlike the taxation of labour or consumption via VAT, there is an appropriate minimum level of energy taxation. This minimum reflects the costs energy consumption imposes on society. Those costs are primarily proportional to the carbon content of energy (more precisely, its contribution to global warming).”

The paper suggests: “It is crucially important for the future low-carbon competitiveness of the EU to get the taxation of the major fuel types – petrol and diesel – right. Currently, EU countries collect less revenue from diesel than they could, with negative implications for the fiscal balance.”

“The solution is to agree a collective increase in diesel tax rates. Of course, rates which have for so long remained differentiated cannot be raised overnight, because the public would not accept it. Yet, a gradual programme of alignment would be worthwhile for all countries and for each individually.”

Source: Grantham Research Institute on Climate Change and the Environment
Image Source: Karsten Hitzschke (some rights reserved)

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