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Recovery plans: EU’s carbon pricing momentum

The debate on green taxation has taken centre stage with the European Green Deal and the Covid-19 Recovery Plan. Lessons at national level show that carbon taxes can speed up the transition if ambitiously and strategically designed at a wider European level.

EEB recently published ‘A carbon pricing blueprint for the EU’, a report commissioned by our Senior Policy Officer for Climate Barbara Mariani, that aims to contribute to the ongoing discussion on carbon pricing and green taxation to help guide policymakers

In a joint statement dating from 2018, the governments of France, Finland, Denmark, Ireland, Italy, Portugal, the UK, Sweden, and the Netherlands called for the EU to both strengthen and extend carbon pricing in Europe. Their main argument was that cooperation at European level would increase both the economic and environmental effectiveness of carbon pricing.

Two years later, with the European Green Deal and the Covid-19 Recovery Plan at the core of the EU policy agenda, that claim becomes more pertinent than ever. Carbon pricing can play a relevant role in the upcoming EU climate policy toolboxes. In the ‘Fit for 55’ legislative package, carbon taxation can make a significant contribution to reducing the EU’s net emissions and in the Recovery Plans it can guide the national fiscal reforms required to ‘build back better’.

Worn-out tools

Carbon pricing initiatives at national level are currently uncoordinated, generally poorly designed and with very few cases of transformative pricing. As such, they are largely ineffective and insufficient to help step up the EU’s climate efforts. 

The Emissions Trading Scheme (ETS), which is the major carbon pricing instrument in the EU, covers 40% of EU’s greenhouse gas (GHG) emissions, i.e. emissions generated by energy-intensive manufacturing industries and power plants.

The remaining 60% of GHG emissions from other economic sectors, like transport, buildings, waste, agriculture, or small industry, are regulated in different ways and mostly at the national level under the Effort Sharing Regulation (ESR), which sets aggregate national binding targets for sectors not covered by the EU ETS. However, Member States enjoy a high degree of flexibility on which measures and tools to implement to achieve the national target.   

Therefore, when it comes to carbon pricing, we are faced with a very heterogenous and unbalanced landscape in Europe, where each country individually regulates a large amount of GHG emissions. The European Commission is suggesting introducing EU-wide carbon pricing for the transport and buildings sectors, which possibly means phasing out the ESR and extending the EU ETS.

In addition, the European Commission is designing a Carbon Border Adjustment Mechanism to address emissions embedded in imports and contribute to raising global climate ambition.

But what is the right tool for fully internalising the cost of carbon in the different economic activities while addressing the social costs?  Much of the EU’s success in achieving the Paris Agreement’s target of contributing to keeping the global average temperature rise to 1.5°C by mid-century will depend on fine-tuning now its carbon pricing mechanisms.

Towards an integrated approach on carbon pricing

It is time for the EU to set some key common criteria for effective carbon taxation rates for all member states. The revision of the Energy Taxation Directive, setting minimum taxation rates for energy products and electricity, is an essential step forwards to get this right.

“The European Green Deal and the EU Recovery provide a unique opportunity for governments to implement a green taxation shift internalizing the ‘polluter pays’ principle while addressing the needed distributional impacts and gaining public support”, says Barbara Mariani, Senior Policy Officer for Climate at the European Environmental Bureau and co-author of the report.

A more coordinated approach when it comes to economic instruments can influence both producers and consumers behaviour, she pointed out.

“Carbon pricing is no silver bullet, but, as it is applied today, is way below optimal from an environmental and societal perspective. If complemented by the right policy mix, it can drive deeper decarbonisation of all sectors of the economy”, says Mariani.

To avoid social conflicts, such as happened in France with the ‘Gilets Jaunes’ movement, Brussels and Member States should also offset regressive impacts through tax shifting and complementary policies, including the use of funds raised to ensure no equity issues.

Not-to-be-missed opportunity

The national recovery and resilience plans (NRRPs), which are being submitted to the European Commission by the end of this month, offer a major window of opportunity to move towards progressive carbon pricing. To date, NRRPs have focused much more on investments rather than reforms, saying too little on environmentally harmful subsidy reform, green public procurement and carbon pricing.

Now the ball will be in the  European Commission’s court, which will have to negotiate with member states to include more green fiscal reforms in the NRRPs.

The promise of public money, taxpayers’ money, gives leverage and responsibility to do the right thing – for the climate, for the needed ecological transition and to build back better. It should steel the resolve and political will to embrace progressive carbon pricing that helps to decarbonise Europe leaving no one behind.