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11.1.5.2. Energy/carbon Taxes

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Economic Incentives for Pollution Control


Energy taxes can be considered product charges. One type of energy tax that has become a frequent topic of discussion in environmental protection is a carbon tax. Levied on fuels based on their carbon content and intended to limit emissions of carbon dioxide, carbon taxes have been adopted in Denmark, Finland, the Netherlands, Norway, and Sweden. As noted above, Poland also has a small tax on CO2 emissions that amounts to a carbon tax. Carbon taxes are generally small relative to other fuel taxes, although the relative size of the carbon tax varies according to the type of fuel. Rates often vary depending on the sector or use of the fuel. In Finland and the Netherlands, the taxes are assessed partly on carbon content and partly on energy content. The taxes are summarized in Table 11-12.

In 1990, Finland became the first country to adopt a carbon tax, setting its level at Mk 6.66 ($1.45) per metric ton of CO2. The tax was raised to Mk 13.59 ($2.96) in 1993 and to Mk 38.3 ($8.34) in 1995. It is no longer based purely on carbon content but rather 60/40 on carbon/energy content, the energy content portion being 3.5 Mk per MwH ($0.21 per gigajoule). Products used as raw materials for industrial production or as fuel for planes and certain other vessels are exempt from the tax. OECD (1996), p. 91 Energy produced from peat is also exempt. According to Finnish government studies, CO2 emissions are five percent lower than they would be without the tax. The government says that the tax has stimulated investment in renewable energy technology such as biomass gasification. However, industry representatives claim "that this tax is just another way to increase budget revenues." IER, February 8, 1995, p. 104.

In Denmark, a tax of 100 DK ($17.6) per metric ton of CO2 was adopted in 1992 as part of a broader energy tax and subsidy package. Table 11-13 shows several features of this tax common in carbon taxes in other countries as well. First, the amount of the tax differs according to the type of fuel, specifically its carbon content. The carbon tax is 242 DK ($42.5) per metric ton on coal but only 178 DK ($31.3) per metric ton on lignite. Second, the amount of the carbon tax is relatively small compared to other taxes on energy, constituting less than a third of taxes on petroleum coke, 26% of taxes on electricity, and 12% of taxes on gas used as motor fuel. Third, there are numerous carbon tax exemptions. Gasoline (but not diesel), natural gas, and biofuels are exempt, and value added tax registered businesses generally receive 50% rebates on their payments. Such rebates are intended to assist large, energy-intensive businesses. Households, however, receive no rebates. Carbon taxes on electricity generated by renewable energies and fuels are offset by subsidies of 0.10-0.17 DK (1.76-3) per Kwh.

Sweden introduced a carbon tax of 250 SEK ($36.8) per metric ton in 1991 as part of a broader tax system reform in which general energy taxes were reduced and the value added tax was extended to energy. In 1993, the carbon tax for industry was lowered to 80 SEK ($12) per metric ton but raised to 320 SEK ($47.2) per metric ton for other consumers, and the general energy tax was abolished for manufacturing industry and commercial horticulture. Several energy-intensive industries were entitled to further carbon tax reductions. The rate has risen every year to 370 SEK ($50.1) per metric ton in 1996, with industry paying 25% of the full rate. In general, the tax applies only to motor and heating fuels. Biofuels and fuels used for electricity generation are exempt, as are fuels for ships, planes, and train locomotives. Ibid, pp. 93-4.

According to a study by the Swedish Ministry of the Environment and Natural Resources, the carbon tax has influenced energy consumption patterns. Some plant owners who have shifted their energy sources from fuel oil to biofuels claim that the carbon tax was a decisive factor in their shift. In the six months after the carbon tax was reduced for industry in 1993, heavy fuel oil consumption rose by about 20% compared to the same period of the previous year. The preferential rate for industry also led some facilities to sell their biobased by-products to heating plants, which were taxed at the full rate and thus eager to use biofuels. Swedish Ministry of the Environment and Natural Resources (1995), pp. 24-31.

Effective July 1, 1996, industry's 75% reduction was lowered to 50%, up to a level equivalent to 0.8% of annual turnover. For additional amounts beyond the 0.8% turnover threshold, companies pay 12% of the full rate. Several energy-intensive companies mostly in the chemical, cement, lime, and glass sectors have their payments capped at 1.2% of turnover. A Confederation of Swedish Industries representative stated that the tax increase would cause Swedish firms to lose market share to foreign competitors generating more emissions and characterized the measure as "completely counter-productive from the point of view of the environment, employment growth and future investment." It has been suggested that industry in Sweden is not opposed to carbon taxation provided that other countries adopt similar taxes. One problem with carbon taxes and other measures to limit CO2 emissions is that they must be implemented in a sufficient number of countries to effectively address climate change. Financial Times, March 20, 1996, p. 10.

The Netherlands first adopted a carbon tax in 1990 but replaced it with a 50/50 carbon/energy tax in 1992. This tax is referred to as the Environmental Tax on Fuels. Another carbon/energy tax, the Regulatory Tax on Energy, entered into effect on January 1, 1996. As shown in Table 11-14, the carbon/energy tax of the environmental levy is 5.16 Dfl per metric ton of CO2 and 0.3906 Dfl per gigajoule, and the carbon/energy tax of the regulatory tax is 27.00 Dfl ($16.4) per metric ton CO2 and 1.506 Dfl ($0.91) per gigajoule.

Table 11-15 shows the two taxes as applied to different types of fuel as of January 1, 1996. As in other countries, the carbon/energy taxes are not the only levies on fuel. The various levies have different purposes. The excise and environmental taxes are intended primarily to raise revenue, and the COVA levy finances strategic oil reserve maintenance. The regulatory tax was introduced to influence behavior, with revenue generation as a secondary objective. Not included in this table is the value added tax of 17.5% on all fuel types and on the taxes paid on them.

As can be seen in Table 11-15, the carbon/energy taxes have not been uniformly applied to all fuels. Some fuels are exempt from either the environmental or the regulatory tax. The rate for natural gas depends on the amount used by the consumer subject to the tax. The appropriate rate for electricity was determined based on estimates of the amounts of electrical energy generated by different types of sources.

The regulatory tax targets small-scale energy consumers. The government maintains that other policies are already encouraging large consumers to save energy and that large additional energy taxes would put industrial energy users at a disadvantage compared to competitors in other countries without such taxes.

As noted above, the regulatory tax is considered an incentive mechanism with only secondary revenue-raising objectives. Tax revenues are being recycled back to the economy through corresponding reductions in personal and corporate income taxes. The regulatory tax introduction and income tax reductions were legislatively bound to each other. According to an official source, the revenue recycling is "in line with the government's aim of shifting the tax burden away from labor and capital based income and towards use of the environment."

The government believes that the regulatory tax will reduce CO2 emissions by 1.7 to 2.7 million metric tons per year (1.5% of total CO2 emissions in the Netherlands) by the year 2000. Groups targeted by the tax are expected to reduce CO2 emissions by 5%.


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