Investment & Controlling. Carbon Taxes in the EEC

Table of Contents

Executive Summary

List of Abbreviations

List of Figures

List of Table

1. Introduction

2. Carbon footprint

3. History of energy taxation in Europe

4. Economical Aspects of Carbon Taxation in the EU
4.1. Greenhouse Emission Trends in the EU since
4.2. Affected Industry Sectors in the EEC
4.3. Costs of Carbon Taxation in the EEC

5. Conclusion

ITM Checklist

Bibliography

Executive Summary

Global warming is becoming a serious issue around the world. On a daily base, the effects of global warming can be seen and the number of related natural catastrophes is increasing every year. The global warming effect is directly related to the greenhouse gases (GHG) which are freed when fossil fuels are burned. In this process, carbon dioxide is produced and rises into the atmosphere where it is causing global warming due to reflection of infrared. As a counter measure with the aim to reduce the GHGs the Kyoto Protocol was signed on 11th of December 1997. In this regards, many policy mechanisms to reduce GHG emissions are discussed and are already exists. Scholars are predicting that the mechanism with the strongest effect is pricing on carbon.

This assignment is explaining briefly the background of carbon dioxide and provides also a short introduction of the carbon footprint of products and enterprises. The main part of the work deals with economical aspects of carbon taxation. The chapter is analyzing the greenhouse emission trends since 1990 and derives the affected industry sectors for carbon taxation. Further, the cost of carbon taxation in the EEC is evaluated and an estimated cost increase for a 4-person household in the European member states given.

The finding of this assignment is that carbon taxation in the EEC is useful and is raising the motivation to develop engines that are more efficient and in addition encourage alternative energy sources. At the same time, there are also risks involved in carbon taxation if this is only a European decision rather than a global strategy. In that case future investments are potentially done outside the EEC due to lower or even no taxation on carbon emission.

List of Abbreviations

CO2 Carbon Dioxide

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List of Figures

Figure 1: Greenhouse effect (Russell Kightley Media, Global warming, 2012)

Figure 2: Carbon footprint standards (Carbon Footprint Ltd.)

Figure 3: Total EU27 GHG emissions trend, 1990-2009 (1990=100) (Eurostat, 2012)

Figure 4: GHG emissions and targets, 2009 (Kyoto base year=100) (Eurostat, 2012)

Figure 5: GHG emissions by source sector, EU-27, 1990&2009 (%, based on data in million tones CO2 equivalent) (Eurostat, 2012)

Figure 6: EII energy costs in the EU 21, 2008 (Eurostat, 2012)

Figure 7: Value added of EII in the EU21, 2008 (Eurostat, 2012)

Figure 8: Energy costs of manufacturing industry by country, 2008 (Eurostat, 2012)

List of Table

Table 1: GHG emissions by country, 1998-2009 (Eurostat, 2012)

1. Introduction

A carbon tax is an energy tax on fossil fuels such as coal or petroleum, which free carbon dioxide, commonly abbreviated as CO2, when they are burned. In that case, CO2 rises into the atmosphere were it remains and causes global warming due to reflection. The repeated absorption and reemission by CO2 effectively scatters the infrared radiation and causes the heating effect commonly known as greenhouse effect (Russell Kightley Media, Global warming, 2012). An atmosphere without containing greenhouse gases would simply radiate back the heat into the space but CO2 and other greenhouse gases (GHG) are absorbing and reemitting this infrared in various directions. As a result, the atmosphere will be heated up (Russell Kightley Media, Global warming, 2012). In conjunction, alternative energy sources such as wind or sunlight, do not free carbon dioxide during the energy creation process.

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Figure 1: Greenhouse effect (Russell Kightley Media, Global warming, 2012)

As for every form of fossil fuel the exact carbon content, hence the amount of CO2 created during the generation of energy is known, an accurate carbon taxation as such be simple.

2. Carbon footprint

What is a carbon footprint?

A carbon footprint measures the total greenhouse gas emissions caused directly and indirectly by a person, organization, event or product. A carbon footprint is measured in tonnes of carbon dioxide equivalent, commonly abbreviated with tCO2e. The carbon dioxide equivalent (CO2e) allows the different greenhouse gases to be compared on a like-for-like basis relative to one unit of CO2. CO2e is calculated by multiplying the emissions of each of the six greenhouse gases by its 100 year global warming potential (GWP). (Carbon Trust, 2012)

The idea and basically the concept of carbon footprint is related to the developed ecological footprint in the 1990s by William Rees (Prof. at University of British Columbia) and Mathis Wackernagel (CEO of Global Footprint Network) (William Safire, 2008). The carbon footprint is a subset of the ecological footprint and of the more comprehensive Life Cycle Assessment (LCA). From an organizational point of view, two different types of carbon footprint exist. On the one hand side an organizational and on the other hand a product related one. The first one is related to all activities on an organization and includes energy as well as industrial processes and if applicable company vehicles. The second one, the product related carbon footprint, describes the emission of a product or service from the beginning until the end and includes the reuse, the recycling and the disposal of the product. The carbon footprint of a product, of an enterprise or organization can be derived by undertaking a GHG emission assessment (Carbon Footprint Ltd, accessed 02.03.2012). Once the size of a carbon footprint is known, a strategy can be developed to reduce it by e.g. technological developments, better process and product management as well as changed Green Public or Private Procurement (GPP), carbon capture, consumption strategies and others (Carbon Footprint Ltd, accessed 02.03.2012).

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Figure 2: Carbon footprint standards (Carbon Footprint Ltd.)

The improvement of carbon footprints through the development of alternative projects, such as solar and wind energy or reforestation, represents one way of reducing a carbon footprint and is often known as Carbon offsetting. The main influences on carbon footprints include population, economic output, and energy as well as carbon intensity of the economy (Brown, 2008). These factors are the main targets of individuals and mainly industry in order to decrease the carbon footprints. The carbon footprint can be a very powerful tool to understand the impact of individual and organizational behavior on global warming. For organizations and enterprises, the carbon footprint standard shows their environmental credentials and can enhance their market reputation. In addition, the standard helps to meet increasing needs of supply chain tenders and support positively public relations. Researchers are suggesting, the most effective way to decrease a carbon footprint, is to either decrease the amount of energy needed for production or to decrease the dependence on carbon emitting fuels (Brown, 2008).

3. History of energy taxation in Europe

In Europe, energy taxes are known since the beginning of the 20th century. In 1917 respectively 1924, Denmark and Sweden introduced a taxation on transport fuels such as gasoline (Speck, 2006, p. 66). In 1957 for instance, Sweden established additional energy taxes on non-transport energy products such as mineral oils and coal (Speck, 2006, p. 192). At that time, fiscal issues rather than environmental ones were the driver for those taxes, which were seen at that time as additional revenue for the national budget. However, a change in the underlying principles for energy taxation happened when European governments began in the 1980s to use gasoline taxes to achieve environmental objectives. As an example, unleaded gasoline was privileged due to lower taxation compared to the leaded one based on environmental considerations and the recognition of the unhealthy effects of lead. Less than ten years later, in the early 1990s, in Scandinavian and in other European countries later on, a general trend in economic instruments for environmental policies was rising. At that time, the environmental awareness was rising and growing pressure on the environment culminated in the adoption of new economic instruments and tools, in particular with respect to energy and carbon taxes. The understanding of economical instruments was seen at that point in time as an add-on to the traditional command and control management tools and measures. Contemporaneously, in the early 1990s, Denmark or Sweden started to revise their schemes for overall energy taxation and implemented CO2 taxes as a reaction to the worldwide increased awareness of global warming and climate changes (Speck, 2006, p. 62). Soon after, countries like Germany or the UK followed the two forerunner countries by using energy and carbon taxes in particular as policy instrument for action on climate change. In 1992, the European Commission promoted the use of energy taxation schemes and proposed a general energy and carbon tax across Europe (Sloan Barbara, 1992, p. 11). However, the proposal, and a revised version presented by the European Commission (EC) in 1994, was rejected by several EU member states (Hasselknippe, 2003, p. 40f). The rejected proposal of 1992, which was first and foremost based on environmental considerations, was revised submitted by the EC in 1997. The 1997, the Energy Product Taxation Proposal was no longer aiming for a harmonized CO2 taxation across Europe but to extend and improve the existing framework of each EU member state. In 2003, the lengthy discussion and negotiation between the EC and the EU member states came to an end after the adoption of the energy taxation directivity of the European Council of Ministers (European Council 2003, art. 5, p. 4f). The 2003 introduced directive adoption was of great significance for EU member states because as it expressed the fiscal framework and structure for the taxation of energy products and electricity. The Directive widened the coverage of the community framework, which was until then limited to mineral oil products and other energy products such as natural gas or coal. In addition, it increased the minimum rates of taxation for mineral oils and introduced new minimum rates for other energy products. The rates are distinguishing between business and non-business purpose and all EU members were legally obliged to set national tax rates accordingly. In 2005, the interest in energy and carbon taxation lost momentum across the EU and its member states due to the EU emission trading scheme (ETS) (BMU, 2004, p. 2ff). With respect to the Kyoto Protocol^[1] from 1997 the EU ETS can be seen as the fundament to fight against climate changes on EU wide level. The EU ETS allows each member state to fulfill with their emission reduction commitments referring to the Kyoto Protocol. Although a structure and a minimum tax level is specified in the directives, different implementations and regulations in the EU member states are existing. The energy and carbon taxation rules, which apply in each country of the EU, are different especially with respect to additive taxes in the industry. The reasons for those differences are diverse, but were generally introduced by national governments in order to protect the competitiveness of their domestic industries (Paul Ekins, 1999, p. 369f ).

4. Economical Aspects of Carbon Taxation in the EU

4.1. Greenhouse Emission Trends in the EU since 1990

Based on the Kyoto Protocol the GHG basket consists of six different types of gases, which are contributing in this regards (Eurostat, 2012). The gases are:

- Carbon dioxide (CO2)
- Methane (CH4)
- Nitrous oxide (N2O)
- Hydrofluorocarbons (HFCs)
- Perfluorocarbons (PFCs)
- Sulphur hexafluoride (SF6)

In order to make them comparable and to determine their individual and total contribution to the global warming they are converted into a CO2 equivalent value (Eurostat, 2012). In Europe, the GHG measured relative to the level of 1990 went down by more than 17 percent in 2009 (Figure 3).

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^[1] The Kyoto Protocol is an international agreement, signed on 11th of December 1997 and entered into force on 16th of February 2005, linked to the United Nations Framework Convention on Climate Change. The major feature of the Kyoto Protocol is that it sets binding targets for 37 industrialized countries and the European community for reducing greenhouse gas (GHG) emissions .These amount to an average of five per cent against 1990 levels over the five-year period 2008-2012.