Tax overhaul
January 22, 2010
Back to the drawing board
The French government met on Wednesday to discuss revisions to the controversial carbon emissions tax bill that was rejected by the country's constitutional court in December.
The court ruled that the bill's numerous exemptions would place an unfair burden on a small number of consumers, while sparing major industrial polluters.
Under the legislation, thousands of firms including power plants and oil refineries would have been exempted as they are already subject to European emissions quotas. Other sectors such as agriculture and transportation would have been given partial exemptions.
The exemptions meant the law would have covered less than 10 percent of total emissions while increasing the cost of heating homes. Critics say the tax would have raised over four billion Euros, and was aimed more at filling government coffers with revenue than saving the environment.
If the revised version becomes law, France will be the biggest economy in Europe to impose a direct carbon tax, mirroring measures that already exist in Scandinavia. But how are the new proposals likely to fare?
Fitting the bill
"We will not touch households, hauliers or fishermen," French Environment Minister Jean-Louis Borloo told reporters on Wednesday. Borloo said the government would preserve much of the earlier bill, while protecting families and key sectors.
Some industries including farming and fisheries are expected to pay just a quarter of the normal rate, currently set at 17 euros per tonne of carbon dioxide. The road transport and shipping industries could pay 65 percent.
Borloo said his government would negotiate directly with industry representatives to come up with fairer methods of taxing heavy industry without reducing competitiveness, possibly including incentive schemes and tax credits.
A fresh bill would then be put to parliament in May. But will the revised proposals be different enough to silence critics of widespread exemptions?
Clash of the lobbies
"Exemptions should be kept to a minimum if any positive and cost-reducing effect of a tax is to be reached," said environmental economist Dr. Karin Holm-Müller, a professor at the University of Bonn and a member of the German government's advisory board on environmental policy.
Dr. Holm-Müller added that she suspects the underlying reason for many of the bill's exemptions is the strength of certain industrial lobbies, rather than economic necessity.
She agreed, though, that in every country some sectors are indeed more vulnerable to international competition than others. Exemption in those cases may serve to prevent businesses from moving their operations to countries with less of an environmental conscience.
In the case of Germany, Dr. Holm-Müller thinks an emissions tax would be unlikely to drive manufacturers abroad since price is not the main factor in the competiveness of German goods. She said German industry is also increasingly turning to new production methods that use less energy and produce fewer emissions.
She pointed out that while some industries might be negatively affected, others would be boosted by the tax, including high-technology producers with environmentally-sound practices.
As for taxes hitting individuals harder than companies, Holm-Müller pointed out that taxes imposed on companies are likely to be passed on to consumers anyway - a fair practice, she said, since consumers are ultimately responsible for the emissions created in producing the goods they consume.
Environmental protection or economic protectionism?
The French government also said it will push for an EU-wide carbon tariff on imports into the bloc.
Critics have said the biggest impact of such a move would be to protect European industry from foreign competition. They point out that many of the goods produced by developing countries using environmentally polluting technologies would not be made at all if they were not in demand from European consumers.
Tarrif advocates point out that not imposing them would have the effect of subsidizing foreign goods produced without regard for the environment. This would disadvantage domestic producers subject to emissions rules, which would undermine the whole point of a domestic carbon tax in the first place.
No guarantees
Taxing carbon dioxide emissions obviously creates incentives for energy conservation and would serve to stimulate the growth of renewable energy industries using wind, solar and geothermal power.
But history has shown that carbon taxes have not been universally successful in actually reducing emissions. Years after Norway and the Netherlands introduced carbon taxes in the 1990s, emissions were shown to have increased.
Dr. Holm-Müller said the problem with carbon taxes is that no concrete targets can be set upon their introduction. Even if significant emissions reductions are initially achieved, the effects of economic growth and inflation can serve to nullify the effects in the long term.
Dr. Holm-Müller said the more widespread Cap-and-Trade system of reducing emissions is not as vulnerable to outside factors.
Cap-and-Trade alternative
The system involves setting total emissions limits and then allocating allowances representing the amount of pollution permitted by any one company as a fraction of that total.
Companies emitting less CO2 than their allowance can sell their left-over credits to bigger-polluters. The latter thus pay for the damage they do and have an incentive to reduce emissions, while cleaner-than-average companies are financially rewarded.
Critics of this system have said the trading of credits is vulnerable to corruption and political manipulation.
Cap-and-trade systems make it easier to fulfill the requirements of international conventions, said Dr. Holm-Müller, because they allow emissions reductions targets to be clearly established at the outset.
On the other hand, she pointed out, the prices of the credits traded under such a system are volatile and transaction costs high, if the government allocates emissions rights free of charge. Dr. Holm-Müller said governments could eventually switch to auctioning off credits to generate additional revenue.
Author: Halida Abdalla (cn)
Editor: Nathan Witkop