Carbon Tax in the European Union's Future? European Commissioners Discuss Carbon Tax, But no Decision Yet

Discussion of a possible European Union carbon tax emerged again recently as the EU's executive body, the European Commission, considered whether to propose legislation to tax carbon emissions.

According to euobserver.com ("EU Carbon Tax Kicked Into the Long Grass," June 24, 2010), the proposal provides "[F]rom 2013, sources of greenhouse gases that are not currently covered by the EU's flagship environmental endeavor, the emissions trading scheme -- sectors such as agriculture, as well as transport and households -- would see a flat minimum fee of between 4 and 30 euros per ton."

The story went on to report that, "One clear line did emerge from the debate, which was that the commission backs a common EU carbon dioxide minimum taxation rate, so member states would not compete amongst each other in offering less onerous rates."

However, the steps in actually moving from a commission discussion of the tax to actually getting it enacted into law are formidable and perhaps even impossible. If the commission does agree to submit a proposed piece of legislation the measure will need to be approved by the European Parliament (not entirely impossible) and then by the Council of the EU. It is at Council level that the real difficulty will be encountered by proponents since the Council -- made up of the ministers responsible for taxation in the 27 member states -- will need to vote unanimously to approve the measure. This is nearly tantamount to impossible.

Nevertheless, while the U.S. becomes more and more bogged down in its own energy legislation, the matter of a carbon tax in Europe should enliven things if only just a little. It does seem worth wondering what the reaction among Europeans might be if they knew that household activities might be subject to a carbon tax.

--Don Smith

French President Sarkozy Drops Plan for French Carbon Tax; Seeks Similar Tax at European Union Level

French President Nicholas Sarkozy has abandoned plans for a French national carbon tax. The decision, announced last week, came in the wake of regional French elections in which President Sarkozy's party suffered enormous electoral losses.

Now, however, President Sarkozy wants the European Union -- as opposed to several individual countries -- to impose a carbon tax to protect EU firms' competitiveness in a world market where almost no other countries have taken firm stands to reduce carbon emissions.

According to Jean-Francios Cope, a spokesman for the president's party, "The [carbon] tax will be European or it won't be at all," the BNA International Environment Daily reported ("French Government Abandons its Attempt at National Carbon Tax, Will Focus on EU Tax," March 24, 2010).

There is no doubt that European firms are concerned about the competitive disadvantage that the EU Emissions Trading Scheme puts on economic sectors operating on the continent. But enacting an EU-wide carbon tax is easier said than done. First, it would need to be proposed by the European Commission, which is the only EU institution that can propose legislation. Second, it would need unanimous approval from the 27 member state governments, a task that is hardly easy even in the best of times.

Does the pronouncement by President Sarkozy make headlines? Yes. Is it very practical? No. On the other hand, it is reassuring to know that politics is much the same everywhere. High aspirational goals made by some local political actors seeking approval in their own constituency often come to nothing on a larger stage in the end. This is likely to be the case in this instance.

--Don Smith

European Union Prepares for Leadership Role at December UN Climate Change Conference in Copenhagen

The European Union firmly occupies the leadership position with regard to addressing climate change. Despite the usual mantra one often hears about U.S. leadership and how it is simply impossible for the Europeans to have eclipsed the U.S, facts are facts and the facts do not reflect a story of American leadership on this issue.

While the U.S. federal government twiddled its thumbs, so to speak, during the administration of George W. Bush (and with no small amount of help from more than a few Democrats slavishly beholden to conventional energy interests), the EU has been ambitiously getting on with its policies. Craig Parsons, a professor at the University of Oregon, has described it this way: "The European Union has established itself as the world's leader on environmental issues." ("EUSA Review Forum," EUSA Review, Summer 2009, p. 2.)

For instance, late last year the EU adopted an ambitious Climate and Energy package calling for the economic giant (despite what one – including most Americans – might think, the EU is the largest single market in the world) to reduce carbon emissions by 20 percent based on a 1990 baseline by 2020 as well as generate 20 percent of its total energy consumed from renewables by 2020 while improving energy efficiency by 20 percent by that year.

And the U.S.? Missing in action on nearly all counts.

Thus “in the pole position” is just where the EU wants to be in the run-up to the UN Conference on Climate Change, to be held in Copenhagen in early December.

To get a better sense of how the Council of the European Union will advocate for the EU’s positions at the meeting, I met last week with a key figure in the Council’s secretariat, Wolfgang Ploch, an economist who is head of unit for the environment portfolio. Mr. Ploch is a “master of EU environmental decision making” as described by a colleague.

As those of you who regularly read this blog are well aware, EU environmental law is of special interest to me. And so it was indeed a pleasure to meet Mr. Ploch.

Before describing the EU’s preparations for Copenhagen, he explained that in the environmental sphere the Council shares legislative authority with the European Parliament (EP). The role of his office is to follow legislative proposals, which are made by the European Commission, through the process of Council and EP deliberation and negotiation. The Council secretariat, which works for the EU’s 27 member state governments, serves as the “institutional memory” for the Council. The secretariat provides “documents and summaries and suggestions for potential compromises” as well as issues summaries of Council meetings. He noted, however, that the president (which rotates at six month intervals and is currently held by Sweden) of the Council, not the secretariat, provides the political leadership associated with legislative compromises.

In matters that are particularly controversial, the secretariat will be involved in negotiations with the Council and the EP.

At this point, the conversation switched to the upcoming Copenhagen meeting. Because Copenhagen involves an international environmental agreement, the position of the EU will be based on the conclusions of the 27 member states. As such, the EP will play little – effectively no – formal role in determining the EU’s negotiating position.

The negotiating position, which will be “consensual” among the member states, is not “legislative but political,” he pointed out. The aim will be to prepare in the weeks between now and December a compilation of “Council conclusions,” which will form the basis of the EU’s position. That position will provide the negotiating mandate for the Swedish Environment Minister, Andreas Carlgren, who will co-lead the EU delegation.

The other co-leader will be the European Environment Commissioner (it was unclear as of this posting whether that position will be filled by current commissioner Stavros Dimas or a newly appointed commissioner; all of this down to whether a new college of commissioners has been nominated and confirmed by the time of Copenhagen).

The Swedish Minister and the European Environment Commissioner will together lead the EU delegation since the subject matter of the conference – an international environmental agreement – is considered one of “joint competence” between the Council and the Commission. The Commission is particularly valuable in these types of situations because of its “technical expertise” on climate change, something that does not typically exist within the Council secretariat.

Issues that come up for the first time at Copenhagen will be addressed on the spot. In the mornings and evenings of the Copenhagen conference, all 27 member state environment ministers will meet to discuss on-going events and to craft common Council positions.

While the years of the administration of George W. Bush were marked by considerable on-going tension between the U.S. and EU regarding climate change, the hope in Brussels early this year was that the new administration of Barack Obama would reverse the course charted by his predecessor. But anyone who has followed American politics knows that things are not always as they seem.

“The EU was very relieved at the first of the year (2009) when it appeared that the U.S. position was moving in our direction,” he said. However, the intervening months have been -- in my characterization not his – disappointing for green campaigners. “The question now is whether there might be a [legislative] delay and if U.S. delegates [to Copenhagen] will be reluctant to sign a far-reaching or detailed agreement. We are watching this very carefully. We know there is a political process to take place in Washington.”

Similarly, John Bruton, the European Union's Ambassador to the U.S., recently told the London Daily Telegraph (as reported by The New Yorker magazine), "Is the U.S. Senate really expecting all the other countries to make a serious effort on climate change at the Copenhagen conference in the absence of a clear commitment from the United States?" ("Leading Causes," The New Yorker, Oct. 5, 2009, p. 24.)

Diplomatically put by both Mr. Ploch and Ambassador Bruton, I thought, but Washington is swimming in special interest money that is fighting hard to maintain the status quo. And then there are the representatives and senators who dispute whether climate change is even taking place.

Setting aside my observations, what the EU is hoping for according to Mr. Ploch is that the U.S. delegation “could politically be relatively precise” on what will happen in the U.S. and what the U.S. will eventually support even if no detailed agreement is reached at the conference.

Meanwhile, other big issues being worked on at EU level:

• Carbon leakage
• Revising the Waste Electrical and Electronic Equipment (WEEE) measure
• Revising the Reduction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHas) directive

As we concluded our chat, Mr. Ploch pointed out that in many environmental areas – e.g., air pollution, waste, water – EU member states have ceded much of their sovereignty to the Union. Consequently, the member states are “implementing” directives that have been agreed to in Brussels and are “enshrined in Community legislation.”

I could go on and on about EU environmental law, but there is not time at the moment. However, if you share my interest in this intriguing – and extremely important area – think about registering for “EU Environmental Law & Policy” course, which I teach in the January-April semester. Insofar as I know, DU is the only law school in the country that offers this course on a yearly basis and has done so for five years now. To fully understand the state-of-the-art of environmental law, understanding EU environmental law is fundamentally important.

New Report Published on "Ten Insights From Europe on the European Union Emissions Trading Scheme"

Since 2005, the European Union has had in place an emissions trading scheme (ETS) aimed at reducing green house gas emissions. From that point until now, the EU has "accumulated a rich experience with designing and implementing a cap-and-trade program."

A recently published report, "Climate Change Policy and Industrial Competitiveness: Ten Insights From Europe on the EU Emissions Trading Scheme," provides insight into the ETS and "suggests key lessons relevant to current U.S. [climate change related] debates" as well as some recommendations.

The report was written by a team headed by Michael Grubb, the chief economist for the U.K.-based Carbon Trust and a highly regarded expert on emissions trading. The report was commissioned by the German Marshall Fund of the United States.

Among some of the report's observations:

• Emissions trading works: European emissions have been reduced by 120-300 million metric tons of carbon dioxide during the first phase of the ETS, according to an MIT study.


• The impact on gross domestic product is small: "Don't let concerns about macroeconomic impacts dictate the environmental targets," the report says. "Economic impacts have been consistently less than projected."


• Competitiveness impacts are limited to a relatively small group of industries: Tailored solutions to those industries that are involved in international business should be considered.


• Windfall profits may result if too many free allocations are handed out (oh what a difficult lesson the Europeans learned on this one...my comment, not the authors').


• Auctioning of allocations should be maximized.

Those interested in how the European experience might inform the debate in the U.S. should definitely read this report.

The European Union should "put an ambitious set of proposals on the table" at the UN climate change meeting in Copenhagen in December, a highly respected EU think tank said last week.

The Centre for European Reform (CER) said bluntly that if the EU does not take the lead in Copenhagen, "the negotiations could end in a stand-off."

While the U.S. largely limps along (the passage by the U.S. House of the Waxman-Markey bill represents some movement, but the details in the bill include a mind boggling array of handouts) in the climate change policy debate, it is interesting to see how European thought leaders -- including the CER -- view the issue:

"The EU has led the world in its response to climate change. And although the election of Barack Obama to the White House means more constructive U.S. engagement, there are few signs that Washington is prepared to take the lead. As a result, the onus to bridge the differences between rich and poor countries will rest with Europe. In an ideal scenario, the EU will put an ambitious set of proposals on the table; other developed countries will follow suit, showing that they are prepared to shoulder prime responsibility for saving the world's climate; and the developing world will then get on board."

However, the CER cautioned that in order for the EU to be credible at Copenhagen it needs to strengthen its own policies:

"The EU is relying on carbon pricing to encourage investment in green technologies. But carbon prices under the EU's emissions trading scheme are nowhere near high enough to provide business with the necessary incentive to make such investments. Unless companies start investing in new technologies now, Europe will not be able to bring about a permanent reduction in emissions. Bleak economic prospects (which means less output and few emissions) mean that prices are set to remain weak over the medium term -- unless action is taken to boost them. The [Swedish presidency of the EU] should recommend tightening the emissions caps or introducing price floors for carbon permits."

Financial Times' Characterization of Waxman-Markey: "Cap-and-Trade Mess"

Sometimes it is useful to look outside of one's "neighborhood" to see how an issue is playing somewhere else. This helps provide context for what may otherwise be only an "inside analysis" of a particular problem or issue.

An editorial in Monday's Financial Times, which is published in London, provides a welcome "outside" look at the recently passed Waxman-Markey energy bill. Despite the hoots and hollers by the bill's U.S. supporters, the view from the other side of the Atlantic -- and the only place, incidentally, that has a major emissions trading scheme -- raises some thought provoking observations:

"Cap-and-Trade Mess"

"The US House of Representatives has passed a bill to limit greenhouse gases. The White House lobbied hard for it: “A bold and necessary step,” said Barack Obama. Many hailed its passage as a triumph. In fact there is little to celebrate.

"Recall that cap-and-trade was expected only recently to pass in the House without difficulty. It scraped through by 219 votes to 212, with 44 Democrats voting against. Opposition to cap-and-trade in the Senate is stronger, so the chances of this bill or anything like it becoming law look slim.

"To make matters worse, the bill makes political compromises that undermine its effectiveness. Even so it passed by just seven votes. What this says about the prospects of a more forceful measure – one that dares to confront consumers with significantly higher energy costs – is discouraging.

"To curb climate change, the world needs to cut carbon emissions. It needs US leadership on the issue too. But this bill is not the way. A bewildering combination of cap-and-trade, mandates, new regulation, and every kind of open and disguised subsidy, it is too complicated, too prone to subversion and in many ways downright self-defeating.

"To soften its impact, the House first adopted undemanding targets for emissions. Debate made them milder still. Instead of auctioning emissions permits, the bill would give nearly all of them away, so the measure does little to raise needed revenue. Permits will be handed to electricity producers on condition that the windfall be passed to consumers, many of whom would see their electricity bills fall as a result.

"Learning nothing from Europe’s experience, the bill relies heavily on offsets, which let companies pay someone else to plant trees or cut emissions, so they do not have to. The still-unsolved problem is policing the system to ensure the offsets are real. The bill gives oversight of domestic offsets in farming to the Department of Agriculture – good news for farmers seeking a new trough of subsidy. To defend US competitiveness, it proposes subsidies for exporters and penalties on importers. In principle, cap-and-trade does require border adjustments, but the bill is careless and creates a gateway for protectionism.

"In short, it is a mess. The key to a better plan is understanding that you cannot cut carbon without making carbon-based fuels more expensive – an obvious point, you would think. But it is one that US policymakers still cannot face."

Doesn't exactly seem like a vote of confidence, does it.

Carbon Trading: A Major Growth Industry?

There are many ways to think about carbon emissions trading schemes, but one that should not be overlooked in the environmental and natural resources communities is the very real possibility that carbon trading will evolve into a major new business opportunity.

Currently there is one mandatory emissions trading scheme -- the European Union ETS. Last year the total market value for carbon trading was about $120 billion, according to an article in The Wall Street Journal ("Trading May Yet Bloom," May 21, 2009). But what if the U.S. enacts a similar scheme? Then the market may grow to more than $2.1 trillion by 2020, according to the London-based consultantcy New Carbon Finance.

Some investment banks in the U.S. have been preparing for this day -- Morgan Stanley and Barclays PLC have carbon trading desks, the Journal reports.  And even Russian gas giant Gazprom is in the carbon trading business.

To be sure, the price of carbon has gone up and down like a yo-yo. But with the U.S. inching closer to some sort of carbon restrictions, it would seem a pretty good bet that this market is going to represent an enormous business opportunity in future years.

That is, of course, if these banks are still around at that point. Last time I checked, many investment banks were begging for government bailouts. Has anybody thought about turning the U.K. and U.S. banking systems over to Steve Jobs and Apple? An "ibank" may be in our future.

EU Emissions Trading Scheme Shows Results in 2008

Greenhouse gas emissions from European Union firms taking part in the EU Emissions Trading Scheme (ETS) fell 3.06 percent from 2007 to 2008, the European Commission has reported.

Stavros Dimas, EU Environment Commissioner, said last Friday the results confirm "that the EU has a well functioning trading system, with a robust cap, a clear price signal and a liquid market, which is helping us to cut emissions cost effectively."  In a not so subtle comment aimed at the U.S. and other large emitters, Mr. Dimas added, "This should encourage other countries in their efforts to set up comparable domestic cap-and-trade systems, which we would like to see linked up with the EU ETS to create a stronger international carbon market."

The ETS, the world's first greenhouse gas cap-and-trade system, began operation in January 2005.  It is now in its "second phase," which runs from 2008 to 2012.  In this phase, GHGs are to be reduced 6.5 percent.  The "third phase" will begin in 2013 and run to 2020.  In April, the EU formally adopted a legally binding target of reducing GHGs to 20 percent below 1990 levels by 2020 as well as increasing the share of renewable energy to 20 percent by 2020.  More information on the third phase of the ETS is available by clicking here.

The degree to which the economic slowdown played a part in the reduction was downplayed by Mr. Dimas' spokesperson who said, "Companies for different reasons have undertaken emissions reductions, but what we can safely assume is that the ETS has been the major force [behind] some of the major reductions" ("Emissions From EU Facilities Participating in Trading Scheme Drop 3 Percent in 2008," BNA International Environment Daily, May 18, 2009).

EU Supports U.S. Congressional Climate Change Bill

From the "is this helpful or the kiss of death" file comes word from Brussels that Stavros Dimas, EU Environment Commissioner, is delighted with the Waxman-Markey climate change bill that has been introduced in the U.S. House of Representatives.

The legislation, Mr. Dimas has said, is "really encouraging," according to the BNA International Environment Reporter. Mr. Dimas, who is a strong supporter of the EU emissions trading scheme, went on to say, "I am sure [the U.S.] will come up with even more ambitious [GHG reduction] targets. Let's see how the debate will evolve."

While congressmen and women generally like to have wide support for their proposals, attracting the enthusiastic support of a key EU official may not be what they had in mind.

No offense to Mr. Dimas, but this is sure to become a "talking point" for right-wing U.S. commentators.

EPA Opens Comment Period for GHG Reporting Proposal

An EPA proposal for the first comprehensive U.S. national system for reporting greenhouse gas (GHG) emissions is now open for comment.

The Proposed Mandatory Greenhouse Gas Reporting Rule would cover about 13,000 facilities that account for nearly 85 to 90% of the nation's GHG emissions.  Some of the sectors covered by the system would include electricity generation, cement production, and iron and steel production.  All of these sectors are already covered now by the fully functioning European Union Emissions Trading Scheme.

Lisa Jackson, EPA administrator, said, "Our efforts to confront climate change must be guided by the best possible information.  Through this new reporting, we will have comprehensive and accurate data about the production of greenhouse gases."

The rule is being proposed under the authority of the Clean Air Act.

For those wanting to comment about the proposed rule, click here.  The 60 day comment period began April 10.  

Obama Willing to Compromise on GHG Auctioning?

Despite initially supporting a cap-and-trade program requiring a 100% auction of greenhouse gas emissions credits, there are indications that the White House might be willing to support legislation calling for less than full auctioning of credits.

Ben LaBolt, a spokesman for President Obama, has told The Wall Street Journal ("White House Flexibility Signaled on Climate Bill," April 9, 2009) that Mr. Obama's "preferred approach was 100% auction to create incentives for companies to reduce their greenhouse gas emissions.  Members of Congress are looking at a variety of policy options to help us make that transition, and the administration will be flexible during the policy-making process" as long as the administration's goals of creating a "clean-energy" economy are met.  

Members of Congress from coal-producing states as well as states that rely heavily on coal-fired power plants have voiced concern that a 100% auctioning scheme would provoke huge home-state opposition.  

The matter of how emissions credits should be handled is a tricky one.  The EU has been mightily burned by disputes involving its initial decision to give away emissions credits as part of the EU Emissions Trading Scheme.  In response, the EU has significantly tightened up the distribution of free emissions credits (although this remains a particularly difficult political issue with regard to the central and eastern European countries such as Poland).

European Commission Publishes White Paper on EU-Related Climate Change Adaptation Strategies

The European Commission has published a white paper, "Adapting to climate change: Towards a European framework for action."

The white paper, which proposes various policy-related measures, reflects the European Commission's view that, "The earth's climate is changing and the impacts are already being felt in Europe and across the world." The white paper presents "the framework for adaptation measures and policies to reduce the European Union's vulnerability to the impacts of climate change."

The European Commission, in presenting the white paper, said, "Adapting to climate change will be integrated into all EU policies and will feature prominently in the Union's external policies to assist those countries most affected."

European Commissioner for the Environment Stavros Dimas said, "The seriousness of climate change is becoming greater and more disturbing withi each passing year...It is therefore essential that we start work now with governments, business, and communities to develop a comprehensive adaptation strategy for the EU and to ensure that adaptation is integrated into key EU policies."

Despite the EU's leadership on climate change (e.g., adoption of the EU Emissions Trading Scheme), not everyone in the "green lobby" is satisfied with the steps the EU has taken. Tony Long, director of the European Policy Office for the WWF, said, "We are particularly concerned for a potential water crisis across Europe, whereby southern countries will suffer from reduced supplies and other regions will face increased extreme weather events and floods. Why isn't action taken now? How much longer do we have to wait?"