Opinion of the Economic and Social Committee on the 'Amended proposal for a Council Directive introducing a tax on carbon dioxide emissions and energy`

(96/C 174/15)

On 4 July 1995, the Economic and Social Committee, acting under Rule 23(2) of its Rules of Procedure, decided to draw up an Additional Opinion on the above-mentioned proposal.

The Section for Economic, Financial and Monetary Questions, which was responsible for preparing the Committee's work on the subject, adopted its Additional Opinion on 6 March 1996. The Rapporteur was Mr Schmitz.

At its 334th Plenary Session (meeting of 28 March 1996), the Economic and Social Committee adopted the following Additional Opinion by 94 votes to 32 with 21 abstentions.

1. Summary

1.1. The Commission is opposed to the adoption of harmonized rules for a CO2/energy tax at present. This would impede action by countries which are prepared for such measures, since there is no prospect of unanimous Council approval of this tax in the foreseeable future. The Commission should therefore withdraw the present proposal for a Directive.

1.2. The Committee calls on the Commission to present a proposal for a recommendation covering:

- fiscal and financial support measures,

- voluntary commitments by business, and

- WTO regulations

in order to encourage the reduction of CO2 emissions and energy consumption.

1.3. On the other hand, the Committee recommends a coordinated approach by those Member States which are ready to introduce a CO2/energy tax on the basis of the draft Commission Directive. This would require the adoption of a common policy by an appropriate group of Member States.

1.4. The Committee is, however, opposed to an intergovernmental agreement along the lines of the Schengen Agreement.

1.5. The Committee favours a framework Directive which avoids proposals for the organization of the CO2/energy tax. This Directive must ensure that any such tax introduced by a group of Member States does not infringe EU competition and excise-duty legislation but remains compatible with the Single Market.

1.6. The Committee unreservedly endorses the energy component, since it should automatically contribute to CO2 stabilization. If a CO2 component were to be agreed in the context of a common approach, its share should certainly be fixed at less than 50 % because of its possible adverse effects on the medium- to long-term energy supply structure. Methane release from gas should also be taken into account in the calculation of the CO2/energy tax.

1.7. The Committee regards 'tax neutrality` as an absolute precondition for the introduction of a CO2/energy tax. The introduction of this tax must not be the occasion for an increase in the overall tax burden.

1.8. The Committee suggests that, pursuant to the recommendation of the EU White Paper, an eco-tax be introduced in the form of a CO2/energy tax and that 'non-wage` employment costs be reduced so as to give a further boost to employment or reduce unemployment somewhat.

1.9. The extent and duration of any damage to the international competitiveness of the national industries concerned will be all the slighter, the greater the number of Member States participating in the CO2/energy tax scheme, the more competitive their industries and the greater the harmonization of the CO2/energy tax arrangements.

1.10. The proposed tax exemptions and reductions should be designed, in particular, to reduce at least some of the potential competitive disadvantages faced by energy-intensive undertakings at international level. In addition, undertakings which invest in CO2 reduction or rational energy use must be allowed to offset their investment fully against tax.

1.11. The Committee believes that the CO2/energy tax will be tailored to the CO2 emission levels and energy content of the products concerned. Whilst recognizing the technical problems involved, it welcomes the inception of an input-orientated tax.

2. Introduction

2.1. In spite of repeated discussions and expressions of support by a majority of Member States, the Commission's draft Directive failed to make significant progress in the Council, the main obstacle to a decision being the unanimity requirement of Treaty Articles 99 and 130s(2).

2.2. The Commission's new proposal of 10 May 1995 is an attempt to break this deadlock. It provides, in particular, for a transitional period to the year 2000, during which Member States can introduce national taxes. After that date, however, harmonized tax rates are to apply throughout the European Union.

2.3. The Committee commented on the original Commission proposal in its Opinion of 24 February 1993 (). The revised Commission proposal takes account of only a small proportion of its reservations.

2.3.1. For example, the Committee questioned the advisability of introducing a CO2/energy tax aimed at shifting the balance between the various energy sources towards less polluting sources in the short term, since increasing world demand would eventually compel reliance on all sources; accordingly, we should be working right now towards ensuring maximum environmental protection in the use of all energy sources.

2.4. The Committee has repeatedly endorsed 'market-orientated instruments` such as environmental taxes and levies, not least in its Opinion on the Commission Communication 'Economic growth and the environment: consequences for economic policy` (). But even there, it stressed that fiscal measures can only have their intended impact in conjunction with other market-orientated instruments and regulatory measures. It would draw attention to a number of taxes (e.g. on mineral oils) which already have an ecological impact.

2.5. The EU Member States have undertaken to stabilize Community CO2 emissions at their 1990 level by the year 2000.

2.5.1. Notwithstanding certain progress to date, reliable forecasts suggest that this EU objective cannot be attained with the anticipated economic growth and if market forces are left to their own devices (). It seems more likely that the Union will fall well short of its target.

2.6. The Committee believes that the CO2 stabilization objective can be achieved only by implementing a range of measures which focus, in particular, on the transport sector (action, including fiscal measures, to reduce average fuel consumption; gradual replacement and improved technical inspection of all road vehicles; measures to improve the flow of traffic based, inter alia, on telematics applications) and thermal insulation techniques (domestic and space-heating standards). The existing environmental machinery (including planning and liability law) needs to be supplemented and backed up by a greater commitment to research and technology and by fiscal instruments which can make a significant contribution to environmental education and management. In addition to the introduction of new instruments, fiscal measures include analysis of the ecological impact of existing tax provisions. Voluntary commitments, which can also be negotiated with public authorities, should make a significant contribution, but seem unlikely to ensure attainment of the CO2 stabilization objective on time.

2.7. The Committee would point out that, as a global problem, CO2 emissions can only be tackled by involving the US, Japan and the Eastern European and CIS countries, as well as many of the newly industrialized Asian countries where there is a marked rise in CO2 emissions.

3. General comments

3.1. The Committee welcomes the Commission's efforts to achieve a solution based on the proposed transitional arrangements. It is, however, concerned that the attempt to introduce harmonized rules by the year 2000 could also deadlock this proposal as long as such fiscal decisions continue to require Council unanimity.

3.1.1. In addition to the proposed Commission approach, two other procedures are conceivable:

a) the Commission withdraws its proposal and leaves the Member States free to adopt tax measures;

b) the Commission withdraws its proposal and a group of Member States attempts to implement a common approach.

3.1.2. The Committee is opposed to the adoption of harmonized rules for a CO2/energy tax at present. This would impede action by countries which are prepared for such measures, since there is no prospect of unanimous Council approval of this tax in the foreseeable future. The Commission should therefore withdraw the present proposal for a Directive.

3.1.3. The Committee calls on the Commission to present a proposal for a Recommendation covering:

- fiscal and financial support measures,

- voluntary commitments by business,

- pressure by the EU for WTO guidelines so as to ensure internationally effective measures,

- efforts aimed at energy conservation and rational use of energy,

- promotion of renewable energy sources,

- provision of incentives for the reduction of energy loss during energy conversion.

These would encourage the reduction of CO2 emissions and energy consumption.

3.1.4. On the other hand, the Committee recommends a coordinated approach by those Member States which are ready to introduce a CO2/energy tax on the basis of the draft Commission Directive. This would require the adoption of a common policy by an appropriate group of Member States.

3.1.5. The Committee is aware of the legal problems posed by such a procedure. Two approaches are conceivable:

a) the group concludes an intergovernmental agreement which excludes the EU Institutions (along the lines of the Schengen Agreement);

b) The Committee favours a framework Directive which avoids proposals for the organization of the CO2/energy tax. This Directive must ensure that any such tax introduced by a group of Member States does not infringe EU competition and excise-duty legislation but remains compatible with the Single Market.

3.1.6. The Committee favours the latter option, since the legal basis for which it provides offers the only possibility of involving the EU Institutions and makes it more likely that countries which so wish can subsequently introduce a CO2/energy tax within the framework of a coordinated EU procedure. Such a procedure would greatly benefit industry, which is particularly affected by the CO2/energy tax, since competitive disadvantages could be avoided. It would also facilitate international negotiations (OECD, WTO).

3.2. The Committee reiterates its view that, if suitably organized, a CO2/energy tax can contribute significantly to CO2 stabilization by restricting the increased consumption of CO2-emitting energy sources and, possibly, reducing overall energy consumption, while at the same time living standards are maintained at their present level or even rise.

3.2.1. In view of the practical difficulties of applying this tax, however, the Committee is concerned that if it is inadequately organized:

- the environmental goal of CO2 stabilization will not be promoted, or only to a limited extent;

- personal taxation will rise, notwithstanding assurances to the contrary by most governments;

- an increased company tax burden will lead to lay-offs and a possible rise in Community unemployment;

- inflationary pressures will be fuelled;

- the increasing tax burden resulting from the CO2/energy tax will reduce purchasing power, with obvious consequences for living standards and employment;

- the global competitiveness of European industry will decline;

- the industries and economies of weaker Member States could be disproportionately affected;

- regions in which energy-intensive industries are established could be adversely affected; - voluntary commitments by industry will be nullified.

3.2.2. These concerns can be met if the CO2/energy tax is introduced in an ecologically, as well as economically, efficient manner and special arrangements are made to avoid undesirable consequences, particularly for employment and competitiveness.

3.2.3. A CO2/energy tax should increase the innovatory efforts and, consequently, the competitiveness of European industry in developing the technology required worldwide to reduce the use of natural resources, especially in the context of rational energy consumption and the eco-friendly exploitation of all energy sources.

3.2.4. The CO2/energy tax must make the taxation and levy system more responsive to the employment recommendations of the EU White Paper [Growth, Competitiveness, Employment ()] by shifting the tax burden from labour to energy resources, without increasing the burden on capital. The current trend towards an increasing tax burden on labour must be reversed. Such a change in the tax burden could increase total employment whilst reducing both the consumption of resources and the overall environmental impact ().

3.2.5. Appropriate restructuring of the taxation system should not affect employees' purchasing power, whilst facilitating a switch to more eco-friendly production procedures.

4. Specific comments

(These relate to fiscal measures taken by the group of Member States which are prepared to use the Commission proposal as the basis for common approach.)

4.1. Whilst the ESC essentially endorses the energy tax component, it would reiterate its doubts with regard to the CO2 component.

4.1.1. It is obvious that the energy-tax component will contribute to a simultaneous reduction in both energy consumption and CO2 emissions. Increased energy costs should lower the profitability threshold of renewable energy sources, stimulate competitive global innovation in the energy and environment sectors and produce a correspondingly favourable impact on employment.

4.1.2. The CO2 component, on the other hand, is essentially aimed at the reorganization of the energy supply structure on the basis, in the short term, of 'eco-friendly` sources, particularly gas. Although natural gas is lower in CO2 than, say, lignite or coal, it is responsible for comparatively high methane emissions with a potential greenhouse effect which should not be underestimated. Restructuring in favour of natural gas seems unlikely to produce the desired environmental impact, at least not on the hoped-for scale.

4.1.3. It can also be asked whether the additional tax on and displacement of European coal entailed by the CO2 component will actually be of long-term environmental benefit. Increasing global energy demand will ultimately mean that all energy sources, including world coal reserves, will have to be exploited in accordance with the principle of optimum environmental protection. This objective will require the permanent development of environmentally safe production methods, together with environmentally-compatible utilization technology, for example in electricity generation.

4.1.4. Whilst some levelling off in the growth of overall energy consumption is desirable, the CO2 component should not force a unilateral decline in coal production and use. Account must also be taken of the need for EU coal production so as to safeguard the long-term security of supply for the Member States.

4.1.5. The Committee unreservedly endorses the energy component, since it should automatically contribute to CO2 stabilization. If a CO2 component were to be agreed in the context of a common approach, its share should certainly be fixed at less than 50 % because of its possible adverse effects on the medium- to long-term energy supply structure. Methane release from gas should also be taken into account in the calculation of the CO2/energy tax.

4.1.6. The CO2/energy tax must also form part of the overall EU plan for the stabilization or reduction of CO2 levels and the promotion of rational energy use. At EU level, this would essentially involve the Thermie, Joule, Altener and Save programmes, which must be organized in such a way as to contribute significantly to CO2 stabilization in conjunction with specific national measures.

4.1.7. The CO2/energy tax should not have a structural impact on the use of nuclear energy.

4.2. The Committee regards 'tax neutrality` as an absolute precondition for the introduction of a CO2/energy tax. The introduction of this tax must not be the occasion for an increase in the overall tax burden.

4.2.1. The Committee assumes that the additional revenue generated by the CO2/energy tax will be fully utilized to reduce other taxes and levies.

4.2.2. Simultaneously, tax systems and structures should be modified so as to provide greater incentives for environmental protection and employment. Part of the CO2/energy tax yield should be earmarked for tax reductions and exemptions aimed at energy conservation and rational use.

4.2.3. In addition, exceptional hardship to private households and small consumers should be alleviated.

4.2.4. The Committee suggests that, pursuant to the recommendation of the EU White Paper ('Growth, Competitiveness, Employment`) (), (i) an eco-tax be introduced in the form of a CO2/energy tax and (ii) 'non-wage` employment costs be reduced so as to give a further boost to employment or reduce unemployment somewhat.

4.3. The extent and duration of any damage to the international competitiveness of the national industries concerned will be all the slighter, the greater the number of Member States participating in the CO2/energy tax scheme, the more competitive their industries and the greater the harmonization of the CO2/energy tax arrangements.

4.3.1. At the same time, market globalization means that the potential dangers for industrial competitiveness if the CO2/energy tax is not properly organized should not be underestimated.

4.3.2. The efforts of the Community or individual Member States to bring down CO2 levels by introducing CO2/energy taxes should induce the EU to press for internationally effective measures for the reduction of CO2 emissions and energy consumption. The WTO should penalize eco-dumping, which includes the environmentally harmful use of energy, as an infringement of the rules of global competition. At the same time, assistance should be provided for the promotion of CO2 reduction and energy-saving.

4.3.3. The EU should support all national employment measures designed to cushion the effects of any short-term lay-offs decided by companies in response to the introduction of a CO2/energy tax. Particularly adverse consequences in Objective 1 and 2 regions could be counteracted by recourse to the Structural Funds, including the Cohesion Fund.

4.3.4. The adaptability of national economies, individual sectors, regions, undertakings and consumers as regards the desirable, ecological and economic impact of the CO2/energy tax should be promoted by specific investment programmes covering rational energy use and the accelerated development and exploitation of renewable energy sources.

4.3.5. The proposed tax exemptions and reductions should be designed, in particular, to reduce some of the potential competitive disadvantages faced by energy-intensive undertakings at international level. In addition, undertakings which invest in CO2 reduction or rational energy use must be allowed to offset their investment fully against tax.

4.3.6. These measures should ensure the international competitiveness of sectors that are disproportionately affected. At the same time, these energy-intensive undertakings must continue to feel the incentive effect of the CO2/energy tax on rational energy use and CO2 reduction.

4.3.7. This applies all the more in the case of undertakings which, without facing direct international disadvantages, should be eligible for partial or even complete reimbursement of investment costs. In addition to avoiding the tax burden, these undertakings would receive a bonus which would increase in value the more the investment in question led not only to energy savings and CO2 reductions, but also (because of its integrated character) to a direct improvement in company profitability.

4.3.8. It therefore seems advisable to replace entitlement to the reimbursement of investment costs by a percentage investment allowance which should, however, remain significantly below the value of the total sum invested.

4.3.9. The Committee does not agree that fuels of agricultural origin should be excluded. Their influence on CO2 emissions is known. Moreover, such a step could encourage the import of these products from third countries.

4.4. The Committee believes that the CO2/energy tax will be tailored to the CO2 emission levels and energy content of the products concerned. Whilst recognizing the technical problems involved, it welcomes the inception of an input-orientated tax.

4.4.1. Electricity taxation is particularly problematical.

4.4.1.1. The Committee recommends the development of a tax-rate structure for electricity which:

- promotes the use of renewable energy sources;

- provides incentives for the reduction of energy loss during energy conversion;

- has no favourable structural impact on nuclear energy.

4.4.2. The Committee endorses the proposed gradual increase in the CO2/energy tax. The advance notice provided in this way will allow industry and private individuals to make technical adjustments and change behaviour patterns and enable structural discontinuities to be avoided.

Done at Brussels, 28 March 1996.

The President

of the Economic and Social Committee

Carlos FERRER

() OJ C 108, 19. 4. 1993.

() Commission working document SEC(95) 288 final, 1. 3. 1995.

() COM(93) 700 final.

() European Commission 1994, European Economy, No 56.

() COM(93) 700 final.

APPENDIX to the Opinion of the Economic and Social Committee

Rejected amendment

The following amendment was rejected but received more than 25 % of the votes cast:

Replace the entire text by the following:

'1.1. At the Rio conference, the Commission gave an undertaking to support moves against global warming by taking steps to limit carbon dioxide emissions. In 1992, it produced a Draft Directive which, if adopted, would have obliged Member States to tax these emissions and it laid down minimum rates. In 1995, a substantially revised version was published, which leaves it to each Member State to decide for itself whether to introduce such a tax and, if so, at what rates.

1.2. The ESC does not favour the introduction of a tax for the purpose of restricting carbon dioxide emissions. Whilst recognizing that this is an important environmental objective, it considers that it would be better fulfilled by other means.

1.2.1. The purpose of taxation is to raise revenue and to act as a regulator of the economy; the use of fiscal measures to serve other purposes, such as environmental protection, is bound to lead to distortions in the macro-economic framework and inhibit economic growth. The restriction of carbon dioxide emissions, which is a very desirable aim in its own right, is best achieved by setting European standards for permissible levels, which would become mandatory after a reasonable period for the introduction of the necessary control measures by the firms concerned, and levying fines at a deterrent level for any infringements of these regulations. Moreover, it would be all too easy for the rates of tax to be influenced by the revenue-raising requirements of the State rather than the actual danger or incidence of emissions, which would be self-defeating.

1.2.2. The ESC regards the issue of controlling carbon dioxide emissions and preventing other forms of environmental pollution as being too important to be placed at risk by being confused with fiscal issues and the revenue-raising requirements of Member States. It calls for separate and distinct measures to achieve a significant reduction in atmospheric and other forms of pollution by the setting of mandatory emission limits for all countries in the European Union. Such measures would be far more effective than an energy tax and would not incur the same risk of creating economic distortions.

1.2.3. Taxation is an unfocused measure which would have a detrimental effect on many activities which do not contribute to pollution while, at the same time, allowing many persistent polluters to escape without penalty. It would be totally ineffective in reducing the incidence of environmental pollution.

1.2.3.1. There is clear evidence for this assertion. Petrol is a form of energy which has been subjected to taxation at swingeing rates in all Member States; some 80 % of the price at the pump is due to taxation. This punitive rate of tax has done nothing to stem the burgeoning increase in the number of motor vehicles on the road or the level of consumption of petroleum products. It was only when emission controls were introduced that anything effective was done to reduce the atmospheric pollution emanating from this source.

1.2.4. There is a clear danger that industrial organizations subjected to an energy tax would, like the petroleum producers, simply pass on the tax to consumers in the form of higher prices. This would fuel inflation and be inimical to the prospects for reducing the current levels of unemployment.

1.3. The ESC is also concerned by many detailed proposals in the Draft Directive:

1.3.1. Under the proposals, Member States could reduce or refund the tax for capital expenditure incurred by companies in improving energy conservation or limiting carbon dioxide emissions. This is open to abuse and could lead to hidden subsidies.

1.3.2. The Draft Directive would permit a firm that is "seriously disadvantaged" by the tax in competition with other countries (inside or outside the EU) to obtain relief from its government. This could be either a reduction in the tax rate or full temporary exemption; the latter would be conditional on the firm having made "substantial efforts" to save energy or reduce carbon dioxide emissions. This could provide scope for a ridiculous "knock-on" effect. For example, a Dutch firm gets relief because of unfair competition from the USA, whereupon a Portuguese firm claims relief because it is now suffering unfair competition from Holland.

1.3.3. As it is currently being proposed, the operation of the tax would impose unacceptable compliance costs on industry.

1.4. The proposed tax does nothing to curb other forms of environmental pollution, some of which are of equal or greater menace to the world.

1.5. The ESC believes that, if such a tax were introduced on the lines envisaged by the Draft Directive, the original intention and purpose would soon be lost sight of by governments and businesses alike, with the result that it would come to be regarded as simply another method of raising revenue for the State and the achievement of its ostensible objective would not be furthered.

1.6. The ESC endorses the principle of "the polluter pays" but believes that this payment should be extracted in the form of fines for exceeding permitted emission levels rather than through the medium of the tax system.

1.7. The ESC believes that the environmental issue is one of paramount importance. An effective solution to these problems can only come from the adoption of a coherent, targeted and comprehensive strategy for identifying and controlling the pollutant elements. It is crucial to the preservation of our planet that this strategy should be put in place as a matter of urgency; proposals for an energy tax (which would not be effective) serve only to distract attention from the need for such measures and delay the introduction of a systematic and effective approach to the problem.`

Reasons

The introduction of a tax for the purpose of controlling environmental pollution is not the most effective way of dealing with this issue.

Voting

For: 47, against: 93, abstentions: 14.